As I mentioned in my first investor letter, my investing philosophy had deep roots in oriental philosophies. For this reason, I always find those investors who are able to master both eastern and western mental models extremely intriguing. On surface, lots of eastern mental models & philosophies resonate with well-known western principles already, but I also believe they have more unrecognized value to investing practices. I am planning to start a series to document all investors that fits this category, to document my lessons learned from them and to share with my readers their insights (many of which aren’t available in English media).
The first one is Shoucheng Zhang (Wikipedia Link). Zhang is an ingenious physicist, to say the least. He got admitted by one of the top universities in China purely by self-study after the Culture Revolution ended in 1978 when he was only 15, then went abroad and finished his PhD by 24. His best known finding is probably topological insulators, for which he was awarded a Dirac Medal in 2012. His work was estimated by Thompson Reuters to be able to win Nobel Prize in 2014 (Link). Zhang is also a tech VC investor. He is said to be one of the early investors of VMWare (as he’s a neighbor of the co-founder Mendel Rosenblum who is also a Stanford professor) and made hundred bagger on it. He officially started his profession investing career in 2013 by founding Danhua Capital (website link), an early/growth stage VC focusing on disruptive technologies.
Like Charlie Munger, Zhang also see Benjamin Franklin as an archetype. Zhang mentioned that he struggled at a young age on whether he should aspire to be a scientist or an entrepreneur, until he realized he really could be both after reading about Franklin, one of the greatest polymaths in history. Not surprisingly, he is also a fan of multi-disciplinary mental models. As a theoretical physicist, his application of quantum physics principles to investing (and life) is the most interesting insights among other thing. Additionally, contradicting to stereotype of physicists, he seems to have strong interests in Aesthetics.
Zhang’s key philosophy can be summarized by a quote he constantly mentioned in multiple interviews: “Complexity out of Simplicity” or “First Principle”. Before moving on, I think it would be beneficial to expand on the “First Principle” (Wikipedia link) as it initially appeared foreign to me. My understanding is that first principle is a thing/principle/notion which is in its most fundamental form and is self-evident without proof or deduction. That is where you want to start your learning/thinking process.
Some of my favorite thoughts of Zhang (paraphrased) are below:
– A perfect world should be a quantum world, where a single particle could perfectly do two things at once in parallel
– I spent 100% of my time researching and teaching, and 100% of my time investing (just like a quantum particle).
– Science and Art, as well as Aesthetics in their most advanced forms are unified.
– Benjamin Franklin would be a great twitter (for his ability to simplify wisdom into less than 140 characters).
– On investing bubbles, Zhang thinks there could be two types of bubbles, one will burst and the other will sustain. He would look at the statistical distribution of the bubbles (based on size of the bubbles and numbers of bubbles), to determine whether it’s exponential or reciprocal. If the distribution is an exponential function (concentrated big bubbles), it is more likely to burst, while if the distribution is a reciprocal one (small numbers of huge bubbles, but many small ones, long tail), it’s more likely to sustain.
– On multi-disciplinary learning, Zhang uses a tree as a metaphor for all the knowledge in nowadays. If you start from the tips of each leave (specialized knowledge), you will find it’s very hard to connect to other branches. On the other hand, if you trace each branch to its root (first principle) and study them, you will be able to find resonance between disciplines and to master all more easily. [My comments: this is exactly one key doctrine of “Mungerism” among us value investors]
– On post-mortem analysis, Zhang insists that it is more important to study from failure than from success. In Napoleonic age, the most famous war treatise was written by one French general and military theorist Antoine-Henri Jomini. His treatise talks about the war art of the winning Napoleon side, with specific mentioning of the techniques of how to use the then-new-technology – cannon. As you could imagine, the relevance of these techniques went only so far as cannon lasts in human history. On the other hand, historians think of much more highly of another treatise, Theory of War, by Carl von Clausewitz, a military theorist from failing Prussian side. The highlight of Clausewitz’s theory is that he realized the importance of the philosophical “moral forces” of armies. He thinks French were winning because their army was more aligned with their commander in their mission of spreading the spirit of Liberté, égalité, fraternité (origin from French Revolution, Liberty, Equality, Fraternity in English) to broader Europe. [My comments: This is exactly Sun Tze’s notion of Tao in his five factors model, which can be translated to morality, see more in my old post about Sun Tze’s Five Factors application in business.]
– On the value of information, Zhang used John Wheeler‘s “it from bit” famous quote to show the supremacy of information (over mass). Zhang views traditional manufacture as reorganization of atom (mass), and IT industry as reorganization of information. With the assumption of information supremacy, he strongly thinks software is more important than hardware (resonate with Marc Andreessen‘s viewpoint of “software is eating the world”). (My comments: further on “it from bit”, I found Wheeler’s original elaboration is a great read and has resonance with my life philosophy —
“I, like other searchers, attempt formulation after formulation of the central issues and here present a wider overview, taking for working hypothesis the most effective one that has survived this winnowing: It from Bit. Otherwise put, every it — every particle, every field of force, even the spacetime continuum itself — derives its function, its meaning, its very existence entirely — even if in some contexts indirectly — from the apparatus-elicited answers to yes or no questions, binary choices, bits.
It from Bit symbolizes the idea that every item of the physical world has at bottom — at a very deep bottom, in most instances — an immaterial source and explanation; that what we call reality arises in the last analysis from the posing of yes-no questions and the registering of equipment-evoked responses; in short, that all things physical are information-theoretic in origin and this is a participatory universe.” )
– Further on the importance of simplification, one interesting thinking experiment Zhang had is to put yourself in a Noah’s Ark situation, where the world is about to be flooded. Before boarding, you can only write on the back of an envelope and take it with you. What would you write on that envelope, so that human could restore as much civilization as possible in the aftermath? Here is his version:
1. Three Scientific Formulas (Physics)
According to Zhang, the universe is composed of two elements, energy and information, as material is one form of energy. [My comments: coincidentally, this is very similar to some traditional Chinese worldview, which says the universe is made of 气 or Qi (energy) and 灵 or Ling (Information).] The greatness of these three formula is that the first one (Einstein’s mass-energy equivalence) describes the law of energy; the second one (Entropy formula) describes the law of information; and the third one (Heisenberg Uncertainty Principle) describes the limitation of science. [My one sentence layman takeaway for each: 1: it unifies mass and energy; 2: it determines the amount of information produced by certain data source, and low probability events (e.g. black swan events in financial markets) carries more information than high probability events; 3: one cannot measure both the position and the momentum of a particle simultaneously, furthermore the observation activity itself would alter the state of an observee, thus it could have profound impact on philosophical level, i.e. idealism vs. materialism]
2. All Things Consists of Atom (Physics/Chemistry)
This holds true across the whole universe, and also a great example of ancient Greek mental model of Atomism. The “undividable” nature is also a resonance of the first principle mental model.
3. Euclid Principles of Geometry (Mathematics)
Euclidean geometry is, according to Zhang, another deduction of the principle of “Complexity out of Simplicity”. Again, an application of the first principle mental model.
4. Natural Selection, Survival of the Fittest (Biology)
One of the most important biological principles. [My comments: not only applicable to biology, in business, the most adaptive companies prospers and those are not adaptive will extinguish.]
5. All Men Are Created Equal (Humanities)
Zhang mentioned US constitution as an application of the first principle as well, where one could build complex constitution based on a most basic and self-evident proposition. “All men are created equal” can be understood by all human being without any deduction.
6. Die Luft der Freiheit weht (Stanford Motto in German means “the wind of freedom blows.”, Education)
7. The Pen is Mightier than the Sword (History)
It is a famous quote from French politician (without a better term), Cardinal Richelieu. The power of idea/knowledge is much stronger than the power of military. For example, the three formulas in the first point may last until the end of human civilization, but the story of historical emperors may not.
8. Invisible Hand (Economics)
Zhang didn’t elaborate on it, but my view is that it is the most important understanding of incentives, which I think is one of the strongest emotional powers, thus one of the most reliable predicting signals (of human and entity’s behavior). Using Bitcoin, which Zhang views highly, as example, I see the greatest innovation being the self sufficient fraud-preventing incentive system — that is making the cost of fraud (i.e. taking control of over 50% nodes) larger than the benefit of the fraud (although fraudulent nodes could claim ownership of certain Bitcoin which is otherwise not theirs, the value of these Bitcoin will be dwarfed by the cost as the trust of the Bitcoin network collapse after the the fraudulent incident). This is a example of “Virtuous Feedback Loop“, and a great application of incentive system to promote societal (network-wise) goodness using individual’s self-interests.
9. Tao is in Its Simplest Form (Philosophy)
In Chinese, 大道至简. It literally means “Tao is in its simplest form”, by extension “General laws and principles are in simplest form”. [My comments: This is really the same notion as Einstein’s “Everything Should Be Made as Simple as Possible, But Not Simpler.”]
I would be blind if I still haven’t seen the striking similarity between Zhang’s and Munger’s mental models. Though not sure whether they know each other, based on the obvious common interests they will probably hit it off if they do. Even without decent length of track records, I would expect Zhang could turn out to be a great investor, as he has a solid investing philosophy and capability to develop an as solid investing process.
– First Principle and Entrepreneurship – a 5 hours long speech/lecture [highly recommended, in Chinese]
– Interview with Phoenix Television (in Chinese)
– Interview with 36Kr (in Chinese) [Link]
– Interview with Tsinghua University (in Chinese) [Link]
– Lecture/Open Class in Stanford on his Physics achievements (In English)