Business & Money

Facebook is the 2nd largest position in my portfolio. And as such, I spend a lot of time thinking about it.

FB has been in the news a lot of late and, as a result of the negative press, the stock is down about 15% since it’s peak in February. The negative press centers on a recent revelation that Cambridge Analytica had gotten its hands on data related to about 50 million user profiles, and they subsequently used that data for targeting purposes during the 2016 elections.

The problem relates to a product offering called Facebook Connect, which I believe launched in 2012 and was shut down in 2015. The product allowed other app developers to use a “log in with Facebook” option within their own apps, allowing a faster signup/login process and also, more importantly, allowed those apps to collect user data related to that person and all of their connections on Facebook. FB was giving away a lot, but in return incentivized more developers to build apps on top of its platform. So, to put it simply, for a non-trivial amount of time, FB was being incredibly cavalier about user data and giving it away in droves. This didn’t come to an end until they realized that it was far more lucrative for them to focus on being a digital advertising behemoth as opposed to a platform for developers.
So yes, the above looks pretty bad and plays well into the Facebook undermining democracy narrative.

And while we’re at it, let’s add a couple extra points to the bear case.

FB recently experienced declines in active users within the younger demographic (though they saw growth overall).

There also seems to be more research surfacing every day about how there is an inverse correlation between happiness and time spent on social media platforms.

But, and a very big but, almost everything above is about perception and sentiment. If you flip to the numbers and the fundamentals of the business, it’s hard not to be a bull. The business has never been better.

You have accelerating return on equity over the last 5 years, largely due to constant margin expansion.

When looking at Q417, daily active users and monthly active users were both up 14% YOY.

And what’s interesting to me when I think about Facebook in my own life is that, despite the fact that their losing younger users in the US, it seems my aunts, uncles, and other family members are joining in increasing numbers and posting non stop.

It also allows me to be connected with anyone who has ever mattered in my life. I’m connected with a bunch of friends in Mexico due to an exchange program in 7th grade. I’m connected with my 5th grade math teacher. My dog Dutch was one in a litter of 7. I’m connected with the families who adopted his siblings. And without a phone number or email address, I can reach out to any of those people on a moments notice. Facebook has essentially become a utility.

So, all in all, nothing has changed about my investment thesis. I am long FB and will remain so (unless, of course, it crosses the stop I have in place at $140).

Human Progress

Back in 2010, Paul Graham wrote one of his famous essays called Organic Startup Ideas. In it he wrote,

Don’t be discouraged if what you produce initially is something other people dismiss as a toy. In fact, that’s a good sign. That’s probably why everyone else has been overlooking the idea. The first microcomputers were dismissed as toys. And the first planes, and the first cars. At this point, when someone comes to us with something that users like but that we could envision forum trolls dismissing as a toy, it makes us especially likely to invest.

I’m thinking about this essay in relation to CryptoKitties, a platform that allows people to collect and breed digital cats on the blockchain. Now you’re probably thinking, “why the hell would anyone want to collect and breed digital cats?” Well maybe you’re smarter than I am, but that’s what I was thinking at first read. But this starts to get interesting when you really think about it.

First, we’ve all know collectors. Over the years, I’ve known people that collected beanie babies, stamps, coins, Magic The Gathering playing cards, Jordans, vinyl records, and many other things. For me, it was little model cars. My favorite was a red 1995 BMW Z3.

Whatever the item, it seems that it’s a fundamental human desire to own things that are rare and desirable by other people.

Second, it’s important to note that CryptoKitties runs on an open network with open standards (the ERC721 standard – a standard on the Ethereum Blockchain dedicated to the creation and exchange of non-fungible tokens). That means other developers can build their own digital assets and collectibles using the same standards.

Let me give an example that helps explain this second point. Today, you might be playing Grand Theft Auto (GTA) where you complete missions to buy things in the game (additional maps, guns, etc). But those digital assets are only valuable in GTA. If you switch over to World of Warcraft (WoW), those assets are nontransferable. But what if, instead of each game using proprietary standards to create their own digital assets, both used a set of common standards allowing assets to be transferable between games? Or what if you could sell those GTA maps and guns for Ethereum, then use that to purchase weapons in WoW.

Or think about Amazon and eBay. As a seller, you attain ratings and reviews over time as you sell more things. But there’s no way to transfer that reputation to another platform. What if the reviews and stars were a digital asset built on open standards that could be transferred to any other digital platform?

So, coming back to CryptoKitties, it’s likely that blockchain-based collectibles might be one of those things that initially gets dismissed as a toy (but not by Andreessen Horowitz and USV).

Philosophy

One day this week I was taking a ride on the 1 train. When I got on, there was this guy strangely rubbing his arm against the pole that’s supposed to be for balancing yourself while the train was in motion. I proceeded to walk to the other end of the car to give the crazy guy adequate space for his crazy antics. Once a safe distance away, I glanced back to see if the strange pole grinding was still taking place. At that point. I noticed something that I had originally missed. The guy only has one arm. From this angle, it became clear that he had some sort of itch or discomfort that, in the absence of a second arm, was incredibly difficult to reach. So he was forced to use the pole.

I wonder how many other moments exist where I jump to snap judgments without really understanding the situation at hand, how often I think one thing because I fail to pay close enough attention. It’s probably more often than I’d like it to be.

Still much work to be done on being present and aware of what’s real and true.

My Latest Discovery

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