#125: Moore’s Law

Today’s letter is a bit mind-boggling; there are some real investing and trading insights to be gained, and perhaps a new perspective on life.

S2N Spotlight

On Tuesday I read this article in the Wall Street Journal about China’s Huawei Technologies introducing a new computer chip to challenge Nvidia for artificial intelligence use in the Chinese market. Normally, I would skip over this kind of article, as I am not really a tech head into such things. However, I have almost finished reading a fascinating book called Chip War—the fight for the world’s most critical technology. There are very few players in the world who can manufacture state-of-the-art computer chips. The cost of setting up a fabrication plant is upwards of $20 billion, but it is far more complex than just money. Read the book for a great walk through the history of this fascinating, crucial technology.

Enter Gordon Moore, the co-founder of Fairchild Semiconductor and Intel and the man who is responsible for Moore’s Law, which was derived from a prediction he made in a magazine article in 1965. We are going to focus on this “law,” which has been occupying an increasing amount of time in my head.

Moore’s law is the observation that the number of transistors in an integrated circuit (IC) doubles about every two years. Moore’s law is an observation and projection of a historical trend. Rather than a law of physics, it is an empirical relationship linked to gains from experience in production. (Wikipedia)

What I found so fascinating is that just when the industry thought Moore’s Law was about to come to an end, scientists found a new way to make even smaller transistors. This is where silicon plays such a key role as a semiconductor, and of course Silicon Valley .

Hold tight; we are going deeper. The smaller the transistor, the more can fit on a chip, which increases its processing power and is central to Moore’s Law. How small are today’s transistors? They are as small as 3 nanometres’. This scale is astonishingly minute; however, it is not yet near the subatomic level that governs quantum mechanics. In order for Moore’s Law to hold, there will need to be significant breakthroughs in quantum mechanics. To put my restless mind at ease, I was comforted to learn that even the field of quantum mechanics believes there is a theoretical limit to the level of small. But is there one? We are going to switch gears a bit now, and I promise to tie it all together shortly.

I have been studying Jewish philosophy at lunchtime on Thursday with a friend for years. Yesterday I was sharing my spiralling thoughts of ever smaller and wondering where it might end. My friend Danny suggested a philosophical approach attributed to Joseph B. Soloveitchik, a prominent 20th-century Jewish philosopher and theologian, who suggests that man’s purpose on earth is to create order from chaos and that man has been created with the creative capacity to continue creation.

We have taken more turns in this article than a rollercoaster on a caffeine binge; let me try and bring it home. My experience through 20+ years of active trading and investing is that the shorter the time frame you focus on, the more unstable and unpredictable things are. This is the paradox of trading and investing, as man’s desires are for instant gratification, making fighting the urge a key to being more profitable. Of course, this does not mean one cannot profit from shorter-term trading. We have been blessed with a divine ability through struggle to bring order to chaos. Those brave souls who pursue the quest to conquer the shorter time frames in trading are like those pioneers in the semiconductor space, pioneering an infinite ability to progress.

The main message I want to leave readers with is this: to increase our probability of success, it is wise to maintain a longer-term perspective on our trades. Just as the natural laws of physics guide us in understanding the physical world, they also offer valuable insights within the financial world, reminding us of the importance of patience and strategic thinking. Tonight I will drink a toast to longer term thinking in all aspects of my life.

S2N Observations

This market does not want to go down. “Buy the dip” has been the way to go, it seems. However, if you follow the line of thinking I “spotlighted” today, history will tell you that from these valuation levels, we should expect very weak returns over the next few years. That is even when retail sales numbers are better than expected. So I would not be chasing short-term, highly unstable returns.

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