Byrne Hobart is the author of The Diff, a newsletter about inflections in tech and finance. ADS is the author of Applied Divinity Studies.
Applied Divinity Studies: Is there a Hotelling’s law for newsletters? It doesn’t seem absurd, at face value, to imagine that there’s a Byrne Hobart Prime writing approximately the same newsletter but say, covering a slightly different subset of events.
Or if talent plays a role, maybe a Discount Byrne Hobart who writes a worse version of the same newsletter but offers it for half the cost.
You might argue that the pressure towards homogeneity is eradicated by zero marginal costs to replication, but ultimately, we should still expect to see a lot of imitators, some of which might by slightly better at filling some demand niche, and with enough of these you would expect to lose your lunch.
What’s going on? Is newsletter defensibility driven by network effects?
Byrne Hobart: There are a couple different dynamics here:
- Business writing and pure entertainment have very different demand curves. For business writing, opportunity cost is a much bigger component of the total cost, which makes pricing differences less salient.
Suppose someone makes $1m/year at a private equity firm. Assume they’re working 60-hour weeks. Their time is worth $333/hour. So an hour-a-day newsletter habit has an opportunity cost that’s far higher than the financial cost of the newsletter.
In fact, the opportunity cost of reading half a dozen Diff issues is higher than the subscription cost for this kind of reader. This puts a high premium on 1) making novel points, 2) making points that will help them make more effective decisions, and 3) getting to the point.
A newsletter that is lower quality might have a lower financial cost, but in terms of opportunity cost it’s actually more expensive. - Another dynamic with newsletters is affinity. This is usually a bigger deal at lower price points than mine, but I know of plenty of people who will pay $5 or $10 a month to support someone, even if they’re not getting anything extra. In fact, I do this sometimes. It’s nice to support people.
That said, the business is quite competitive. There are some very smart people out there writing on topics I cover, and when there’s a big story I often assume it’s going to be covered, and covered well, by someone who I like to read.
This doesn’t preclude me writing about it, too, but it does put a premium on writing about topics that aren’t timely and thus don’t have direct same-day competition.
Fortunately, this kind of writing is self-sustaining, because there’s this iterative aspect: see an interesting pattern, write about it; find a case study of that pattern, write about that case study; see other interesting patterns in the case study, write about those.
This often takes the form of turning a footnote into a full article, and sometimes that article will have a footnote worth expanding on, too.
Applied Divinity Studies: 13 years ago you were living in a former crack den eating rice and beans. What was that: a mistake? Instructive? Would you do it again? Recommend it to a colleague?
Byrne Hobart: Some amount of suffering is good for moral development and gives you better stories to tell, but it’s hard to recommend it.
For one thing, maybe that experience is entirely subjective to me, or I’ve been successfully memed into thinking that it Builds Character when it really doesn’t.
For another, it seems like it’s better for you if you choose it, or, even better, if you make choices that inevitably lead to it.
In my case, it was not especially bad. It doesn’t really count as poverty since I wasn’t struggling to pay bills or have enough to eat, just paying very small bills and eating not especially great food. And I was confident it was temporary, which turned out to be justified.
It’s probably healthier to pursue some edifying level of suffering either a) through some kind of structured belief system that tells you when to suffer and what it means, e.g. religiously prescribed fasting, or b) by working out, which is painful but has good physical effects in addition to the character-building ones.
Applied Divinity Studies: What’s the most value a reader has even gotten out of The Diff? A job offer? A particularly lucrative trade? Will you ever know?
Byrne Hobart: I know of at least one very cool job someone got through The Diff, although I haven’t been given permission to disclose it. I’ve heard about trades—including, oddly, one case where I was musing about an interesting situation in oil markets but did not actually come to a firm conclusion. My reader did, and did well at the trade. (Maybe this is why I’m not at a hedge fund any more.)
Other than that, I’ve had readers say that something I wrote nudged them in the direction of creating one more startup (and some things I wrote outside the newsletter apparently encouraged one acquaintance to have one more kid, which is a very big deal!)
Applied Divinity Studies: John Luttig has a great piece about finance’s encroachment on popular culture. In the past, we might have had Gordon Gekko as a villain, or Ryan Gosling in The Big Short as a kind of anti-hero, but now it seems we’ve gone from demonizing Wall Street’s excesses, to demonizing them, but also wishing we could get a cut of the pie.
Have people gotten greedier? Has trading become more democratic? Is anti-capitalist sentiment evolving into a sense that if it’s all just a game, maybe ordinary people can win too? Are we just bored?
Byrne Hobart: There have been finance heroes and antiheroes for a long time. Jesse Livermore was a celebrity in the 20s, as were a few other now-mostly-forgotten traders, like Michael Meehan, the first person prosecuted by the SEC. Before that, you have Dreiser’s The Financier. And Moby-Dick has a scene where Ishmael is negotiating his equity comp package (he gets 33 bps).
So it’s been going on for a long time. It seems to follow the market on a syncopated timeline: when everything’s going great, it’s easy to write a finance-type character into your story if you need someone rich and don’t want to spend any time on how they made their money. After a crash, they’re easy villains.
That said, we do seem to be in a weird moment around democratizing finance. In the past, there were some ways people got rich without even trying, like buying a house in the only neighborhood they could afford and seeing that neighborhood gentrify to the point that homes sold at a premium. But meme stocks have some novelty to them, where there’s more earnestness about the collective effort to get rich and more nihilism about the connection between the real economy and why people get rich.
Maybe it’s some kind of alienation from modern economic complexity. You can spend your entire career working on something in the bowels of the supply chain, get good performance reviews, actually create a lot of value, and have no tangible connection between what you do and the end value you create for people.
That’s especially common in the white collar service sector; a chip designer can know that the physical thing they helped create is present in x million devices, but if you’re an accountant there’s not anything tangible you can point to that you created, even though the economy would collapse if nobody kept the books.
Applied Divinity Studies: You once wrote that “Netflix’s ostensible goal is to win the Moment of Truth: when you’re home from work and too tired to do anything but vegetate”.
What time of day do people read The Diff, and why? Is it a business book you listen to at 3x on the commute to get an edge at work? A consumption good read mostly for entertainment? A source of gossip you can share and debate over lunch?
Byrne Hobart: I only know this anecdotally, because I don’t collect or track really fine-grained metrics on how people read it. The four main use cases are:
- Scan headlines/table of contents, immediately read anything that jumps out, and ignore the rest.
- Read everything immediately.
- Read over lunch (it’s right in that intermediate state between doing serious work and goofing off)
- Batching articles and reading them over the weekend, on a long flight, etc. I see this behavior sometimes because I get alerts when someone hits the favorite button, and I’ll sometimes see someone go through a big chunk of the back catalogue over a couple hours.
There’s a category of information consumption that’s analogous to micronutrients. If you don’t get any Vitamin C for a day, it’s not a big deal, but if you miss out on it for months your teeth will fall out and your scars will un-heal. Similarly, there are some things you want to read not because you’ll use them today but because you’ll remember them in five years.
I deliberately lean in to this kind of reading, and try to do a fair amount of this kind of writing. For company profiles, for example, I’m generally not writing for someone who’s thinking about buying or selling the stock today, or weighing a job offer from the company; the hope is that they’ll remember some interesting lesson from Palantir or FedEx or Coinbase and apply it later.
Applied Divinity Studies: Just before The Diff became popular, the NYT wrote of Matt Levine: “...his columns are never boring. They may be the only entertaining words a financial markets professional reads all day.”
The recent wave of finance newsletters seem to be challenging the notion that financial news should be boring. Or that business news should be boring. Or that news or any kind in any form should be permitted to exist unless it also entertains.
What broke the dam? Or is it just a different reader base?
Byrne Hobart: Finance has always been entertaining because at one level it’s this totally mercenary, quantitative field, and yet it’s full of human beings with normal human flaws and biases. And since we have tons of data on finance relative to other fields, we can actually measure those biases.
The pseudonymous Adam Smith wrote some wonderful things about the 60s bubble and 70s downturn. And way before that, How We Got Up the Glenmutchkin Railway and How We Got Out of It is a short story about the 1840s railway bubble, written by a participant, that feels eerily similar to recent events, all the way down to radical libertarians who are convinced they’ve solved economics and found a way to get rich, as well as ESG investors who turn out to be rather sharp dealers.
A lot of this stuff is cyclical. Part of what’s changed now is distribution, and especially economics: older media companies finally got people to pay for news and opinion, and then that got packaged into a software stack that independent operators can use. And Stratechery was also a big deal here, since it proved that independent operators can produce a great product and also build a sustainable economic model for themselves.
Once you have someone writing directly to their audience, it’s easier for them to experiment, and it turns out that a lot of those experiments were funnier than straightforward reporting. This makes sense—finance people were always more willing to crack jokes in person than in formal reports. (The one exception to this is in equity research reports, where there’s a long tradition of puns in titles. I’ve always envied a friend of mine who managed to write “Back that -aaS Up” as a section heading in a piece on Microsoft’s cloud computing ambitions.)
Applied Divinity Studies: At the start of lockdown, you wrote: “March 2020 was the month that you learned whether or not, if you got sent to prison for a crime you didn’t commit, you’d emerge well-read and fantastically ripped… I also have some bad news about the novel you were going to write “someday.”
How’s your book going?
Byrne Hobart: I have the bad habit of making relatable observations that I can’t personally relate all that well to: since I’m fairly introverted to begin with, and was already working from home, the early pandemic was not a serious change in my day-to-day lifestyle.
It got tougher as the kids started feeling more cooped-up, which is not a problem you get in prison as far as I know. If you’re surrounded by adults who are having an objectively awful time, you can probably force yourself to ignore them, but when it’s your family that’s struggling it’s not a good idea to tune that out and focus on your own projects.
That said: the book is going well, and it’s been fantastically fun to write. Having a long-term deadline for a big project has been healthy for me, because I’m bad at managing those—a mostly-daily newsletter is easier to write because so much of the work is done in that magic last few hours when you can really concentrate.
Applied Divinity Studies: You’re known for applying financial metaphors to every aspect of life, including marriage, parenthood, beauty, and sometimes even financial markets. Does writing change how you see the world? If you had to summarize your perspective in a few principles, what are the rest of us missing?
Byrne Hobart: One of the reasons I started writing regularly was that I felt like I was reading a lot but not retaining as much as I should, and writing has helped with that. In particular, going back and forth between object-level writing (company profiles, thinking about news stories) and meta level ones (recurring concepts that show up in both) is a good way to improve retention. That’s a very direct change.
Less directly, I’ve gotten a lot more appreciation for how complicated the world is, and how many weird niche value-creating activities there are. There are just so many ways people make a living, and so many activities that look like they couldn’t support a company but actually do.
Another thing I got from writing was a good illustration of how much effort compounds over time. I think there’s a tendency for people to underestimate just how much continuous effort is behind really big successes.
There are natural talents, of course, but what natural talent does is
1) have an effect on what your limit is if you invest maximum effort, and
2) give you rewarding feedback right when you start something, which is a good reason to keep at it.
At the tails of the distribution, talent is the differentiator, but most of us are not in those tails, so most of us should work harder. And at the tails, it still matters; there are plenty of talented people who never did anything besides notice that they were talented.
A long time ago I decided that I would never allow a situation where someone beat me at something I cared about not because they were lucky or smart, but just because they tried harder—having a natural leg up at some task gives you a slight moral obligation to be as good at it as you can possibly be.
Taking things really broadly, a few high-level principles/themes:
- Transaction costs often explain why simple economic theories don’t perfectly explain the real world. As a corollary, drops in transaction costs make the world look more like an Econ 101 textbook.
- Economic progress is a lossy compression algorithm that discards information on ideas that didn’t work out. So the story at the time is always more complex than the story after the fact, and it’s instructive to look at what didn’t work and understand why the thing that did work was not obvious from the beginning.
- Why are financial metaphors powerful? Because finance strips complicated topics down to something consistent that everyone can trade. Futures contracts, for example, standardize commodities that in the real world have some variation, which allows us to trade them, and to make more elaborate bets on them.
Every individual soybean is a little different, but by compressing those differences and looking at futures we can measure otherwise meaningless concepts like “how much the volatility of soybean prices correlates the frequency of news stories about Taiwan” or whatever.
But this consistency also means that the analogies map imperfectly to the real world, where things are less quantitatively measurable and where transaction costs are higher. Markets refine information and mental models, but they’re imperfectly efficient at both. - Incentives matter on the margin, and dominate most of the time. Real constraints matter at extremes. This is true in multiple domains: getting more solar energy instead of fossil fuels can be encouraged through tax credits and taxing emissions, but going to 100% renewables requires advances in both power generation and storage.
And for people, a lot of us can go from terrible to mediocre in some domain—speaking a language, playing an instrument, lifting weights, etc.—if we have a reason to try. But going from mediocre to world-class is not an option everyone has in every field.
Applied Divinity Studies: Could you introduce us to your concept of financial bubbles as coordination mechanisms?
Byrne Hobart: This one’s fun: what financial bubbles and megaprojects do is articulate a specific, definite future, which means they tell you that there are some activities that wouldn’t be worth doing normally, but for which there will probably be a market in the immediate future.
If you think about the Internet bubble, for example, the hype around e-commerce and online entertainment told ISPs that if they gave people Internet access, there would be things on the Internet for those people to do; by the same token, the fact that ISPs stepped up their capital expenditures told website operators that they’d have a big target market to sell into.
Probably the strongest version of this is Moore’s Law. For a long time, the feedback loop worked like this: there was always a delay between getting the capacity to build a particular kind of chip and actually selling it, and there was a similar delay between starting to code a software product and actually selling it in stores. So both the hardware and software companies had to look a few years ahead to decide what was worth doing.
For a long time, if Intel thought a few years ahead they could see that Microsoft’s product roadmap implied demand for faster CPUs, and Microsoft could look at Intel’s roadmap and see that PCs would be able to handle more complicated software. So both sides kept egging each other on. An equilibrium at the level of how companies’ strategies interacted created a state of constant change in the real world, which is pretty cool.
Of course, this stuff is not easy; it’s not like there was a dial Intel could turn that was labeled “faster,” or one Microsoft could turn labeled “better.” Actual execution was a messy process, and in terms of software it’s quite easy to argue that we’re making slow progress, or even regressing in some ways. But to the extent that it is measurable, that’s how it shook out.
This means that FOMO is actually a perfectly good action-guiding thing to feel: in the rare circumstances where feedback loops will accelerate progress, you really should fear that you’re missing out on a once-in-a-lifetime opportunity, because it could be true! Google, Microsoft, Ford, Standard Oil, Carnegie Steel, Facebook, Shopify—these companies could only get build once, and only during particular circumstances.
It might be a good filter to apply to opportunities: was this crazy five years ago, will be be crazy five years from now, and are you part of the tiny minority of people who think it’s right on the cusp of sanity right this minute? If so, jump in.
Applied Divinity Studies: The Diff costs $20/month, $18 if you pay annually, and regularly delivers insights that I presume, make people a lot of money. Why don’t you charge way more? Is it really true that you would lose over half your subscribers if you doubled prices? Is it about long-term growth? Network effects?
Byrne Hobart: I could charge more; I charge more now than I used to; I will charge more than that in the future.
(This is known as the Patio11 Prayer. Say it every day. Especially if you yourself are not especially commercially-minded, because charging more for a given amount of effort means a lower amount of effort is necessary to achieve a given standard of living.)
But it’s complicated—this is yet another example of transaction costs messing with what would otherwise be a simple model. Part of the network effect for the newsletter is that people share it when they like it, so there’s some organic growth. But a big part of the network effect is that people give feedback, and that feedback helps me find new topics to write about. Very simplistically, my backlog of posts to write is either growing over time or it’s approaching zero, and the best way for the backlog to grow is to get ideas and questions from readers.
(Incidentally, my favorite form of this is when people email and say “You mentioned concept X in your post. Where can I read more about it?” and the answer is “As far as I know, concept X was invented for this post.” That happened with the 3D Laffer Curve idea, for example—I wrote about how companies try to maximize the net present value of the future “tax” they earn from economic activity on their platform, rather than taxing at the immediate Laffer maximum. This is pretty close to supply-side economics, except that unlike a country, the various companies with platforms have heterogeneous discount rates, and to some extent compete for economic activity.)
To get good feedback, I don’t just need lots of readers—I need some who are working in unusual fields or have weird backgrounds, and many of these readers are not making a huge amount of money right now. If I raise prices and end up keeping all of my financial industry readers, FANG employees, VCs, etc., but pricing out all of the students, pre-Ramen Profitable founders, independent researchers, emerging writers, etc., I lose.
There are two approaches to this. One is to encourage people in those situations to reach out and work out a discounted rate. And the other option is to find ways to profit from the newsletter beyond just subscriptions and ads. The recent recruiting operation is an example of the latter: recruiting can be very lucrative, but it’s hard to get a differentiated flow of candidates and companies. The Diff is very differentiated in that sense, and we’ve made some good connections already.
There’s a long history of newsletters evolving into other companies. Craigslist, Charles Schwab, and (if you squint) Bridgewater Associates all started out with a newsletter as the core of the product. For Bridgewater, it turned out that the business question wasn’t “how do we increase the subscription price our readers are paying?” but “Why don’t we charge them a management fee plus a share of the profits?” Agglomerating smart people, talking to them, and finding ways they can work together is very valuable, and newsletters are a way to kickstart that, but they’re not the only way to get the maximum possible value out of it
Applied Divinity Studies: Well I’m very much looking forward to seeing how The Diff evolves to get maximum value.
Thanks so much for joining me today, it’s been a pleasure.
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