At least for the time being, please see my Medium page for posts I’ve published on financial markets since I stopped writing daily articles in this space. I hope to see you there, and maybe one day back here again if the need to blabber every morning should again be felt. You can never know, the future is unpredictable, but I assign a low probability.
Since taking a break from my daily notes in this space about a year ago, I’ve published a handful of longer pieces on Medium; and for some of you who used to follow me here, I thought you might be interested in these. The most recent one is copied below and the link for all the others is this. Maybe one day I will return to the daily exercise, and until then I hope you will stay well and check in on occasion.
Networks are having a moment, or rather, they’ve been having it for quite some time, long before the big contagion and the flattening of curves, but the moment is expanding. Stephen Wolfram is working on a new physics model that would explain the universe in terms of network evolution and lead to the long-sought Unified Theory in the field. Niall Ferguson published a book that presents modern history as a series of network events, governed by network behavior and attributes. It is generally recognized in financial markets (themselves dense network structures) that the modern economy was borne of the InterNET (emphasis added). Most currently, cryptocurrencies — a revolutionary but natural extension from all that — are inherently network structures.
And yet there has been very little in the areas of finance and economics — in the mainstream at least, really nothing — to seek to bridge the analysis of value and strategy with what would seem an important counterpart in network science. If science is in this case too strong a word, network theory would be a good enough place to start. While the footprint of commercial networks has been growing to the point where regulators are even taking note, the resulting arguments don’t seem rooted in any network concepts or their context, which renders the debate — at a minimum — incomplete.
Perhaps the financial conventions that we still resort to, predicated on old-economy metrics and trends, are adequate enough. It is nevertheless non-trivial and now also opportune to try to understand the network asset on its terms. What follows are high-level notes, almost a preface, in support of an investment thesis that may be backtested with promising results. This is only a summary, purposefully light on supporting detail and examples that could one day turn it into someone’s massive book. But the interested reader should be able to consider cases, circumstances and criteria from one’s own observations that will fit the mold.
1. In an economy dominated by technology advancement and the digitization of virtually all things, there is a diminishing distinction between companies in the so-called “technology” segment and all the others. On the supposition that a time will soon arrive when the distinction will have altogether vanished, the more important difference is between companies that offer product or service solutions with and those without network effects.
2. The latter are in a state of constant need to upgrade, update, reinvent, ride cycles up and down, and reduce pricing on their offering, or else become disrupted or commoditized in a competitive environment that is moving ever faster. The former — businesses with network value — are better able to withstand attack and well positioned to drive down the costs of growth, because the network mesh is both a base and self-perpetuating driver.
3. But not all networks are the same, in fact they’re mostly very different from each other. At the highest level, these include marketplaces, exchanges, communication systems, platforms, artificial intelligence and other connected data tools — to name some of the principal categories — which may also combine several of the listed fields. And by the same token, network effects — defined as the improvement of network experience or value with the addition of new sources of engagement — are also different among the varied types. These can be broadly classified as user or data network effects — the first a matter of popularity and the second a matter of depth — which may also for some networks work in combination.
4. At levels below the very high, there are more nuanced distinctions that define the nature of the asset, often relative along a continuum, rather than binary or absolute. Examples of such qualities include the centralized, decentralized, and distributed topologies; the single-, bi-, and multi-directional data flows; and the single and manyfold layers of the network, which often co-exist and may in fact be linked, internally or externally to the individual business unit. There are also differences of strength between the ties that link the nodes together, and there are differences in size and numbers of the clusters that ensue.
5. These things and others shape the network profile, which in turn shapes its value and potential. Distributed networks, for instance, all other things being equal, may be more valuable than the centralized variety at the opposite extreme, because the single center-point of the former is a vulnerability to its whole. But all other things are not equal, and thus the network whole is best to understand without such oversimplification. Perhaps the one true constant in the general assessment of all sorts is the value of engagement, an attribute that’s always worthy, regardless of the other qualities described.
6. The so-called FAANG contingent — a less than ideal grouping as each of the five constituents is a different type of network from the others — is a highly visible sampling of the digital network asset class. Because they’re big and public and have evolved in more or less transparent ways, they make good subjects for more general analysis that can be carried over to the less developed cases. The fastest growing (if not already dominant) forces in many if not all the major industry segments — transport, finance, commerce, education, health, security, most recently biotech and manufacture — are additional examples.
7. In all the branches and the realms, it is difficult to the extreme to build a network from ground up. Unlike a product or a service that is designed, produced, and introduced into the market — successfully or not — a network is a complicated being, almost biological in nature, and subject to improbable conditions to take root. And when it does — a miracle in ways, which follows an inflection point that’s hard to manufacture — the network must be nurtured like an organism. The influences and the outcomes (which is to say, the behavior of nodes and clusters) aren’t always easy to anticipate, and there further comes a time at which the growth will asymptotically stall. When this occurs, new use cases or network offerings may provide a lift, but it isn’t always known during such times if the desired effect will materialize. Conversely, a robust and growing network can create great optionality, which may among other things enable an expansion into contiguous network areas.
8. Despite the frequent overlaps of categories — for instance, in finance and commerce, in information and entertainment, messaging and transactions — it has been observed that where user network effects are a core network driver, the resultant entities tend to be unique. Think, Instagram, LinkedIn, Twitter, YouTube, in the social realm, despite the basic similarity ingrained in messaging. It’s also been observed that as new categories form, the landscape tends to winner-take-most or even winner-take-all (power law) competitive effects. The same is true of the behavior within the network, as big clusters tend to become bigger and even dominant at times. (The influencer economy is a result of such network patterns.) What all of this describes is a tendency to centralization, even among the decentralized, that the subject networks may seek to mitigate.
9. Financially, the network’s most attractive features are profitability (after the inflection point) and predictability (as network effects take form). In combination with the winner-take-most advantage previously described and the high-gross-margin nature of the software business in the digital economy, the cash flow of the operation can be superior to almost any other business type. In cases where this is not so, it is advisable to wonder why. Perhaps the subject isn’t quite the network that we might assume it is, while, on the other hand, it’s also true that there are companies that unsuspectedly reveal themselves as such.
10. As certain network platforms have grown and reinvested cash over the years, the concern has recently arisen that these have taken on monopolistic forms which have to be controlled. Should there be a breakup of some kind (which wouldn’t be a first, e.g., Ma Bell), it may be worth remembering the nature of the living organism. Plants can continue to grow after a branch or two have been sliced off, and even branches may evolve into a tree or two once they’re replanted. After a while, we may be back to where we started, or someplace very different and strange, because the consequence of change in complex systems is often unintended.
One way perhaps to summarize all the above and draw a financial conclusion in terms that match traditions and accepted standards, is this:
In the digitized economy, networks and network effects are capital, and seeking to develop these is a capital investment; technology advancements and disruptions are important, but on their own are an expense.
In the long term, however, network effects may also turn negative and spiral down, while the technology expense can in the short term create value.
Reinterpreting the networks (2020)
Interpreting the networks (2017)
I started to jot down my morning notes 300 days ago. It was right after Labor Day, when the world is energized and set to blossom. I didn’t know what I would write about, although I set myself some ground rules in the masthead, to limit the endlessly potential subject matter with enough diversity to keep it interesting. The interest was mainly for my own part, to be honest, which is to say, I used the vehicle to take notes, to learn, to force myself to think about the meaning(s) of events and patterns that I saw or lived or read about.
It started brief and barely richer than a tweet in the initial weeks. Like this one here, for instance, The miracle of blocks, from a Boulder hotel room; and this other the next day, The bridge, hanging at the Denver airport. As time went on, and somewhat to my own chagrin, the posts got longer and more verbose; in part, I guess, because I felt encouraged by a growing readership, in part because I got more comfortable with my posting voice, but also, to be fair, because the world became more complicated and amazing into the new year and after.
So, lately, what started as a series of brief morning notes has turned into a daily blog of standard form and length (e.g., Convergence, platforms and new market color, The consequence and its intentions, New verticals and horizontals, The truth, which isn’t linear, The market standard-bearers), examples from just the past ten days or so. And I don’t think I can keep this up.
The time it takes each morning is far longer now than it once was, and, what is much more problematic, I’m falling behind as a result in reading that I used to do during these same early hours. The writing itself, I think, suffers, as the subject of these notes and of my learning starts to get repetitive and stagnant.
In other words, I think, the time has come. 300 posts, including this, is a handy milestone number on which to end. I’ll probably return (I say this to myself) to speculate and write about some favorite subjects (if I had to guess), but perhaps it won’t be daily and it may not be for a while. On the other hand, when it does happen, I will likely have some new material, having caught up by that time with so much reading I would like to do. By then as well, perhaps, the world will also settle into a new normal, which hopefully will be a good thing and provide a new and interesting area of study.
Until then, the posts are all here for the browsing, categorized by subject and pull-down menu reference, each with links to others at the bottom, suggested by the platform based on some tagging reference, I imagine, which makes the bounce-around even more of an adventure. As well, there is a drop-down menu organized by month, which may at some point be another reference, a document of sorts as we progressively evolved from one world to another.
I guess, in ways, this may have been a book. Maybe sometime in the future, and maybe we’re already there, such interactive and dynamic books will be a whole new category. Like fiction, history, biography, business, mystery and etc., but converging all of these and more, like markets do, and other networks.
The work-from-home instructions at many organizations may be indicative of two things, one of which is widely discussed (and no need to belabor the remote enablement aspect of software eating the world and its environs). The other, more nuanced perhaps and subject to interpretation, reflecting the speed, decisiveness, and permanence of such corporate moves, is the ease with which this has all happened.
I’m kidding, by the way, as I often do around here, but it feels almost like a slight. “Stay home,” they say, “no, really, it’s ok. Forever.” This isn’t based on fact or data, obviously, not even hearsay or experience, it is entirely made up for purposes of speculation. The health concerns are obviously serious, the anxiety relief is critical all around, the crowd control will save so much grief that is avoidable.
A consequence, however, or perhaps a trend that has been underway, may be an accelerating impersonalization of the workforce. A time may come, perhaps, when we will miss the long commute, and when business labor practices will become centralized again as a point of differentiation.
The big cities, the main hubs, will maybe concentrate again if that should come to be, or possibly some new ones will emerge before the feeling passes.
To pivot – a term recently popularized in the startup economy – is to change course around a stationary point from which the angles and trajectories are guided. Before the startup ecosystem borrowed the idea, and after physics, a sports motif was sandwiched in between, such as in basketball for instance, where a player rotates from a pivot foot to find free space, to fake out a defender, or shape a new course of action.
In all of these examples, the idea of the pivot is predicated on two elements, only one of which is the new direction. The other, arguably the more essential, is the stationary point that is the root and base which makes the pivot possible. In enterprise, this is a core technology, a differentiator or essential skill, from which new possibilities emerge. As in sports, this center is a necessary springboard of support and leverage.
Now, if this central base is shaky or planted on unstable ground, the resulting motion is not a pivot, technically, but (in basketball) a travel (resulting in a penalty and turnover). In the enterprise, the change of course may be a broken line, a reset, a whole new profile that may or may not bear semblance to the previous. In other words, the thing that made the business what it was, good or bad, is cast aside and entirely refashioned.
A pivot is often prescribed in business, where flexibility and nimbleness are advantageous, particularly when new markets or new trends are visible. What matters in these cases is the efficiency of execution as much as the directional vision. If either of these two are botched, the pivot, good or bad, may not even be a pivot. It may well still work out, randomly or by good fortune, but not necessarily by planning, unless the plan itself was based on chaos theory.
In the environment we’re in, to pivot with success may be a challenge because the pivot foot, and also the potential new directions, are being knocked around by an unstable ground that makes the planting virtually impossible. And as we have little visibility into what comes on the other side of this, when the ground has stabilized, it’s hard to know what the area one lands upon will look like, or what one’s place in the area will be.
The better course, perhaps – although it’s difficult to know and to pursue the ideal path when the ground is violently shaking – is to stay liquid and keep all options open. If that is at all possible. One day this turbulence will end.
These guys were a scrappy bunch, they barely made the playoffs as the 8-seed in the eastern conference, and they went on to the finals in the only such occurrence for the league to-date.
The ’98-’99 season started four months late, in February ’99, and was shortened – 50 games out of the usual 82 – with several back-to-back-to-backs on the schedule just to fit those 50 into the allotted time. The labor dispute that led to the delay, a player lockout in which our city’s franchise player was the union head, kept said Big Fella busy and distracted in what would have been pre-season. He – already past his prime, running on fumes, and hurting everywhere – was joined that season by his polar opposite, a quick improvisational firecracker coming off a season-long suspension (don’t ask), which made that year’s team an experimental hodgepodge of chemistry and style. What a season.
The new arrival played the same position as the incumbent smooth-as-silk sharpshooter, and was thus relegated to the bench for quite a while. The other notable big name, one Grandmama, played with a sore back and had lost his signature explosiveness for years. The two point guards were maybe one good role player if combined. The tall athletic up-and-coming forward bounced around and swatted balls like flies around the court, and sometimes even scored. There was a slow and grinding starting unit and a fast uptempo second; it was such a mess.
The coach who kept it all together had sort of made his mark the year before, latching on to the opponent center’s ankle and the hardwood floor in what was at the time the traditional annual skirmish with the conference rival.
So anyway, this was the freakish team that barely made the playoffs in that freakish season, coming off a winning final stretch in which somehow there came to be chemistry, like a miracle, and the 8-seed beat the 1 and 4 and 2, in that order, to get to the championship round.
By that point though, the Big Fella was out for the count, Grandmama could barely walk, and the rest of them could only do so much against what was the start of a major franchise on its long historic run, only recently ended.
No matter. The moment was an inspiration for all involved.
After the game the crowd spilled out into the New York City streets, chanting and energized, glorious, inspired, the grown-ups and the kids, everybody and in all directions from the Garden. Because these guys who we all saw coming together in those few months of concentrated action, were more than entertainers, more than athletes, as a whole. These guys really meant it.
It was a nice gift in our isolation for the MSG Network to rerun these highlights yesterday.
Here’s to the street musicians, everywhere.
A sentiment is beginning to spread that once the pandemic crisis has subsided, we (i.e., social norms and patterns) will never be the same. While this is a justifiable prediction, matters of “we” are very difficult to predict.
There is a tendency, as always, to extend the observed trajectory out into the future, with no friction or reaction to the trend, without external elements that may influence a movement, even if indirectly and from afar, which influence itself is probably non-linear in nature.
In real-time, the broken lines or shifting of momentum that occur to change an outlook or to render forecasts incomplete, if not completely wrong, appear as though random or chaotic. With hindsight, there are always explanations, over which there usually is dispute because with hindsight even explanations are complex and subject to interpretation.
The one on which we settle is then used to shape an outlook going forward, and maybe we convince ourselves at times that we predicted well, but who’s to say if we were right for the right reason or by happenstance. And sometimes we learn more from instances where we were wrong, at least when we acknowledge our wrongness.
Anyway… with this by way of backdrop, here is a current event that may be projected out, and one day prove to be prophetic, or at least symbolic, though possibly anomalous, or maybe all these things, depending on perspective.
Everyone has an interest or two, often more, some held more strongly than others. It is the case sometimes that interests are so many that the tracking is impossible, maybe even for their owner. That may be generally the case, it’s not for me to say, and maybe the successful (in whatever way that gets defined, which is subjective) are those who keep these interests organized, prioritized, and focused.
For example, the new category dropdown menu to the side, just introduced, is an attempt to list the interests in this space in an organized, prioritized, and focused fashion. My favorite is “Etc.”, which I expect to use more often (in fact this very post), it seems thus far under-represented. In fairness, though, all subjects have a bit of “Etc.” to them, it’s really more a question of how much and is it worth the special designation.
A messy business, as I think it through… and depending on how deep below the surface one may choose to dig, the mess only gets more tangled, intertwined, and circular. And that’s just for the simple subject of this little blog, which doesn’t scratch the surface of complexities around it.
The point of these digressions anyway relates to yesterday’s “Etc.” post on choosing experts. We give and take advice, we follow and unfollow, we converge around directions set by those we deem to be in privileged positions to lead the way, but as we do, it pays sometimes to think about the interests involved. Sometimes these are disclosed and clear, though oftentimes they’re not, which isn’t necessarily for deception, but just because the matter is quite complicated.
We often latch on to success in any form, and project it out to every form, for following and guidance. This is especially true, I think, when uncertainty is more than ordinary.
The shown example is just one, in terms of scope as well as subject, and the phenomenon prevails in business execution especially…
… where uncertainty is always great and expertise is deemed quantifiable, measured by value formation and investment return.
But every situation is different, even with some common elements here and there, while expertise tends to be general to an area.
What’s more, when the portfolio is diversified, and when investors are observers rather than active doers in most cases, this does not make portfolio success (in the past) a good credential for individual success (in the future).
And it’s unfair, I think, to put some investors in such a position, expecting the big answers and big guidance to the big unknowns.
Though, on the other hand, many enjoy it.