Nov 3, 2021 · 1h 59m · acquired
Complexity Investing & Semiconductors with NZS Capital (Extended Cut) · Acquired
John Bathgate · 33m spoken Brinton Johns · 31m spoken Ben Gilbert · 24m spoken David Rosenthal · 18m spoken Joao Menin · 2m spoken
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this extended Acquired episode, hosts Ben Gilbert and David Rosenthal interview Brinton Johns and John Bathgate of NZS Capital to explore how complexity theory, non-zero-sum value creation, and biological resilience govern modern investing and the global semiconductor supply chain.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ben and David hold 39% of the talking time here. How this is scored →
Ben and David as informed peer 4.2 Guest teaching 5.5 Guest disagreement 1.2 Ben and David pushing back 1.1
speaking balance: gold is Ben and David, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 41:12 Brinton Johns rejects 'conviction' as a virtue
Brinton forcefully equates investor conviction with overconfidence and sunk cost bias, rejecting a core sacred cow of venture and public market pitch culture.
Hardest push from Ben and David ▶ 49:09 David Rosenthal challenges trimming winnersDavid pushes back against NZS Capital's rule of capping and trimming optionality winners, citing canonical VC wisdom to let compounders run indefinitely.
Biggest teaching moment ▶ 34:28 Brinton Johns demonstrates non-ergodic risk flawsBrinton dismantles standard Gaussian risk models by walking through Ole Peters' coin-flipping theorem where ensemble averages mask individual bankruptcy.
Ben and David hold their own ▶ 1:48:55 Ben Gilbert synthesizes under-extraction and duration underwritingBen connects NZS Capital's thesis with their earlier Ho Nam/Altos interview, articulating how intentional under-extraction gives sophisticated investors an informational edge.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ben and David as informed peer | Guest teaching | Guest disagreement | Ben and David pushing back | Why |
|---|---|---|---|---|---|---|
| Complexity Theory, Santa Fe Institute, and Resilience | 4 | 6 | 1 | 1 | The hosts introduce NZS Capital's foundational paper on complexity theory. Brinton explains complex adaptive systems, Santa Fe Institute origins, and biological frameworks, educating the hosts while they reference Bill Gurley and Michael Mauboussin. | |
| Ants, Durability, and the Compounding of Resilient Companies | 4 | 5 | 1 | 1 | Brinton explains Deborah Gordon's ant colony study where half the colony is idle to optimize for resilience rather than short-term productivity. Ben and David synthesize this with Warren Buffett and Charlie Munger's compounding philosophy. | |
| Defining Resilience, Scale, and Non-Zero-Sumness (NZS) | 4 | 6 | 2 | 1 | John unpacks the resilient half of their portfolio and challenges standard moat theory, noting traditional moats often encourage value extraction rather than non-zero-sum value creation. | |
| Value Creation vs. Value Extraction: Apple, TSMC, and Porter | 5 | 6 | 2 | 1 | Hosts and guests examine Apple's App Store take rate and contrast it with TSMC leaving gross margin on the table for customers, extending Porter's shared value concepts. | |
| The Optionality Portfolio, RootMo Companies, and Life Philosophy | 4 | 5 | 1 | 1 | Brinton defines optionality, portfolio barbell sizing (15 resilient names vs 40 optionality names), and explains 'RootMo' companies like early Amazon and eBay with PayPal. | |
| Power Law Distributions, Ergodicity, and Outsized Returns | 5 | 7 | 2 | 2 | Brinton and John detail Ole Peters' non-ergodic coin flip toy model, illustrating why normal distributions fail to model financial markets governed by power law dynamics. | |
| Conviction as Overconfidence, Bias, and Risk Culture | 4 | 6 | 2 | 1 | David and the guests explore the concept of conviction as overconfidence and bias. The guests explain how their firm culture rewards catching cognitive bias rather than doubling down on certainty. | |
| Position Management, Valuation Discipline, and Market Multiples | 5 | 6 | 2 | 2 | David questions the practice of trimming winners rather than letting them ride indefinitely. John and Brinton explain how position caps prevent severe drawdowns and how sky-high valuations force narrow predictions. | |
| Semiconductor Categories: Leading Edge, Catalog, and Silicon Carbide | 4 | 7 | 1 | 1 | Brinton and John outline the difference between leading-edge logic semiconductor makers and catalog analog giants like Texas Instruments, introducing Cree and silicon carbide substrates. | |
| Sponsor Spotlight: Modern Treasury | 0 | 0 | 0 | 0 | Host sponsor read for Modern Treasury. | |
| EDA Duopolies, Leadership Culture, and Executive Research | 5 | 6 | 1 | 1 | John shares their investment history in Cadence Design Systems and interactions with Lip-Bu Tan, while Brinton recounts an anecdote about TI's CEO Rich Templeton during the 2008-2009 recession. | |
| The Physics and Origins of Semiconductors: Bell Labs to Integrated Circuits | 4 | 6 | 1 | 1 | Brinton jokes about Roswell UFO reverse engineering before walking through Bell Labs, William Shockley, solid-state switches, and doping germanium. | |
| TSMC vs. Samsung: Memory Dynamics, Logic, and Business Models | 5 | 7 | 1 | 1 | Ben asks for nuance regarding TSMC vs Samsung. Brinton and John explain Samsung's dominance in DRAM and NAND memory versus the distinct customer-neutral foundry model of TSMC in advanced logic. | |
| TSMC Geopolitical Risks and the Semiconductor Superorganism | 5 | 6 | 2 | 2 | The conversation covers the catastrophic systemic risk of a Taiwan conflict. Brinton conceptualizes the semiconductor value chain as a single, indispensable superorganism. | |
| The Evolution of Moore's Law: EUV, Chiplets, and Advanced Packaging | 5 | 7 | 1 | 1 | John breaks down advanced packaging, chiplets, GAA transistor architecture, and EUV lithography, explaining how Moore's Law continues along a 'more than Moore' multi-dimensional trajectory. | |
| Deep Supply Chain Specialization: ASML, Zeiss, and Trumpf Lasers | 5 | 7 | 1 | 1 | Ben investigates why suppliers like Trumpf or Zeiss don't vertically integrate into lithography tools or foundries. John and Brinton highlight the extreme fractal complexity across the supplier base. | |
| Sponsor Spotlight: Fundrise | 0 | 0 | 0 | 0 | Host sponsor read for Fundrise. | |
| ASML's Ecosystem Rescue and TSMC's Trillion-Dollar Platform Value | 5 | 6 | 1 | 1 | John recounts how Intel, Samsung, and TSMC co-invested in ASML in 2012 to fund EUV development, and calculates the trillions of dollars in downstream enterprise value enabled by TSMC. | |
| Leaving Money on the Table, Duration, and Governed Growth | 6 | 6 | 1 | 1 | Ben links leaving money on the table to valuation duration and Ho Nam's investing philosophy. Brinton emphasizes that negative feedback loops and natural governors create durable compounding. | |
| Unstructured Time, Team Process, and NZS Resources | 4 | 5 | 1 | 1 | Brinton and John describe their day-to-day workflow at NZS Capital, allocating unstructured time to explore non-linear insights without administrative distractions. |
Statements from this episode (38)
Johns: Emergent behavior makes exact future predictions useless
“We don't know how the future is going to unfold because the system is interacting together, and it creates what's called emergent behavior, and emergent behavior makes predicting useless in most cases, and we can have guidelines and heuristics, and those are a…”
Johns: Investing should prioritize biological resilience over predicting the future
“You know, it's really more about resilience than it is about predicting the future. And it's about adaptability. Like biology doesn't really care that much about the future. They care about adapting to this wide range of futures, right? Like my bees don't real…”
Bathgate: NZS Capital holds Texas Instruments for its decentralized culture
“Some companies in the portfolio we admire that, that do that would be someone like Texas Instruments where they have a really decentralized Culture and they actually push responsibility and decision-making down into kind of the deeper parts of the organization…”
NZS Capital: Microsoft and TSMC anchor resilient portfolio with ~10% turnover
“And so this would be a company like companies we own in the head of the portfolio, be someone like a Microsoft or a TSMC where we're not looking for like value stocks or kind of like cheap companies. We're looking for companies that are healthy growers that we…”
Bathgate: Investors should avoid extractive moats reliant on price-hiking lock-in
“One of the things that we're careful about is like looking for companies where, you know, part of their moat is kind of you know, inserting themselves into the value chain or into their you know, their customers, you know, share of wallet basically, where they…”
Bathgate: Halving Apple App Store take rate costs 5% of gross profit
“What's the gross profit impact if they cut their app store you know, take rate from 30% to 15%, you know, across The board. What is that like? Five percent of gross profits. It's like meaningless to them and it would create so much value for all the, and there…”
Bathgate: TSMC keeps margins below its customers to prioritize long-term platform value
“TSMC has lower margins than most of their gross margins than most of their customers. And so at any point they could probably take the margins from 50% to 60% and say, Hey, I'm obviously have a monopoly in this market, but the way, you know, Morris Chang archi…”
Johns: Intel should have adopted ARM's IP licensing model for mobile chips
“They came down, they came out with a cheaper version of it, but in reality, that's not what they should have done. They should have, you know, actually embraced a totally different business model like arm dead. We're just, they were just selling IP and enablin…”
Johns: NZS holds ~15 resilient names and ~40 optionality names
“So we concentrate resilience. That's about 15 names and just over half the portfolio. And then we distribute optionality. So that's about 40 names. Also just under half the portfolio. Max position size one and a half. And in the middle is between one and a hal…”
Bathgate: NZS targets a 30% hit rate on optionality investments
“What we're really playing for in the optionality, half the portfolio is asymmetry. And really it's not about batting average. Like it's okay if we're only right. 30% of the time, which is not intuitive at all for public markets investors.”
Johns: Investment 'conviction' is just a synonym for overconfidence and sunk-cost bias
“We use conviction as a synonym for overconfidence. I think that's what Really is the right way to, that's the right way to think about it. Conviction for us means, hey, I've done a ton of work, so I've got a lot of sunk costs, which means I've got bias, and I …”
Johns: Investing is inherently a team sport because teams counter bias
“We think investing is inherently a team sport. It's a terrible solo sport for the most part. And the way we view team is our role is calling out bias in each other.”
Johns: Zoom looks more like a feature than a platform
“With a company like Zoom, which we never owned because, you know, I don't know, this bad call. It looks a lot to us like a feature, and then, so now the question is, can it become a product and eventually maybe a platform?”
Johns: Expensive valuations force investors to make predictions
“Valuation is a key piece. And this is the piece that we get every day as public investors and valuations, expensive valuations force predictions. I have to believe a lot more at 10 times sales than I do at 10 times earnings, right?”
Johns: Texas Instruments' moat is decades of catalog breadth, not technical superiority
“They're very hard to replicate, not because what they're doing so technically hard, it's hard, but it's because the breadth of what they have would take you decades to recreate.”
Bathgate: NZS Capital holds roughly one-third of its portfolio in semiconductors
“We have about a third of the portfolio in, in semis.”
Bathgate: Cree controls two-thirds of the silicon carbide substrate market
“Cree is the one company that has two thirds of the market for the substrate itself.”
Bathgate: Cadence is taking digital EDA market share from Synopsys
“We do think they're taking market share, especially in digital markets, like where they would be selling to an Intel or an Apple or an Nvidia. We think they're the share gainer, but both companies, it's like an extremely high quality duopoly.”
Johns: Rich Templeton eliminated TI's 40% wireless and Nokia exposure
“When he took the company over, they have 40% of the business geared towards wireless and Nokia was a massive customer, their largest customer, and he bled that down to zero.”
Johns: Samsung controls 50% of DRAM and one-third of NAND market
“They have 50% of the market share in DRAM and about a third of the market share in NAND.”
Johns: Samsung's consumer hardware division creates a foundry trust deficit versus TSMC
“Samsung is also doing logic, but it's, they have a different business model, right? They compete with their customers. So it's harder for their customers to trust them. Whereas TSMC doesn't have that conflict.”
Bathgate: TSMC surpassed Intel because vertical integration forced impossible multi-front technological battles
“Intel has to fight TSMC on process technology, which, like, in itself is one of the hardest things, you know, any technology companies had to do over the last 20 years, and that's why Intel has been surpassed by TSMC, right?”
Bathgate: Escalating Moore's Law complexity favors horizontal semis over vertical integration
“The needs of Moore's law are just so difficult that like, it's hard enough to just do one of these things well and doing multiple of them well makes it makes it harder.”
Bathgate: A TSMC fab shutdown sets Western tech progress back five years
“If for some reason, you know, China moved to seize Taiwan or however, you know, it went into play and all of a sudden TSMC's fabs were shut down, then you really, the Western world would be, you know, set back at least five years, if not 10, just in terms of l…”
Bathgate: TSMC manufactures a quarter of the world's digital chips
“TSMC fabs a quarter of the digital chips made in the world right now.”
Johns: Major technological shifts require vertical integration rather than horizontal efficiency
“When technology changes, like, I just didn't have a concept for the smartphone. So technology was about to change quite a bit. And in that change, you really want to be vertically integrated because you're not pushing efficiency. You're pushing sort of product…”
Bathgate: TSMC never exceeds a 10% portfolio position due to geopolitical risk
“I mean, I guess it'll never be our, like, a 10% position for that reason as there is always this risk”
Johns: NZS Capital intentionally holds zero Chinese technology stocks
“We've owned China tech for a long time, but when we put this portfolio together at the end of twenty-nineteen it just looked Sketchy to us, honestly. I don't know what there's a lot for lack of a better word. And so we own zero, zero China tech.”
Bathgate: Moore's Law will continue spiritually for 10 to 15 years
“I think just like for the spirit of Moore's law, we still have, we have visibility probably for the next. 10 to 15 years.”
Johns: Texas Instruments generates higher operating margins than Microsoft
“Who has higher operating margins, Texas Instruments or Microsoft, right? Because I ask it, you know, the answer is, it's TI.”
Bathgate: Nvidia has one of the world's best business models
“NVIDIA has got close to 70% gross margins and like, you know, low forties operating margins. I did really with very little cyclicality because TSMC offloaded all that cyclicality. Right. So it is just like one of the best business models besides I would say en…”
Bathgate: Zeiss makes the most uniform lenses in history
“ASML's partnership with Zeiss, the lens company is also like really special. And I guess like Trump and Zeiss could try to partner to, I don't think they have any ambitions to do this, but they could try to partner together to kind of circumvent ASML. But like…”
ASML took nine years between first EUV shipment and high-volume production
“They shipped the first EUV tool in 2010 to TSMC, and EUV didn't even really start high volume, and this was after, you know, a decade of R&D already, but then they didn't start high volume manufacturing on EUV until 2019. So they had, like, almost a decade of …”
Johns: No single company can vertically integrate advanced semiconductor manufacturing
“It's really this ecosystem approach that makes sense. No one can do all of this. It's just way too hard. It really does take a village.”
Bathgate: Intel, TSMC, and Samsung bought 25% of ASML to fund EUV
“Intel and TSMC and Samsung partnered and actually bought 25% of ASML to inject capital into ASML to develop EUV systems.”
Johns: Leaving money on the table maximizes long-term total value
“When you leave money on the table, what you're doing is you're creating goodwill for your customers and you're buying the company duration, which is oftentimes the way to maximize total value, right?”
Johns: Watershed research insights require wandering through 90% wasted time
“And the way we think about it is we can wander around not knowing what we're doing and waste 90% of that time. And 10% might be really useful and one percent might be absolutely watershed. And that's really all we're looking for. But you can't ever just get to…”