Monthly Archives: August 2017

The Richness of Simplicity

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August 28, 2017

I recently joined several friends for a hike in the Andes mountains of Peru. We spent four days hiking along ancient Incan trails, through a cloud forest, over an alpine tundra, and ultimately to the lost city of Machu Picchu. It was a refreshing break to be totally devoid of cell phone coverage, and the relentless barrage of pings, posts, and tweets. We were fortunate to have among our number a native Quechuan guide, steeped in Incan culture and history. It was the perfect environment for quiet reflection.

One evening, high along the slopes of Salkantay mountain, we were treated to a cloudless, moonless sky. It was the blackest sky I’ve ever seen and the stars sparkled with glittering beauty. As I gazed up at that magnificent sky, I couldn’t help but wonder how the Incans did it. At the height of their empire they numbered more than 10 million. They designed and built elaborate stone structures that have endured the power of earthquakes. And they did it all without wheels; without horses; without steel. Their methods remain a mystery to this day.

That’s when I remembered something equally astounding from our own era. We solved the enormously complex task of sending humans safely to the moon before we put wheels on luggage. It sounds preposterous but it’s true. Neil Armstrong took those first steps on the moon in July of 1969. The following summer, a gentleman named Bernard Sadow, was struggling with his luggage when he noticed an airport worker pushing a piece of machinery on a dolly. When he got home, he mounted four casters to his suitcase and applied for a patent which he received in 1972. It was a great idea, but it would be another 17 years before a Northwest Airlines pilot reduced the number of wheels by half, and integrated the telescoping handle, to produce the rollaboard luggage with which we are now so familiar.

With hindsight, these innovations seem simple and almost obvious. Surely it is easier to put wheels on luggage than to fly to the moon. Today, we have brilliant minds working on complex tasks like automated driving or artificial intelligence. It will be interesting to see how these potentially disruptive technologies emerge. There will be winners and losers for sure. I can’t help but wonder, though, about the simple ideas we are currently missing. What are those hidden innovations, like wheels on luggage, that are right before us, waiting to be discovered?

When it comes to investing, the simplest ideas can often have the most profound results. It’s really not rocket science. Develop a long-term strategy and stick to it. Don’t put all your eggs in one basket. Maintain exposure to public and private markets where  appropriate. Keep your fees and expenses low. Arrange your affairs so you pay as little taxes as possible. In a world where complexity is ever increasing, where information is plentiful but wisdom is scarce, it makes good sense to follow the basic time-tested principles that have served so many investors well over generations.

Mike Masters

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What is Bitcoin?

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August 22, 2017

Recently, a friend told me he turned $800 into $7,000 in just two weeks! Whenever I hear figures like these it is hard to suppress my skepticism. My friend is a twenty six year old software consultant, with one undergrad finance class under his belt, so his claim still struck me as highly implausible and perilous. I owed it to him and myself to do a little research. As a result, I became familiar with cryptocurrencies and specifically, Bitcoin.

Bitcoin evolved from the quest of a mysterious inventor, Satoshi Nakamoto, to create a digital peer-to-peer electronic cash system back in 2008. Bitcoin’s initial trading history is murky. I can only imagine how early investors felt about stomaching the trading risk in the volatile investment climate of that time. I do not feel too bad for them though. The price, tracked by CoinDesk BPI, was $0.06 on July 18th, 2010, and had reached $4,268 as of last week. So how did these earliest investors gain access to something that would prove so lucrative? Most of them had developed their own similar predecessor products that never took off. These products included “ecash”, “b-money”, and “bit gold”. This pioneering group had an information advantage which enabled them to see an opportunity in an evolving marketplace; the need for a digital money which was convenient, untraceable, and free from government and banking regulation and taxation.

Nakamoto knew his invention needed a network with specific rules to be successful. No payment system can operate without components such as accounts, balances, and transactions. But how was value initially created and assigned and by what forces? Before online merchants adopted Bitcoin, its value came from characteristics such as decentralization, untraceability, and its finite supply. Numerous researchers argue that Nakamoto’s greatest achievement was not the invention of the currency itself but rather the development of a decentralized transaction system where each peer in the network shares responsibility for maintaining consensus. Without this accomplishment, one user’s disagreement about a single balance could crumble the entire system given there is no controlling central authority. The most important characteristic of Bitcoin’s success was probably the fact that regulatory bodies have great difficulty in tracing and taxing its use. Moreover, its limited quantity mitigates devaluation through inflation. The level of trust in the system has now reached the point where familiar merchants, such as Microsoft, Expedia, and Whole Foods, accept payments using this decentralized currency even though it still lacks traditional governance and central control.

While Bitcoin is highly technical and complex, it is really not too different from the balances in our bank accounts. Think about how much of the U.S. dollar supply exists solely as digital account balances rather than as green pieces of paper. The trend for commercial transactions to be completed through ecommerce will only continue, and cryptocurrencies like Bitcoin seem destined to take an increasing share of this market.

Adam Stimpert

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