Investing Mistakes, Chapter 1001.

Investing is a difficult, humbling… | by Gavin Baker | Aug, 2020 | Medium 12/10/20, 1:59 pm

Investing Mistakes, Chapter

1001
Gavin Baker Follow
Aug 15 · 11 min read

Investing is a di,cult, humbling pursuit. I am often asked about mistakes I

have made. While the list of my mistakes is quite long, I thought I would
write up my most recent mistake of commission, i.e. a mistake based on an
action I took that resulted in a loss of capital as opposed to a mistake of
omission that resulted in missing out on potential gains. I have been
following semiconductors for 20 years and had never been bullish on Intel
until June, 2020 when I bought the stock and made it a signiAcant position
for the Arst time in my career. This was a mistake.

I had owned AMD throughout 2019 and into early 2020, but was generally
disappointed in their underlying fundamental performance. Their share
gains in server CPUs in particular were slower than I expected based on the
performance per watt per $ shown in third party benchmarks. I did a lot of

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Investing Mistakes, Chapter 1001. Investing is a difficult, humbling… | by Gavin Baker | Aug, 2020 | Medium 12/10/20, 1:59 pm

work to understand potential reasons for this and kept coming back to a
paper written by Urs Hölzle “Brawny cores still beat wimpy cores, most of
the time” in 2015. Urs Hölzle was Google’s 8th employee and is currently a
Google Fellow and its SVP of Technical Infrastructure, where he oversees
the design, installation, and operation of the servers, networks, and
datacenters that power Google’s services. The conclusion of this paper is
that single core and single threaded performance is often the rate limiting
factor even for highly parallelized workloads:

“Even though many Internet services beneAt from seemingly unbounded

request- and data-level parallelism, such systems aren’t above the law. As
the number of parallel threads increases, reducing serialization and
communication overheads can become increasingly di,cult. In a limit case,
the amount of inherently serial work performed on behalf of a user request
by slow single-threaded cores will dominate overall execution time…
although we’re enthusiastic users of multicore systems, and believe that
throughput-oriented designs generally beat peak-performance-oriented
designs, smaller isn’t always better. Once a chip’s single-core performance
lags by more than a factor to two or so behind the higher end of current-
generation commodity processors, making a business case for switching to
the wimpy system becomes increasingly di,cult because application
programmers will see it as a signiAcant performance regression: their
single-threaded request handlers are no longer fast enough to meet latency
targets. So go forth and multiply your cores, but do it in moderation, or the
sea of wimpy cores will stick to your programmers’ boots like clay.”

As anyone even vaguely familiar with the x86 CPU market understands,
AMD has signiAcantly more cores than Intel and overall superior
performance per watt per $, but the AMD cores are “wimpier” than the Intel
cores and slower on single threaded performance. It was fascinating to me
that despite being an entire node behind on manufacturing (Intel at 14 nm
vs. AMD at TSM’s 7 nm, which is equivalent to Intel’s 10 nm), Intel was still
ahead on single core and single threaded performance.

Beyond this single core, single threaded performance advantage, Intel has
the “exorbitant privilege” of having all x86 software code ecectively
optimized for their own architecture. No dominant digital processor
company has lost the #1 market share position over the last decade because

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Investing Mistakes, Chapter 1001. Investing is a difficult, humbling… | by Gavin Baker | Aug, 2020 | Medium 12/10/20, 1:59 pm

of this privilege. What this means in practice is that software just runs faster
on Intel processors than AMD processors — it is not enough for AMD to be
20% faster in benchmarks, because real world software optimizations by
developers mean that software generally runs faster on Intel. AMD needs to
be much faster for a sustained period of years for software to be rewritten
and optimized for their own particular architecture. As a sidenote, this is
why Windows on ARM did not work for PCs and ARM server CPUs have
been slow to take oc — any ARM CPU needs to ocer dramatically higher
performance per watt per $ to justify rewriting software so that it can run
on ARM instead of x86. On top of the “exorbitant privilege” conferred by
software developers optimizing for Intel’s own architectural javor of x86,
Intel is much better at writing their own software — compilers, frameworks
— than AMD and all of this software is essential for other software to run
well. Having followed the GPU market for 20 years, I can conAdently state
that software has never been a strength of AMD and is the main reason they
lost to Nvidia. In the CPU market, Intel’s inference software frameworks are
far superior to AMDs and inference is a growing workload for CPUs.

Given better single threaded, single core performance, better overall

software and the “exorbitant privilege” of having most of the world’s
software optimized for their architecture, I was becoming intrigued with
Intel given a dramatic period of underperformance vs. other semiconductor
companies. The main risk I focused on was manufacturing. SpeciAcally,
being able to successfully ramp their 10 nm++ process. Intel had led the
world in semiconductor manufacturing for decades and always got to each
new node before their competition. Given Moore’s law and learning curves,
this gave Intel an enormous performance and cost advantage on top of the
“exorbitant privilege” of having software optimized for their own particular
javor of x86. As I wrote in January, 2019, Intel lost this crown to TSM by
being over 4 years late to 10 nm which led to TSM fully ramping their
equivalent 7 nm node before Intel even really began to ramp 10 nm. This
seismic shift profoundly advantaged all of TSM’s customers who compete
with Intel: AMD, Xilinx and Nvidia.

Monocausal explanations are dangerous, but in my opinion Intel lost their

manufacturing lead to TSM because of arrogance. While Intel ecectively
worked with all semi-cap equipment co’s at some level over the last 20
years, they tended to spend disproportionately more with a variety of #2

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Investing Mistakes, Chapter 1001. Investing is a difficult, humbling… | by Gavin Baker | Aug, 2020 | Medium 12/10/20, 1:59 pm

semi-cap equipment companies where Intel was the overwhelmingly largest

customer — this gave Intel pricing power and ecective control over the
company. Unfortunately, the #1 semi-cap equipment companies generally
steadily increased their lead over the #2 players as their largest customers
(TSM, Samsung) beneAtted from the enormous ramp in Smartphone
volumes which also shifted the learning curve advantage from Intel to TSM
and Samsung. This led to more revenue, more resources and a greater
technological lead for the #1 player that TSM and Samsung relied upon
relative to the #2 player that Intel generally relied upon (please note that
this is a very broad generalization and I am aware of the exceptions).
Nowhere was this more apparent than in lithography, which is arguably the
most important part of semiconductor manufacturing. ASML’s
technological gains in lithography relative to Nikon, Intel’s preferred
lithography supplier, over the last 20 years have been astonishing. The
manufacturing race basically came down to Intel and Nikon vs. the rest of
the semiconductor industry and ASML. Intel’s belief that they could win
with second tier suppliers like Nikon was arrogant.

This disadvantage in terms of ecosystem scale and technology was

exacerbated by poor decision making at 10 nm. SpeciAcally, Intel decided
not to insert EUV at 10 nm and instead rely heavily on multipatterning. This
was ecectively a message to the world: “We are so good that we do not need
EUV. We can do this with DUV, which no one else can.” On top of this, Intel
tried to scale aggressively at 10 nm. Moore’s law is actually not constant.
The scaling at each node is dicerent. Intel tried to scale transistor density by
2.7x at 10 nm rather than the more common 2x to 2.4x without using EUV.
I have tried to to think of a good analogy for this and the best one I can
come up with is that Intel attempted the world’s highest pole vault in a
torrential rainstorm while blind folded with no mat on the other side.

The result was disastrous. Intel’s 10 nm was ecectively more than 4 years
late. However, I thought it was encouraging that Intel admitted all of their
mistakes at 10 nm and for 7 nm, Intel committed to working more with the
external ecosystem of suppliers, inserting EUV and scaling more
conservatively. They might never again have a manufacturing lead, but they
might be able to get to parity with TSM and despite being behind on
manufacturing technology they had not lost signiAcant CPU revenue share
to AMD given their superior single threaded/single core performance,

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Investing Mistakes, Chapter 1001. Investing is a difficult, humbling… | by Gavin Baker | Aug, 2020 | Medium 12/10/20, 1:59 pm

better software and the “exorbitant privilege” of having 3rd party software
optimized for their own javor of x86. So I was really focused on whether or
not the optimized 10 nm++ process would work for their Tigerlake laptop
CPUs in late 2020 and their Sapphire Rapids server CPUs in 2021 as this
would bring Intel from 2 to 3ish years behind TSM to 1 year behind with the
hope of reaching parity when Intel ramped 7 nm. I didn’t focus on 7 nm as I
thought Intel would be inserting a much more mature EUV machine than
TSM was able to work with when they inserted EUV along with the more
conservative scaling targets. As anyone familiar with the story knows, this
was my critical error. Regardless, I became comfortable that 10 nm++
would work and that Intel would be able to ramp Tigerlake and Sapphire
Rapids.

Beyond this, Intel was an optically cheap stock with a reasonable dividend
yield and I was becoming uncomfortable with some of the more extreme
valuations in technology. Intel traded roughly in-line with Oracle and Cisco,
but had actually grown revenue and GP $ faster over the last 5ish years.
Intel also had recently passed an important milestone with data center
accounting for a majority of both revenue and GP $. The faster growth of
data center and its steady increase in Intel’s revenue mix meant that Intel’s
overall growth should accelerate all else equal. Intel also played into my
excitement about the higher computational intensity of AI relative to
software written by humans — while less positive for CPUs relative to GPUs
and memory — AI was still powerful for CPUs. Capital allocation was
improving with the divestiture of the modem business (exorbitant privilege
worked against them) and acquisition of Habana, which I was quite familiar
with and very bullish on. It worried me a little that the Chairman came
from the Med Tech industry and the CEO was a former CFO, but I actually
thought the new CEO was making good decisions overall.

None of this mattered. Intel delayed their 7 nm program by over a year and
may need to use TSM for more of their manufacturing. This is an indicator
of the magnitude of the problem, as once a company stops trying to
compete at the leading edge they can never get it back. It is still unclear
what happened at 7 nm. Rumor is that Jim Keller, one of the greatest
semiconductor architects of the modern era, went to CEO Swan with an
ultimatum in June that either he or Murthy Renduchintala had to leave. If
true, given that Swan chose Murthy — a terrible error — then it is almost

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Investing Mistakes, Chapter 1001. Investing is a difficult, humbling… | by Gavin Baker | Aug, 2020 | Medium 12/10/20, 1:59 pm

certain that Swan did not know about the 7 nm delay when he made this
decision in early June. The unprepared tone of the second quarter call
certainly suggested that the 7 nm delay was a very recent revelation to the
CEO and CFO. It does seem as if Intel attempted a new transistor design
called GAAFET at 7 nm, which would have been extremely di,cult to do
concurrently with EUV insertion. If true, this means that Intel repeated
their mistakes from 10 nm at 7 nm rather than learning from them. These
successive mistakes at 10 nm and 7 nm are strange as one of the greatest
nodes in Intel history was 22 nm which had conservative scaling targets,
ramped quickly and had fantastic yields. Better to be on time with great
yields with less aggressive scaling than late with terrible yields with more
aggressive scaling. Strange that Intel did not learn from all of these
experiences.

The 7 nm delay means that software will likely begin to be optimized for
AMD and that Intel may lose their “exorbitant privilege.” And as an IDM,
Intel has enormous Axed costs and fabs to All which creates signiAcant risk
if market share really begins to shift. To add salt to the wound, AMD then
Anally put up a great quarter in Q2 with clear evidence of server CPU share
gains. It is always the bullet you don’t see that gets you. I just did not focus
on 7 nm. This was not an “unknown unknown,” which often lead to
mistakes of commission. This was simply a variable I did not focus on due to
an incorrect assumption that I did not adequately diligence. None of this is
meant to be an excuse, only an explanation and perhaps some learning out
loud. As one of my mentors is fond of saying, “There are only two things in
investing, numbers and excuses. And if you don’t have the Arst, no one cares
about the second.” Investing is ever humbling.

However, the pain I feel about this mistake of commission is trivial relative
to the pain I feel about my mistakes of omission. The stocks I did not buy in
March 2020 cause me much more pain and represent much more
signiAcant errors in my mind. In, “I, Claudius,” when Claudius writes of the
Top highlight
death of Germanicus, he says “of my own sorrow, I do not trust myself to
write.” That is how I feel about several stocks that I carefully considered
buying in March of 2020 and did not. A 1% position in almost any of them
would have generated 3–6x more proAt than was lost on Intel. Mistakes of
omission are always more painful than mistakes of commission for a growth
investor. Investing is ever humbling.

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Investing Mistakes, Chapter 1001. Investing is a difficult, humbling… | by Gavin Baker | Aug, 2020 | Medium 12/10/20, 1:59 pm

I am not a golfer, but there is a phrase often used by golfers that I think
applies to investing: “play in the present.” A golfer can evidently be so
consumed and frustrated by a mistake that they made earlier in the round
that it impairs their play for the rest of the round. I think the same goes for
investing and it is important for investors to “play in the present” rather
than being consumed by their mistakes. One must learn what there is to
learn and then move on. In the case of Intel, I am not sure that there are
generalizable learnings — I am an avid user of checklists, premortems,
designated skeptics, falsiAable hypotheses and certainly knew the stock and
industry well. Perhaps the generalizable learning is to simply double check
every assumption, but this is something I have learned many times and a
mistake I will likely make again.

And speaking of mistakes, as an American, I think it would be an enormous

mistake for America not to do everything possible to help Intel stay at the
leading edge with its fabs in America and Israel. If Intel were to outsource
manufacturing to TSM, Taiwan would be the most geopolitically important
country in history. It would be no understatement to say that “Taiwan
would be the new Arrakis” per Epsilon Theory. Modern semiconductor
manufacturing is at least as important to the economy as oil was in the
1970s — at least in the case of oil, it was available all over the world albeit
at higher prices than in the Middle East. If the overwhelming majority of
leading edge semiconductor manufacturing is concentrated in Taiwan with
the rest in South Korea, then the geopolitical implications are signiAcant as
there is no cost curve with leading edge semiconductor manufacturing —
either you can do it or you cannot. It would be as if the Middle East was the
only place in the world with oil rather than simply the region with the
lowest costs. And it is strange that that the Chairman, CEO and CFO of Intel
have zero technical expertise in semiconductor design or manufacturing at
arguably the most critical time in the history of Intel.

Investing Stock Market Investment Technology Intel

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Investing Mistakes, Chapter 1001. Investing is a difficult, humbling… | by Gavin Baker | Aug, 2020 | Medium 12/10/20, 1:59 pm

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