I loved this episode between @patrick_oshag and Alex Sacerdote. Probably one of my favorite investing podcasts of all time. For my way of thinking and investing, this was an A+ 💯.

As I was nearing the end of the episode, I thought to myself "Alex has mapped out the entire global tech stack and ecosystem and uses that map as his guide to the future.” As soon as I was thinking of that, Patrick said that Alex has "built a research machine to understand the world through the lens of companies.” I think it's the same thought, just different way of saying it.

Alex also gives a nice shout-out to @shaunmmaguire who was talking to Alex about the opportunities in hardware three years ago.

Here are some of the quotes I am filing away…

“Anytime you have a new compute paradigm, there is a new [tech] stack, and that creates new winners and losers on the old stack.”

“We have this infrastructure layer S-curve, which we think is like 10% penetrated, and by the way, we think it’s still one of the best ways to play Ai.”

“Sundar said its 10 basis points of the knowledge workers in the world [currently using Ai coding tools].”

“We think the enterprise application Ai market is less than 1% penetrated. We talk about S-curves, but we call this an L-curve.”

“We’re at 10 basis points of people really using Ai and we’re already sold out of compute…there’s not enough compute in the world. So, Anthropic has half of what they need right now.”

“We do 2,000 to 3,000 face-to-face meetings with management teams each year, and about 10% to 15% of those are with privates.”

“We have an investing framework of (1) S-curves, (2) competitive advantage, and then (3) underappreciated earnings power…when you get the right part of the S-curve you get exponential unit growth if you have a very strong business model (which in tech there are so many of those for so many different types of moats), your earnings don’t grow linearly, they grow exponentially, and that is the last piece…invest when there is underappreciated long-term earnings power, and very often the earnings can grow from $1 to $10 or 50 cents to $20, and it happens way more than you think, and it allows you to buy some of the best companies in the world for extremely low P/Es. When we were buying Nvidia in 2023, we were paying 4x earnings. When we bought Tesla in 2019 for the car S-curve, we were paying 5x earnings. When we were owning Apple, we were paying 4x earnings. When we bought Amazon for AWS we were getting it for free.”

[Fascinating about how the bottom part of the S, before the exponential growth phase, can last 10+ years]: “Smartphones were out ten years before the iPhone. The Internet was out 20 years before Netscape…Tesla went public 15 years before 2019 when it went vertical.”

“Andy Grove says when you have strategic inflection points you can’t trust the data. Strategic inflection points are about intuition, anecdotal evidence.”

“BTW, it’s OK to be late. It’s OK to miss the first one, two, three years in a lot of cases because if the top of the S-curve is half a trillion, the growth can go on for a long time. It’s OK to miss the first 100%.”

“I started at Fidelity and Peter Lynch loved to mentor young kids, so I got some time with him, and he said “whiteout the chart. It’s all about the future.”

“First we look at the S-curve and then we do an exhaustive study of everyone with exposure in that area and try and find the one with a very powerful competitive advantage.”

“Warren Buffett didn’t like tech because he couldn’t predict the future. But the S-curve is our map for looking into the future.”

“We sold almost all of our application software…entering this year we were actually net short [SaaS].”

“You can imagine a world where in one, two, four, five years you could have a brand-new AI native company going after each one of these very strong [SaaS] incumbents.”

“In software there is the Rule of 40…for chip investing we have a new Rule of 40: what percent of your sales are AI and what is your market share in that category (say 30% and 30%, you’d be 60%...that’s a great place to look because you’ve got exposure and you’ve got a strong market position). The problem with software is their AI is 1%-2% of sales and it’s a long way to go.”

“AI could make some of these software platforms more important because what’s the first thing you do with Claude??? You plug it into Slack.”

“The workloads in AI are growing 10x every year. And it is pushing every single aspect of hardware to the physical limits of what it can do. So not only are you creating tremendous unit growth, but we are experiencing the de-commoditization of the hardware industry. I met with Shaun Maguire like three years ago and he said I wish I could come back and be a hardware hedge fund because all the companies are public, and they all have powerful IP…and we’re in this renaissance of chips so not only do you have tremendous unit growth but it’s requiring tremendous innovation across every aspect of the server and so…”

“We need you for the next four years designing this road map with us.”

“No one has paid attention to hardware and chips at all. So, we’ve got all these newbies coming into it.”

“One thing that bothers me is there is a lot of negativity in the general population about AI. And there is a lot of negativity in some aspects of the government…But I do think that the genie is out of the bottle. Another risk is that if AI slows down in its improvements…then the open-source models will catch up and then it could be a race to the bottom and it wouldn’t be good for the stocks, probably…it could be good for the chip companies because chip companies don’t care who wins.”

“We’re meeting with as many companies as humanly possible…the [scuttlebutt] system we use is right out of Common Stocks and Uncommon Profits by Phil Fisher.”

“Phil Fisher said get to know ten or fifteen like-minded people [investors] around the country and share ideas…you share ideas and it’s important that it’s a two-way street. I call it the tripod when I like something, and then my analyst like it, and then somebody who I really respect also likes it. Those three legs of the stool can really help the conviction.”

“We think there is a huge structural underweight of the largest tech companies in the world…[partly because] there is a belief that there is no alpha in large caps]…[investors worry there is not alpha in big companies] but we realized this is just a product of the digital economy in that in tech the leader usually grows bigger and wins and develops very high market share quickly and there is great competitive advantages, and they are also selling around the globe so this is going to lead to massive profit pools and massive market caps…And most endowments are betting against this because they are completely underweight this…I think there is tremendous alpha in the largest cap because with a small cap it takes just one person to figure out it’s good and move it up. But it takes 100 diversified PMs to realize Google is not a loser, it’s a winner, and can we figure that out before 95% of those generalist PMs?…and we’ve been able to do it and we like our odds on that.

Disclosure: I am an investor in and the portfolio manager of the Bastion Industrial and Infrastructure portfolio, which owns shares of Nvidia, Alphabet, and Amazon. I personally own shares of Apple and Tesla.