Invest Like the Best with Patrick O'Shaughnessy
· Patrick O'Shaughnessy
[00:00:00] S0: I just was reviewing my notes ahead of our conversation today, from Graham Allison's book on China, called "Destined for War" with China. Can you give your perspective on how you think about China as an adversary, as a country? I highly recommend the book "Apple in China". I mean, it really gives you this deep sense of how tightly integrated, arguably our most important company is with manufacturing there. It's this very strange circumstance, I have to admit, where I've been to China. It's another place filled with human beings and interesting things and amazing, interesting culture and all sorts of positives. It's a hard thing to wrestle with that they're an adversary in the traditional sense. But I think there are components of that and the nuance is important. I'd love to just hear you describe how you think about China as a political entity, as an adversary, as a country. Just feels like an especially important thing to understand your view on.
· Shyam Sankar
[00:00:00] S1: When we won World War Two, we spent our own money to rebuild Germany and Japan. Microelectronics moved to Southeast Asia, as "Apple in China" documents and "Chip Wars" documents, because we helped move it there. Yes, we got cheaper goods in return, but the economic development of these countries, their flourishing, in order to create global stability, was part of the calculus. Same thing with admitting China to the World Trade Organization. The problem is they cheated the whole way through. And even if you go back to a pre-Deng Xiaoping era, they call us the big enemy. I think part of it is our own naivety, our own belief that capitalism and human flourishing is a natural consequence of prosperity. So, OK, they're saying these things, but as they get richer, they're going to change their perspective on these things. And we're all going to find some way of having a positive sum view on the world. That's essentially what didn't happen. I think the challenge for us with the CCP, is that it's not enough for China to be prosperous. America must fail. You see this through simple acts. If you look at agriculture, it is totally their prerogative. It's a business decision whether you want to buy American soybeans or not, or you want to buy Brazilian soybeans. I do not begrudge them one bit. It's a totally different thing when you're trying to smuggle in agricultural funguses so we can't grow soybeans. Now, if you start going down the laundry list of what's actually happening, that's the shape of what's happening. They're a formidable adversary, in the sense that our conception of war is kinetic. It's the lone heroic cowboy against the odds, winning through heroism. Their conception of war is deception. It's the general who tricked the adversary to get into the valley and then flooded it. It's a cultural thing. You want to win without firing a shot. So a lot of the things that are happening are below what we would consider the threshold of conflict, but it absolutely is conflict. It is, in their system, system destruction warfare. It's waging war through all the means, because they're going to wage it where they have asymmetric strength. The American Calvinist sensibility is structurally positive sum. We're going to turn the other cheek time and time again, over and over again. But there will be some line, there'll be some point at which we just react.
· Shyam Sankar, Patrick O'Shaughnessy
And when we react – the best quote I have from an admiral I like is – it's no longer John Boyd's OODA Loop. Observe, orient, decide, act. It's the American OODA Loop. Observe, overreact, destroy, apologize. What we want to do is prevent this from happening by having enough deterrence that we're not provoked to being in a position where we even need to react. [00:00:00] S0: You've mentioned the idea of asymmetries a few times, nuclear subs being an example of one of our last huge asymmetries versus others. What are the most important asymmetries in your mind for the US and for China? Where do they have an asymmetric advantage against us? Where do we have it against them? And what do you hope shifts?
· Shyam Sankar
[00:00:00] S1: This is a great question. Their principal asymmetric advantage is long-term planning. They actually can't pivot on a dime. So let's go back to Gulf War I, which we're talking about with John Boyd. They saw the devastating violence we were able to do in basically four days to the fourth largest army in the world. They said, okay, we have to systematically map all of the critical dependencies of America's military technology and invest against it. And they have been doing that since '91. The frog has kind of boiled in some sense. And it's a little bit of an easier game because they're playing a home game, but that's the map they've been on. And it's been a steady journey. And if you look back, they broadcast their intent the whole time. There's no surprises that were there, ever. Our asymmetric advantage is that we're crazy. The AI phenomenon was not in their long-range plan. It wasn't in our long-range plan, but when it happened, our whole economy pivoted on a dime. And even the Chinese models, those are the result of distillation. And so our ability then to be unpredictable, because we ourselves do not know what we're gonna do. That's our key strength. That comes back to the heretics. Where does that unpredictability come from? Because it's not our bureaucracy. Our bureaucracy is incredibly predictable. It's not the steady Eddie managed decline. It's the crazies.
· Patrick O'Shaughnessy
[00:00:00] S0: How do we get more heretics in this part of the American story? Because there's obviously a massive profit and I would argue status motivator in the private sector. All these companies that are popping up with amazing founders, we've invested in a bunch of them. The potential rewards are extremely obvious. The heretics that you described at the start of the conversation, that's definitely not true. You mentioned dying penniless or whatever. How do we create the right set of incentives for more of our most talented people to go be heretics in this part of the American story right now?
· Shyam Sankar
[00:00:00] S1: There's two incentives. One is recognition that we need the heretics. I think Hyman Rickover enjoyed his celebrity for a big period of time, and just being known as the guy who did this is itself a sort of reward. Then the second part of this is definitely financial. One of the arguments I've been making is the cynical view of the defense industrial complex in particular is something like, these are greedy warmongers. Well, they picked the wrong industry then. Because on the greedy side, you should be in tech. You should be in some other business. These are crappy businesses. They have 9% operating margins or something. They're valued at less than two times revenue. So we actually need to make our primes more valuable. That would help us continue to attract the heretics. How do you make the primes more valuable? The facile critique of the primes is somehow they're the problem. The system's the problem. The primes are just downstream of the consequence of the incentives the government gives. And I think the worst incentive is cost plus contracting. Your upside is capitated. You're not supposed to take any risks. The government basically pays for your R&D. So you have no skin in the game. And yeah, you're still able to make a small number of exquisite things, but that system is anti-heresy. You can only do the conventional thing that the government's agreeing that you should do. You think about the Higgins boat. Andrew Higgins built that boat on his own. There was no spec. In fact, that's why the Navy kept rejecting it. It wasn't the Navy's idea. But then 92% of all boats in World War II are the Higgins boat. The heresy is the boat that won the war. How do you create an economic incentive where that's the case? And I think companies like Anduril are pioneering that on the hardware side where it's like, hey, I'm building a product. These are my specs. These are my opinions. I'm absorbing the risk. You should buy it if you like it or not. Part of the reason for profound optimism right now is I would not have started all this advocacy if I thought I was just screaming into the wind. It's like, having done this for 20 years, for the first solid 10 years, we were alone in the darkness. It was SpaceX on the launch side, and us.