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We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general.

Here are the articles for the week ending 31 January 2021:

1. Why It’s Usually Crazier Than You Expect – Morgan Housel

I want to try to explain why Gamestop went up 100-fold in the last year and why Sears never recovered. They have to do with the same force in opposite directions. It’s a force that can explain a lot of baffling trends lately, and it’s so easy to underestimate and overlook…

…Find a feedback loop and you will find people who underestimate how crazy prices can get, how famous a person can become, how hard it can be to change people’s minds, how irreparable a reputation can be, and how tiny events can compound into something huge.

They take small trends and turn them into big trends with unforeseen momentum. And they happen in every field.

If you become a good reader as a child, reading is fun. When reading is fun you do it more. When you do it more you become a better reader – on and on. The opposite is true: delayed reading ability can make reading feel like work, which can cause kids to read less, which delays reading comprehension even more.

When it doesn’t rain, there’s less evaporation, which makes the air drier, which reduces rainfall, on and on.

And, of course, feedback loops can do astounding things in business and investing…

…GameStop – whose stock is up 100-fold in the last year as a reddit message board coordinates a buying spree to hurt short sellers – is experiencing a similar thing.

The reddit campaign to push its stock up started two months ago. At first shares rose a little. That caught people’s attention, those people bought, which pushed prices up more, which caught more people’s attention – on and on – until this week when virtually every investor in America is paying attention to GameStop because it’s risen so high, and it’s rising high because every investor in America is paying attention to it. I have three friends who bought a few shares of GameStop this week “to see what happens.” They’re only doing that because the price went up. And they’re making the price go up.

Attention is hard to obtain. But once it’s achieved it can take on a life of its own, becoming self-sustaining and able to morph into something you never imagined.

2. Keith Gill Drove the GameStop Reddit Mania. He Talked to the Journal. –  Julia-Ambra Verlaine and Gunjan Banerji

The investor who helped direct the world’s attention to GameStop, leading a horde of online followers in a bizarre market rally that made and lost fortunes from one day to the next, says he’s just a normal guy.

“I didn’t expect this,” said Keith Gill, 34 years old, known as “DeepF—ingValue” by fans on Reddit’s WallStreetBets forum and “Dada” by his 2-year-old daughter. He said he didn’t set out to draw the attention of Congress, the Federal Reserve, hedge funds, the media, trading platforms and hundreds of thousands of investors…

…Mr. Gill began investing in GameStop around June 2019, he said, when it was hovering around $5 a share. Earlier that year, the game retailer was hunting for its fifth chief executive in a little over 12 months. Mr. Gill kept buying. Although he never played much besides Super Mario or Donkey Kong, he saw potential for the struggling retailer to reinvigorate itself by attracting new customers with the latest videogame consoles.

“People were doing a quick take, saying GameStop was the next Blockbuster, ” he said, a chain caught in a retail decline. “It appeared many folks just weren’t digging in deeper. It was a gross misclassification of the opportunity.”

3. Yes, a Stock Can Have Short Interest Over 100% — Here’s How – Dan Caplinger

At first glance, it might seem like you could never have more than 100% of a company’s shares sold short. Once all the shares have been borrowed, you might think there wouldn’t be any more for short-sellers to get.

Indeed, there are U.S. Securities and Exchange Commission regulations designed to prevent what’s known as “naked” short selling. With a naked short sale, the broker allows the customer to do a short-sale transaction without actually arranging to borrow the shares beforehand. This can lead to market disruptions, and while there are some exceptions to the regulations, most brokers stop regular retail customers from selling stock short if they can’t obtain shares to borrow.

However, even without a naked short sale, it’s theoretically possible for short interest to exceed 100%. The reason has to do with the nature of the short-sale transaction itself.

As an example, take a situation involving four investors. Annie owns shares of GameStop, and Annie and her broker have an agreement that allows the broker to lend Annie’s shares to short-sellers. It lends them to Bob, who subsequently sells those borrowed shares short in hopes that GameStop’s share price will fall.

An investor named Chris ends up buying those borrowed shares from Bob. However, Chris has no way of knowing that those shares have been borrowed from Annie. To Chris, they’re just like any other shares.

More importantly, if Chris has the same kind of agreement, then Chris’s broker can lend out those shares to yet another investor. Diane, another GameStop bear, can borrow those shares and sell them short.

In this example, the same shares end up getting borrowed and sold twice. The short interest volume these transactions add to the total is twice the number of shares actually involved. You can therefore see that if this happened throughout the market, total short interest would eventually exceed the number of shares outstanding and approach 200%.

This still might seem impossible, and in a sense, it is. But part of the answer lies in the fact that there are investors that don’t currently possess actual shares of GameStop but who have the same economic interest as shareholders. They have the right to get back the shares they lent at any time. When you add together the actual shares plus these “synthetic” positions in the stock, the short interest can’t exceed 100% of that larger total.

4. A Look at Compounders through the Lens of “The Intelligent Investor” – Robert Vinall

I expect everyone has a slightly different understanding of what the term “compounder” means, but generally it describes a company that can grow or compound earnings by reinvesting capital (not by raising external capital). Compounders are likely to share some or all of the following characteristics.

1. High returns on capital;
2. Profitable (on an underlying, not necessarily reported basis);
3. Large Total Addressable Markets (“TAMs”);
4. A growing competitive advantage;
5. A strong culture characterised by humility and adaptability (essential to overcome growth pains);
6. A founder who likely embodies these values;
7. And predictable, better still, recurring revenues.

This is not a definitive list, and different companies will have these qualities in different quantities, but it gives a sense of what I am driving towards. Google most certainly is a compounder; Deutsche Bank probably is not…

…Graham did not write, to my knowledge, about compounders, but he did write about what he termed “growth stocks”. He defined growth stocks as follows:

“A growth stock may be defined as one that has done this in the past and is expected to do so in the future.”

This description falls somewhat short of my definition of a compounder above; however, many of today’s compounders have certainly done well recently and look set to continue to do so in the future. I feel fairly sure that Graham would identify today’s compounders as growth companies. For the remainder of this memo, I will use the terms “compounders” and “growth companies” interchangeably, notwithstanding the obvious definitional differences.

Graham was a well-known sceptic of growth companies. In Chapter VI of “The Intelligent Investor”, Graham asks rhetorically why not simply buy the most promising-looking growth companies and let the cash roll in? Consider his response:

There are two catches to this simple idea. The first is that common stocks with good records and apparently good prospects sell at correspondingly high prices. The investor may be right in his judgment of their prospects and still not fare particularly well, merely because he has paid in full (and perhaps overpaid) for the expected prosperity. The second is that his judgment as to the future may prove wrong. Unusually rapid growth cannot keep up forever; when a company has already registered a brilliant expansion, its very increase in size makes a repetition of its achievement more difficult. At some point the growth curve flattens out, and in many cases turns downward.

Graham’s scepticism is routed in three main objections. First, few companies can sustain their growth, i.e., genuine growth companies are rare. Second, the analyst’s judgement about a company’s long-term prospects is often flawed, i.e., there are lots of false positives. Third, growth companies have high valuations, i.e., the positive long-term prospects are already priced in.

The conclusion that generations of value investors have drawn is that investing in growth companies is a mug’s game to be avoided at all costs. This is without question Graham’s opinion too; however what people miss is that his scepticism was clearly routed in the context in which he was investing. Based on the opportunity set he saw – and extensively documented in “The Intelligent Investor” – he thought the odds of successfully investing in growth companies were poor. This being the case, is it any wonder he was sceptical about doing so?

In my view, the lesson to be derived from “The Intelligent Investor” is not that investing in growth does not work, but that every generation of investors needs to figure out for itself what the odds of it working are. Graham’s approach offers an excellent framework to figure out just what those odds are.

5. Type I and Type II Charlatans – Ben Carlson

Pockets of the market are flirting with silly territory.

SPACs, IPOs, and electric vehicle companies are all sprouting up like weeds.

I’m not intelligent enough to sort through the winners and losers in these areas but the fact that there are currently winners means there will be a flood of losers to follow. That’s how these things work. When speculative investments are in demand, the supply ramps up to meet it.

And many of those losers will be pushed relentlessly by hucksters and charlatans who flock to rising markets like me to a new Tom Cruise movie.

Charlatans tend to flourish when some or all of the following characteristics are present:

• When there’s an “expert” with a good story
• When greed is abundant
• When capital becomes blind to risk
• When individuals begin taking their cues from the crowd
• When markets are rocking
• When innovation runs rampant…

…Type I charlatans are the visionaries who are more or less sincere but wind up ruining their investors anyway because they take their ideas to the extreme or fail to account for the unintended consequences of their ideas.

These false-positive charlatans are so passionate that it becomes difficult for their victims to see any downside. When you combine intellect, passion, and people in search of money and/or power, it’s easy to become blinded to potential risks.

And once a Type I charlatan gets a taste of success, it’s tough to pull in the reins when things go wrong.

Type II charlatans are the out and out fraudsters who blatantly set out to take people for all they’re worth. These hucksters are only interested in making as much money as possible and don’t care who gets hurt in the process.

These charlatans are false negatives because they lie to persuade you to part with your money. It’s difficult to see through this type of charlatan because they know exactly how to sell you. They understand human behavior and tell you exactly what you want to hear.

They move the goalposts and shift the blame when it appears they’re wrong and understand how to massage your ego to keep you in line.

Bernie Madoff is a type II.

Elizabeth Holmes likely started out as a type I and slowly morphed into a type II once she realized Theranos was never actually going to happen.

6. Twitter thread on mental models learnt from Tobi Luetke, Shopify’s CEO – George Mack

LUTKE LEARNING 1 – OPERATE ON CROCKERS LAW

Crocker is a Wikipedia editor who asked people to NEVER apologise about editing his pages.

He just wanted them to focus on making his pages BETTER.

He took 100% responsibility for his mental state. If he was offended, it’s his fault.

“Just give me the raw feedback without all the shit sandwich around it.” – Tobi 

“Feedback is a gift. It clearly is. It’s not meant to hurt. It’s meant to move things forward, to demystify something for you. I want frank feedback from everyone.” – Tobi

“If I’m insulted it’s because my brain made a decision, to implant in my memory and thoughts the idea of being insulted by that person…

I did that under my own volition. It was my own choice. My brain has assigned the power to the other person” – Tobi referencing Aurelius

LUTKE LEARNING 2 – ALWAYS BE A STUDENT TO FIRST PRINCIPLES

Tobi’s most consistent used mental model throughout his interviews is:

Global Maximum > Local Maximum

Local Maximum = Optimising a cog in the machine

Global Maximum = Optimising the machine itself

Tobi’s favorite example of FIRST PRINCIPLES is a Truck driver.

His truck was sat still for 8 HOURS on THANKSGIVING waiting for his cargo to be unloaded when he realized…

“Why not take the WHOLE trailer off the back of my ship rather than unloading + reloading each item?”

This Truck driver was called Malcolm McLean

His first principles approach created the SHIPPING CONTAINER

The results?

Global shipping costs went from $6 a tonne to $0.16 a tonne Exploding head

The most underrated entrepreneur of the last century AND the godfather of modern global trade.

7. Buried in Reddit, the Seeds of Melvin Capital’s Crisis – Michelle Celarier

For months, retail investors posting on a Reddit forum were broadcasting their intentions to take down a prominent, but reclusive, hedge fund called Melvin Capital — and doing so by buying call options on video game retailer GameStop, a stock in which Melvin had disclosed a big short bet…

…The effort to take down Melvin appears to have started late last year, and by mid-January, short sellers began noticing spikes in the price of GameStop. They suspected someone was covering — well-known short sellers Jim Chanos and Andrew Left were known to be short GameStop and had tweeted about the company.

But it wasn’t either one of those men who had earned the most ire of a popular Reddit forum, WallStreetBets, whose description reads, “like 4Chan found a Bloomberg Terminal.”

These retail investors had taken aim at Melvin, a fund headed by Gabriel Plotkin, a former portfolio manager with Steve Cohen’s SAC Capital. Cohen’s successor firm Point72 had more than $1 billion invested in Melvin’s fund, according to the Wall Street Journal.

About two months ago, a Reddit user called Stonksflyingup posted a video, with the title “GME Squeeze and the Demise of Melvin Capital” — with trial scenes from the miniseries “Chernobyl” superimposed with text asserting that “Melvin Capital got too greedy,” as well as an explanation of how a short squeeze can occur. The clip concluded with a photo of an explosion with the words “Melvin Capital” splashed across it. 

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. Of all the companies mentioned, we currently have a vested interest in Alphabet (parent of Google) and Shopify. Holdings are subject to change at any time.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general.

Here are the articles for the week ending 24 January 2021:

1. The Best Investors of All Time – Chris Mayer

Who are the best investors of all time?

You probably thought of Warren Buffett or Peter Lynch or John Templeton or other renowned money managers, past and present.

But did you think of the Walton family, the Rales brothers or Jeff Bezos?

Why not?

Yes, we tend to think of them as entrepreneurs. But they do own stakes in public companies just like any of those other investors. In this case, the public companies are Walmart, Danaher and Amazon, respectively. The returns on these stocks have been, well… let’s just say they would be the envy of nearly any traditional money manager you care to name…

…Pabrai mentioned how Sleep told him the best investors were entrepreneurs who kept stock in their businesses. If we want the best returns, why don’t we adopt the same approach as these people? Why bother with economists, Fed watching, sell-side analysts, quarterly earnings, etc. etc.? Why bother with “taking profits” “trimming the position” and the like?

I love this message and I have talked and written about it before myself. In my book 100 Baggers, I note how many of these great stocks also have a person’s name attached to them that is almost synonymous with the business — so much so that all I have to do is drop the name and you can think of the company. (I say “Bill Gates” and you say…)

As Pabrai said, no professional investor held Walmart from the IPO to, say, even 1985. We don’t know for sure, perhaps somebody did. But the point is the vast majority clearly did not. Many investors bought and sold Walmart over that time frame. Surely they would’ve been better off just sitting on the stock — as the Waltons did.

2. The Debt Question Facing Janet Yellen: How Much Is Too Much? – Kate Davidson and Jon Hilsenrath

A big question hangs over Janet Yellen this week at her confirmation hearing to become U.S. Treasury secretary: How much debt is too much?

In the past four years, U.S. government debt held by the public has increased by $7 trillion to $21.6 trillion. President-elect Joe Biden has committed to a spending program that could add trillions more in the year ahead. At 100.1% of gross domestic product, the debt already exceeds the annual output of the economy, putting the U.S. in company with economies including Greece, Italy and Japan.

When Ms. Yellen served in the Clinton administration as Chairwoman of the White House Council of Economic Advisers, she was among those who pushed for a balanced budget. Today, she has joined, cautiously, an emerging consensus concentrated on the left that more short-term borrowing is needed to help the economy, even without concrete plans to pay it back.

Central to the view is the expectation that interest rates will remain low for the foreseeable future, making it more affordable to finance the borrowing.

The Biden administration will now contend with progressives who want even more spending, and conservatives who say the government is tempting fate by adding to its swollen balance sheet. Ms. Yellen’s challenge, if confirmed, will be to keep Democrats together and persuade some Republicans to come along.

Ms. Yellen, who will be a top economic adviser to Mr. Biden, is scheduled to testify Tuesday before the Senate Finance Committee, which will vote on her nomination. She served as top White House economist in the 1990s and Federal Reserve chairwoman in the 2010s. Confirmation of Ms. Yellen as Treasury secretary would make her the first person to achieve such a trifecta of economic leadership roles.

Ms. Yellen would be managing the nation’s debt when the economic consensus has flipped. In the 1990s, economists argued that surpluses would push down long-term interest rates and encourage private-sector borrowing and investment. Government borrowing, this view held, crowded out the private sector. The strategy seemed to work. The U.S. saw an economic boom, with the longest expansion on record at the time, fueled by technology investment.

After years of low inflation and interest rates near zero, more economists say the government should be borrowing to keep the economy going because the private sector isn’t. With borrowing costs expected to remain low and the pandemic-stricken economy still weak, temporary increases in deficits aren’t only tolerable but desirable if they help strengthen the recovery, the thinking goes.

3. Anti-Usage Products: The Next Generation of SaaS Products – Gabriel Lim

“Hey Gabriel, why did you fill in N/A for Weekly Active Users in your investor report?” “Oh, we are not tracking it.” “Wait, what? Why?”

“You are a SaaS company, and you are not tracking how many of your users are logging into your platform and using it actively?”

“Yeah… here’s the thing – I don’t want people to log into my software.”

“Wait, what?”…

…Josh Elman said that the only metric that matters is how many people are using the product – https://news.greylock.com/the-only-metric-that-matters-now-with-fancy-slides-232474cf414c

This is an old paradigm from 2010 – 2019. It presupposes that if users keep logging in, and performing a certain action, then they are gaining something of value from the product. However, we wanted to break this paradigm.

The paradigm of retention = product engagement.

You see – When a product is able to work fully autonomously, and yet, able to deliver outcomes, user engagement is an anti-pattern. It’s not something that we want to optimize for.

On the contrary, I tell my product team: if our users are logging in too often, it means that our software isn’t autonomous enough, and we have to work harder to sand down the product. This is counterintuitive, and requires a leap of faith. But internalizing this logic helps us to build a better product. A product that is laser focused on solving our customers’ problems, and not faux-engagement.

4. The Bit Short: Inside Crypto’s Doomsday Machine – Crypto Anonymous

There are things in crypto right now called Tethers. To simplify a bit, Tethers are issued by a crypto company called Tether Ltd. — meaning that if Tether Ltd. says you own a Tether, then you do.

Tether Ltd. also says one Tether is worth exactly one US dollar. Can they do that? Well they say they can, because they hold $1 worth of assets for each Tether. But are those assets actual dollars? No, they are not. So what if the assets go down in value? Don’t worry; they will not. Okay, but can we at least see the assets? No, you may not.

Who in their right mind would use something like Tether? Well, the short answer is that many people use Tethers to buy Bitcoin and other cryptocurrencies. The long answer, though, is astounding — but more on that later.

Because Tether sounds exactly like a currency fraud, it may not surprise you to learn that Tether Ltd. is currently under investigation by the Office of the Attorney General for the Southern District of New York. That investigation was announced to the public on April 25th, 2019….

…On January 8th, I saw this post on Hacker News about Tether manipulating the price of Bitcoin. That shook me: I’d assumed Tether had been purged from the crypto markets, yet apparently it was still around. But how much Tether could there really be in the crypto markets? Surely not that much.

Still, I took a look. The answer, I was surprised to see, was a lot.

5. Twitter thread on the top of the oil bubble in 2008 – Sankey Research

Here’s a story about the top of the oil bubble. We were hosting our energy conference in Miami May 2008 with oil at $140/bbl and rising in a four year bull run, with oils crushing the market. I was standing at the bar in the evening speaking to Valero CEO Bill Klesse…

Looking across the bar, I could see there was a fight. Then I could see that it was adjacent to our E&P analyst Shannon Nome, a statuesque Texan blonde, so there was an issue for me directly; my colleague was stepping back on high heels in shock from a major kerfuffle.

Then I could see that two of our clients were fighting, and one staggered away from the other clutching his bleeding face saying “he eye-gouged me!”

Being as we were in a Miami Beach Hotel, one that hosted a week before a “Rap Weekend”, the security was there almost instantly…

…The argument? It was over the then-cult natgas stock, EQT.

Here’s the punchline. They were both bullish.

But Boston long only was not bullish enough for drunk NY Hedge fund guy, and it turns out, at first drunk HF guy was pushing cash into Boston’s top pocket, saying “you don’t know how to run money, here I will give you money” as Boston was nothing like bullish enough on EQT.

6. Twitter thread on useful rules of thumb to help us make decisions – George Mack

Bezos’ Razors:

• If unsure what action to take, let your 80-year-old self make it.
• If unsure who to work with, pick the person that has the best chances of breaking you out of a 3rd world prison…

…Luck Razor: 

• If stuck with 2 equal options, pick the one that feels like it will produce the most luck later down the line.

I used this razor to go for drinks with a stranger rather than watch Netflix.

In hindsight, it was the highest ROI decision I’ve ever made…

…Naval’s Razors:

• If you have 2 choices to make and it’s 50/50, take the path that’s more painful in the short term.
• If a task is worth less than your ambitious hourly rate – outsource it, automate it or delete it….

…Taleb’s Surgeon:

• If presented with two seemingly equal candidates for a role, pick the one with the least amount of charisma.

The uncharismatic one has got there despite their lack of charisma.

The charismatic one has got there with the aid of their charisma.

7. The Stock Market is Causing the Bubbles – Michael Batnick

This morning I was thinking about the environment we’re in. As a relatively young person, I’ve never experienced anything like it. So how can I say with a straight face that the stock market isn’t in a bubble? First of all, Tesla isn’t the market. Neither are SPACs. The market is the S&P 500.

The S&P 500 is rising, but not at the level that would normally be associated with “bubble,” a word that gets used way too frequently. A bubble is when investor behavior and fundamentals become completely detached from reality, all but ensuring the bubble’s popping.

Let’s look at behavior, or price. The stock market is not going parabolic. The S&P 500 is up 3.6% over the last 30 days, which is in the 76th percentile going back to 1950. Warm? Sure. Hot? Not really.

A quick look at fundamentals also doesn’t support the bubble argument. At 33x earnings, you could make the case that there is froth in the top 10 stocks. I wouldn’t argue.

But what about the other 490 companies whose stocks trade at 19.7x earnings? Cheap? No. Bubble? Come on.

There is exuberance in certain areas of the market. There can be no denying it. So the question is, how long can this go on before it infects the overall market? Actually, this might be backwards. I think some of the froth in the top 10 names, given their size, are causing all of the exuberance that we’re seeing. There is reflexivity at work, circular relationships that are causing a feedback loop.

In my opinion, there is not a bubble in the index, but there are bubbles inside of it and around it, which are being caused by froth at the top of the index itself.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. Of all the companies mentioned, we currently have a vested interest in the shares of Amazon. Holdings are subject to change at any time.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general.

Here are the articles for the week ending 17 January 2021:

1. Twitter thread on lessons from running a successful venture capital firm – Frank Rotman

1/26: It’s hard to produce a 3X+ #VC fund.  It’s much harder to do this consistently.  Our first 4 funds are mature enough to know where they’ll end up and all of them will handily beat this benchmark.  I reviewed our portfolio this morning and jotted down 12 notes. 

2/26: Insight 1: It’s more important to be an average investor in a target rich ecosystem than a great investor chasing windmills.  It’s been a great decade for #fintech which made our jobs easier…

…5/26: Insight 2: Winning with consistency requires discipline. Finding breakout winners is everything but how a #VC fund operates determines repeatability. What worked for us: Trusting our own insight, diligence and future casting vs. investing entirely based on team and TAM…

…8/26: Insight 3: Our best investments were in companies or themes that other investors didn’t want to bet on. Being early to a trend or a geo drove returns. Our best investments only looked good to us early on and then suddenly looked good to everyone once they scaled a bit….

…10/26: And price wasn’t what won us deals because were almost never the highest bid.  We obsessed about having a value proposition for Founders that won us the deals we were interested in.  Our 95%+ success rate paired with price discipline drove real economic return.

11/26: Insight 5: When we blindly trusted someone else’s diligence or strayed from what we new well we almost always stubbed our toe. The “hot deal with great lead investor” thesis didn’t serve us well. The farther we strayed from #fintech the worse we did.

12/26: Insight 6: Portfolio construction matters.  You need enough “at bats” in any given fund to give yourself the chance to find breakout winners.  But if you have too many investments you end up spreading the peanut butter too thin and returns will suffer.

13/26: Our first 4 funds consist of roughly 80 companies and ~25% of them will end up returning 5X+.  About half of these will return 10X+.  And 2 will return greater than 100X.  Every fund has between 1 and 3 “return the fund” investments.  N matters…

…17/26: Insight 8: Investments based on anything other than table pounding conviction sucked.  Insider rounds that extended runway sucked.  Investments justified based on their deal structures sucked.  Investments based on “the price reflects the flaws” sucked.

2. Ram Parameswaran – Internet Scale Businesses – Patrick O’Shaughnessy and Ram Parameswaran

So to be clear, when we invested in ByteDance, gosh, four years ago, they did not have TikTok, there was no TikTok. ByteDance is not an application business. What people don’t understand about ByteDance is right now everyone thinks of it as this big consumer phenomenon in the US and in China, but it wasn’t always the case. And it’s important to understand what underlies the business. First of all, the company at its core has the best machine learning and the best personalization algorithms in the world, period. One of the best. Almost to the point of in the Western world, we will call it creepy, but it works really well.

I say this with respect, it felt creepy is when we were in the testing of the old Toutiao application across five or six different phones sitting in our office in Menlo Park. I distinctly remember one of my colleagues telling me, “Man, why are you investing in this piece of crap? It’s just showing me pictures of skimpy women, skimpily clad women?” “What are you talking about? I’m seeing sports.” And it turns out that that guy clicked on a couple of pictures, because it was right there because they’re going to entice you and then the machine went off on a complete tangent of its own, and just kept showing him picture after picture and he’s like, “This is a really crappy product experience.” A couple of clicks took him down the wrong rabbit hole.

But that is what really struck us as, “My God. It’s the personalization algorithm that is so powerful here.” The machine just adjusts to your requests very, very, very quickly. So that’s number one. Number two, people don’t understand the infrastructure and the depth of hardware and software being built inside the organization. This company is one of the biggest buyers of Nvidia GPUs in the world. If you talked to the management team a few years ago, the company they would really idolize is Google. And what is special about Google? Google basically built some of the most incredible internet infrastructure for its own because the technology at the time was not enough to satisfy the volume of search queries being conducted on Google. You’ve heard all the stories about it. At its core, it is a software and machine learning-driven enterprise.

So then the question is, how do they create applications? What’s going to be interesting when ByteDance goes public next year and if you look at this company over the next four or five years is people will not quite know what to make of it. We in the Western world, look at Facebook and say we’ve got four big applications. There we got WhatsApp, Messenger, the Big Blue App, and Instagram. Google has 10 properties, Tencent has two properties. ByteDance will look like one or two properties and a bunch of rats, cats, and dogs.

And the reason why it’ll look like that is I don’t even think, unlike many companies that we’re used to in the US where you got a big visionary leader who has a view on this is the way the world looks like, Zhang Yiming, is what I call is an amazing leader, but he’s got one of the most flexible minds I’ve met in my life. And what I mean by that is, the company is on the constant edge of experimentation. At any point in time, there are probably dozens if not hundreds of experiments being run on what will work.

A couple of years ago when I met them, we were mapping out where can we pull dollars from into advertising? Because what we know is you’ve got these big platforms that scale, but the reality is, if you think about the totality of human knowledge, there are people who love Brazilian Jiu-Jitsu movies in Brazil, and in India, and in Japan and in China. We know people who love Volkswagens in Germany, and in Argentina. If you actually look at the totality of human nature, there are look-alikes in every single part of the world and Zhang Yiming was all about that. How do you unlock knowledge and interest graphs? Which is why every single application on ByteDance is based on removing friction. It is very easy to build a Toutiao piece of text, very easy to build a TikTok video, it’s very easy to do a bunch of other things. So removing friction is important.

The key point here is at any point in time there are hundreds of applications being done. This is why they had a jokes application. At one point they had an application primarily for car enthusiasts because this is all the places in the world where you see look alike audiences in different parts of the world. I cannot tell you with any confidence that I have a view on what the next big app from ByteDance is going to look like. But where we do know that consumers love to spend time is on education and gaming, outside of entertainment. So education, gaming, entertainment, and knowledge. Four places we spend most of our time staring at our phones. Knowledge, TikTok, Twitter, podcasts, entertainment, Netflix. Education, very important, especially post COVID education could be a very important time that people spend money and time. And then it comes to gaming. Gaming is just again, part of entertainment.

So where I think they are going to spend their time is education and gaming, but the reality is, we don’t know what’s actually going to take off till it takes off. It’s a culture of experimentation of once they find that something works and clicks these guys just pour growth marketing dollars on it, and they are willing to spend. In fact, one of the big criticisms of TikTok back in the day is they were spending money to acquire customers. And again, that goes against every framework and every piece of pattern recognition that we have as internet investors. But their genius was to think about consumers as e-commerce entities.

In an e-commerce company, you spend money, you acquire the customer, the customer spends money on the platform. It’s an arbitrage story. And they have the same view, “Well, let’s acquire the customer. But then we’re so good that once we acquire the person, they retain at 40, 50% six months on, and once they’re in, they spend 70 to 80 minutes in the platform, and so they can be monetized at very, very high levels.” That is the interesting part about ByteDance nobody gets, it is this experimentation model, which in three years, we don’t know what they’re going to create, but you kind of know that the culture in the company is based on building the next big thing. Once they find it, they know how to scale. If this company knows one thing well, it’s how to scale independent products.

And number three is, of course, the company always wanted to be a global company. So why that got me very excited early on is, man for the first time, we may actually have a global Chinese company, which has not happened so far. Now, unfortunately, some of their terms in the US got swatted for a few months. But again, it looks like next year, things may be back on track. But it may be the first global Chinese company. I think that’s the genius behind ByteDance that I don’t think most people quite understand because even now what I read in the media is “Oh, my God, TikTok’s so great.” And TikTok is just one piece of a huge empire that people don’t really see.

3. Fraud Is No Fun Without Friends – Matt Levine

The way a lot of financial crime works is by slow acculturation. You show up at work on your first day, bright-eyed and idealistic, and meet your new colleagues. They seem like a great bunch of people, they’re so smart and know so much and seem to be having so much fun. They go out for beers after work a lot, and sometimes they let you tag along and listen to their hilarious jokes and war stories.

During the day, they teach you how to trade Treasury futures, and it is all so exciting and high-stakes and important. You shadow one experienced trader and quickly find yourself imitating his mannerisms, looking up to him, hoping to be like him one day. “Here is where I put in some fake orders to spoof the price higher,” he says; “a little razzle dazzle to juke the algos.” “Isn’t that, uh, illegal?” you ask timidly. “Hahahaha illegal!” he replies ambiguously. You do not press the matter. Three months later you are bragging in the desk’s electronic chat room about your own big spoofing victories. As you type “lol i just spoofed em so good hope i dont go to jail” into the chat window, you feel a rush of pride; now you really fit in, you are one of them. You go out for beers that evening and you are the center of attention; everyone congratulates you and celebrates your achievements. It is a great day. Six months later you are arrested.

Now imagine the same story except that you show up at work your first day on Zoom, and your colleagues seem kinda nice but talking to them is awkward and disjointed, and you have no idea what they do after work because nobody leaves their house, but you have a Zoom happy hour once and that’s pretty awful. And there is an electronic chat room, sure, and your colleagues make jokes in the chat, but you don’t get a lot of them because they reference stuff that happened in the office, in person, before you arrived. You learn to trade Treasury futures by reading some training materials. “I just put in some fake orders to spoof the price higher,” says one experienced trader in the chat one day. You frown and reference the training materials, which say “spoofing is super duper illegal and should be reported to compliance immediately.” You shrug and send the chat transcript to compliance. Your colleague gets fired and prosecuted. He may or may not feel a sense of personal betrayal that you turned him in, but you’ll never know or care.

4. The ‘Shared Psychosis’ of Donald Trump and His Loyalists – Tanya Lewis

Scientific American asked [Brandy X.] Lee to comment on the psychology behind Trump’s destructive behavior, what drives some of his followers—and how to free people from his grip when this damaging presidency ends.

[An edited transcript of the interview follows.]

What attracts people to Trump? What is their animus or driving force?

The reasons are multiple and varied, but in my recent public-service book, Profile of a Nation, I have outlined two major emotional drives: narcissistic symbiosis and shared psychosis. Narcissistic symbiosis refers to the developmental wounds that make the leader-follower relationship magnetically attractive. The leader, hungry for adulation to compensate for an inner lack of self-worth, projects grandiose omnipotence—while the followers, rendered needy by societal stress or developmental injury, yearn for a parental figure. When such wounded individuals are given positions of power, they arouse similar pathology in the population that creates a “lock and key” relationship.

“Shared psychosis”—which is also called “folie à millions” [“madness for millions”] when occurring at the national level or “induced delusions”—refers to the infectiousness of severe symptoms that goes beyond ordinary group psychology. When a highly symptomatic individual is placed in an influential position, the person’s symptoms can spread through the population through emotional bonds, heightening existing pathologies and inducing delusions, paranoia and propensity for violence—even in previously healthy individuals. The treatment is removal of exposure.

Why does Trump himself seem to gravitate toward violence and destruction?

Destructiveness is a core characteristic of mental pathology, whether directed toward the self or others. First, I wish to clarify that those with mental illness are, as a group, no more dangerous than those without mental illness. When mental pathology is accompanied by criminal-mindedness, however, the combination can make individuals far more dangerous than either alone.

In my textbook on violence, I emphasize the symbolic nature of violence and how it is a life impulse gone awry. Briefly, if one cannot have love, one resorts to respect. And when respect is unavailable, one resorts to fear. Trump is now living through an intolerable loss of respect: rejection by a nation in his election defeat. Violence helps compensate for feelings of powerlessness, inadequacy and lack of real productivity.

5. Inflation Truthers – Ben Carlson

Every time I write about the current inflation rate or the possibility of higher inflation in the future, invariably a handful of people will comment about how high inflation is already here.

Are you serious?! Have you been to the grocery store lately?! What about the price of real estate or asset price inflation?

First of all, there is a 0.98 correlation between people who use the phrase “asset price inflation” and someone who is wrong about the markets or monetary policy.

Asset price inflation is not a thing. Risk assets generally go up over the long-term. The same is true of most real estate. In fact, that’s one of the biggest reasons to invest over the long-term — to beat inflation and keep up with or improve your standard of living.

Second of all, anecdotal price increases do not mean government statistics are somehow masking the true nature of inflation…

…But if we take away the outlier 2020 data points, the average real annual GDP growth from 2010-2019 was 2.3%. The inflation rate in that time averaged roughly 1.8% per year.

If you’re one of the conspiracy people who believe inflation has actually been running at 5-6% per year, that would assume the economy has been contracting by 1-3% per year over the past 10 years.

And if you’re a full tinfoil hat person who assumes inflation is actually 10-12% per year2, that’s like saying we’ve been in a full-blown depression and the economy has lost 80% of its value.

This is absurd and patently false but that’s the claim you’re making if you really think inflation is this high.

The United States actually had runaway inflation in the 1970s when it averaged around 7% annually. But nominal GDP was running at more than 10%because of this. Wages grew nearly 150%. This is what happens when there’s inflation.1

There are areas where prices have risen further than the average for the simple reason that this is how averages work.

One of those areas is healthcare. This is the one I sympathize with the most. For certain households, the cost of healthcare feels like it’s experienced hyperinflation.

Another is college tuition. But it’s worth remembering that just 30% or so of the population even has a college degree. It’s not like everyone is being forced to pay for that higher tuition.

And tuition rates rose roughly 180% from 1998-2019. That’s an annual rate of 4.8%, much higher than the reported inflation numbers but well below the conspiracy numbers…

…There are certainly households that feel the sting of rising prices more than others. And there are those households where people don’t realize how much their standard of living has improved over time because we become accustomed to the deflationary forces of technology.

The government isn’t suppressing the “actual” inflation number. And if they were, they would also be suppressing reported economic growth which is something no politician in their right mind would ever do.

6. 10 Things I’ll be Watching Closely in 2021 – Michael Batnick

Will value come back?

Over the last 5 years, the Russell 1000 Value Index has grown at 9% a year. Not bad, not bad at all. But when you compare it to its growth counterpart, which has grown at 21% a year, it looks downright dreadful.

Maybe we should be talking less about value being dead and more about growth being impossible to keep up with.

One of the reasons for the discrepancy in returns has to do with the difference in sector weights. Value has 29% fewer technology stocks and 26% more financials, industrials, and energy. The spread between value and growth on fundamental factors is as wide as it’s been since 1999, and on some metrics, it’s even wider. But is it actually different this time? You can’t rule it out…

…Is this the year the 60/40 finally dies?

The 10-year treasury rate began the year under 2%. Investors in the traditional 60/40 portfolio didn’t expect too much from this side of their ledger. They got it anyway. Bonds are up more than 7% this year.

The stock market started the year with a CAPE ratio north of 30, was coming off a 32% year, and had seen increases in 9 of the last 10 years. Investors couldn’t have expected too much from this side of their ledger this year. They got it anyway. The S&P 500 is up 16%.

The 60/40 is alive and well, for now. It’s hard to believe, but it gained 13% this year.

I keep telling investors to lower their expectations. Markets keep making me look ridiculous.

Where does the Dollar Go?

Maybe all that money printing is finally catching up with us. For the first time in a long time, the mighty dollar is starting to show signs of weakness. This has implications for the global economy and implications for U.S. investors.

A weaker dollar is good for gold and good for non-hedged foreign stocks. Gold quietly made an all-time high earlier in the year, and international stocks are showing signs of life, after doing a whole lot of nothing over the last decade.

International developed stocks (EFA), think Japan, United Kingdom, have only outperformed U.S. stocks once in the last 8 years. This is another one of those things that shouldn’t continue forever, but it’s hard to make the case why it wouldn’t.

7. My Close Encounter with a Conspiracy Theory – Robert Vinall

“Hey, Rob, it’s Jack here,” said an old college friend, whose name I have changed to protect his identity. “I am calling from a payphone so I cannot speak long. I am in Zurich and was wondering if you want to meet up?”

I was delighted to hear from Jack. I had not heard from him since a few years after graduating and had fond memories of our time together at college. I thought it was strange he was calling me from a payphone but figured either his phone battery was dead, or perhaps he wanted to avoid the horrendous roaming charges in Switzerland. I gave the matter no further thought.

Sooner than I expected, the doorbell rang, and Jack entered the scene at our kitchen table. He looked no different from how I remembered him and happy to see me as indeed I was to see him. He was keen to hear how I was doing, and in the first half-hour or so, I filled him in on how I had got married, started a family, moved to Zurich, etc. The conversation was relaxed, fun, and felt like we picked up where we had left off 15-odd years before.

I then asked him how he was doing. From one moment to the next, his expression changed as if a dark shadow had fallen over his face.

“You are probably wondering why I called you from a payphone,” he said. “Unfortunately, I have upset some very powerful people, and they are out to get me”.

I was totally taken aback by what Jack had said given the sudden change in the mood and the seriousness of his predicament. I immediately inquired what on earth had happened.

He then went on to recount how he had recently been fired from a high-profile job trading derivatives, in the City of London. He was unsure why he had been fired, but shortly beforehand, he had had a heated argument with his assistant. She was married to a middling official in the UK government, and Jack suspected the official was so incensed by the treatment of his wife that he was now out for revenge. Not only did he work his powerful connections to get Jack fired, but he also had Jack’s name placed on a list of suspected terrorists.

If I was initially taken aback, I was now in a state of full-blown shock. I was desperately upset about the misfortune that had befallen my friend. During my own brief sojourn in the City of London, I experienced first-hand how political large banks can be and how vindictive some individuals are if you get on the wrong side of them. I asked him to go on.

He told me that fortunately, he was financially secure as he had earned well as a trader and also received a large severance package when he was fired. He had bought a large house next door to his parents. It was a relief that he was at least financially ok. He told me that he spent a large part of the day investigating his suspicions and had turned up multiple documents as well as first-hand sources confirming that such lists exist, and he was on them. Could he really be sure all this was true, I asked, starting to feel a vague sense of unease.

“I wish it was not,” he responded.

Having exhausted all other options, he saw no other alternative other than to address himself to the highest echelons of UK society. He went to the top – David Cameron, then Prime Minister of the United Kingdom.

“Call off your lackeys,” he told me he had written to the Prime Minister “Or else there will be consequences. It would be a huge mistake to underestimate me.”.

Jack had exercised all the restraint he could muster and was running out of patience. He believed he had unwittingly uncovered a conspiracy going to the highest levels of government in which innocent victims are placed on lists of suspected terrorists and subjected to round-the-clock surveillance just to settle the petty scores of middling officials. His own treatment was just the tip of the iceberg.

“Rob, what I know has the power to bring down the entire British government and if pushed I am not afraid to use it,” he said with the look of a man who holds all the aces.

The magnitude and reach of what I was hearing were starting to get a little bit too much for me to process.

“Shortly after I sent the letter,” he went on “multiple neighbours as well as complete strangers approached me around town confirming to me that the Police were snooping around asking questions about me”.

This was the clincher argument from his perspective. It was not just people he knew – complete strangers were confirming to him his worst fears.

For me, it was the moment that the spell was broken. If you send a threatening letter to the Prime Minister of the United Kingdom, an alternative explanation sprang to my mind. Perhaps they were sending the police around to assess how great a threat he posed and how seriously to take it! I tentatively suggested to Jack this alternative explanation.

Jack would have none of it and instead recounted another story to illustrate the extreme lengths the authorities were going to pursue him. He recently booked a vacation to Mauritius in order to get as far away from things as possible and wind down. Things had started really well and he had met a beautiful girl at a bar. Finally, he had the chance to be free and have a crack at happiness. Then, ominously, he noticed two guys at a bar.

“They even followed me all the way to Mauritius,” he sighed. “That’s how far they are willing to go!”.

He even feared that the beautiful girl was a honey trap sent to ensnare him. Reluctantly, he said goodbye to the girl and returned to the UK earlier than planned.

“What I really want, Rob, is to have what you have,” he told me gesturing to the scene in my kitchen. “But they won’t let me have it.”

“Listen, Jack,” I responded, “All I know is based solely on what you have told me over the last few hours. But, based on what you have told me, I am almost certain, as certain as I possibly can be, that this is a figment of your imagination. You need to do everything in your power to rid yourself of this delusion.”

Then a shadow fell across his face again, like it had done at the beginning of his story several hours before.

“Damn!” he cried, “They managed to get to you before I could”.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. Of all the companies mentioned, we currently have a vested interest in the shares of Alphabet and Facebook. Holdings are subject to change at any time.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general.

Here are the articles for the week ending 10 January 2021:

1. One of The Great Bubbles of Financial History – Michael Batnick

Jeremy Grantham is going for it. In his latest piece, Waiting For The Last Dance, he writes:

“I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.”

Yikes

Grantham is famous for calling the Japanese, tech, and housing bubbles. So when he speaks on this topic, investors pay attention. You can’t mention his prescient calls without mentioning the ones that didn’t come to fruition. It’s only fair to point out that he has been bearish for much of the recent bull market….

…It’s hard to argue with Grantham when he says, “a higher-priced asset will produce a lower return than a lower-priced asset.” It’s hard, but I’m going to try anyway. I have a massive amount of respect for Grantham, so I hope this does not come off as disrespectful. I’m just trying to provide an alternate view…

…One of the most popular methods that market historians use is the CAPE ratio, which I want to discuss briefly. At just under 34x, it’s the second-highest it’s ever been, behind only the tech bubble in 2000…

 …One other thing the long-term does is hide the medium long-term. Including numbers from the 1800s masks the fact that the CAPE ratio has been rising for decades, as I wrote about in 2017, “Should Stocks Be Worth More Now Than They Used to Be?

The average CAPE ratio for the entire data series is 17. But it averaged 25 in the 90s, 26.7 in the 2000s, and 25.5 in the most recent decade. We haven’t once talked about how things like low interest rates, low inflation, Fed intervention, fiscal policy, or market structure affect market behavior, but those are different stories for a different day.

At 34x on the CAPE ratio, it’s impossible to argue stocks are cheap. I won’t do that. But what if we’re looking at the wrong metric?

Ensemble Capital recently tweeted:

“The 9% long term rate of return to US equities has historically come from a 4% FCF yield and 5% growth. In the decade since 2009, there have been regular claims that we were back in a bubble, but the FCF yield suggested valuation was not stretched. This is still true today.”…

…I will go on record that I don’t think this is anywhere near like 1999 or 1929, despite what the CAPE ratio says. Are there pockets of excess? Absolutely, I’m not blind. But a 70% decline in the major averages? Sorry, I don’t see it.

2. Twitter thread on the establishment of Amazon Web Services in its early days – Dan Rose

I was at Amzn in 2000 when the internet bubble popped. Capital markets dried up & we were burning $1B/yr. Our biggest expense was datacenter -> expensive Sun servers. We spent a year ripping out Sun & replacing with HP/Linux, which formed the foundation for AWS. The backstory:…

…Amazon’s CTO was Rick Dalzell – ex-Walmart, hard-charging operator. He pivoted the entire eng org to replace Sun with HP/Linux. Linux kernel was released in ’94, same year Jeff started Amzn. 6 years later we were betting the company on it, a novel and risky approach at the time….

Product development ground to a halt during the transition, we froze all new features for over a year. We had a huge backlog but nothing could ship until we completed the shift to Linux. I remember an all-hands where one of our eng VPs flashed an image of a snake swallowing a rat

This coincided with – and further contributed to – deceleration in revenue growth as we also had to raise prices to slow burn. It was a viscous cycle, and we were running out of time as we ran out of money. Amzn came within a few quarters of going bankrupt around this time.

But once we started the transition to Linux, there was no going back. All hands on deck refactoring our code base, replacing servers, preparing for the cutover. If it worked, infra costs would go down by 80%+. If it failed, the website would fall over and the company would die.

We finally completed the transition, just in time and without a hitch. It was a huge accomplishment for the entire engineering team. The site chugged on with no disruption. Capex was massively reduced overnight. And we suddenly had an infinitely scalable infrastructure.

Then something even more interesting happened. As a retailer we had always faced huge seasonality, with traffic and revenue surging every Nov/Dec. Jeff started to think – we have all this excess server capacity for 46 weeks/year, why not rent it out to other companies?

Around this same time, Jeff was also interested in decoupling internal dependencies so teams could build without being gated by other teams. The architectural changes required to enable this loosely coupled model became the API primitives for AWS.

3. Two Worlds: So Much Prosperity, So Much Skepticism – Morgan Housel

The demand for forecasts grows after a surprise. It’s quite an irony. Surprises make you feel like you’re not in control, which is when it feels best to grab the wheel with both hands, listening to those who tell you what happens next despite being blindsided by what just happened…

…But the most important economic stories don’t require forecasts; they’ve already happened. And they tend to be the most overlooked, because when everyone’s focused on the future it’s easy to ignore what’s sitting right in front of us.

I want to tell you two of the biggest economic stories that aren’t getting enough attention.

One is that household finances might be in the best shape they’ve ever been in. Ever. That might sound crazy, and it’s easy to overlook because of the second story: Covid has dumped kerosene on wealth inequality in ways we’ve yet to fully grasp…

…Your spending is someone else’s income.

When you don’t spend, someone else gets laid off, which means they don’t spend, and someone else gets laid off, on and on.

Same thing works in the other direction. That’s why booms and busts have momentum.

And it’s why last March was such a red-alert moment for the global economy. Once spending stops due to lockdowns – and “stop” is hardly an exaggeration here – incomes collapse, and a nasty cycle takes hold.

Stimulus checks blunted the worst. Big portions of the economy figuring out how to operate with everyone working from home helped too.

But a lot of the spending still stopped. Vacations that would have been taken never happened. Weddings that would have taken place were postponed. Trips to the mall were replaced with aimlessly scrolling Twitter.

When income is replaced with stimulus checks but spending doesn’t rebound, savings surges.

Which is what happened in 2020, in an epic way.

The personal savings rate averaged 7% in the quarter-century before 2020. Then Covid hit, and overnight it went to 34%. It’s since dropped to about 14%, which would have been a 50-year high before Covid.

The result is that the amount of cash households have in the bank has absolutely exploded. I don’t even know if that word does justice. American households have $1 trillion more in checking accounts today than they did a year ago. For perspective, they held $800 billion in checking accounts a year ago. So it’s more than doubled. In one year. Benjamin Roth observed that “no one had any money” during the Great Depression. We now have so much I’ve run out of adjectives.

You begin to wonder what happens to that money once there’s widespread vaccination and the vacations, weddings, and mall trips that have been delayed are suddenly unshackled.

The best comparison might be the late 1940s and 1950s.

Then, as now, bank accounts were stuffed full as war-time spending brought record-low unemployment. And then, as now, a lot of that money couldn’t be spent because of war-time rationing.

After the war ended and life got on, the amount of pent-up demand for household goods mixed with the prosperity of war-time employment and savings was simply extraordinary. It’s what created the 1950s economic boom.

Fewer than two million homes were built from 1940 to 1945. Then seven million were built from 1945 to 1950. Commercial car production was virtually nonexistent from 1942 to 1945 as assembly lines were converted to build tanks and planes. Then 21 million cars were sold from 1945 to 1950.

4. Tweet on how nobody can foresee the future – Bill Mann

[Title of memo] Thoughts for the 2001 Quadrennial Defense Review

If you had been a security policy-maker in the world’s greatest power in 1900, you would have been a Brit, looking warily at your age-old enemy, Frane.

By 1910, you would be allied with France and your enemy would be Germany.

By 1920, World War I would have been fought and won, and you’d be engaged in a naval arms race with your erstwhile allies, the U.S. and Japan.

By 1930, naval arms limitation treaties were in effect, the Great Depression was underway, and the defense planning standard said “no war for ten years.”

Nine years later World War II had begun…

… By 1970, the peak of our involvement in Vietnam had come and gone, we were beginning detente with the Soviets, and we were anointing the Shah as our protege in the Gulf region.

By 1980, the Soviets were in Afghanistan, Iran was in the throes of revolution, there was talk of our “hollow forces” and a “window of vulnerability,” and the U.S. was the greatest creditor nation the world had ever seen…

… Ten years later [in 2000], Warsaw was the capital of a NATO nation, asymmetric threats transcended geography, and the parallel revolutions of information, biotechnology, robotics, nanotechnology, and high density energy sources foreshadowed changes almost beyond forecasting.

All of which is to say that I’m not sure what 2020 will look like, but I’m sure that it will be very little like we expect, so we should plan accordingly.

5. Deep Risk in the United States of America – Ben Carlson

One of my favorite descriptions of risk in the financial markets comes from William Bernstein in his book, Deep Risk: How History Informs Portfolio Design:

Risk, then, comes in two flavors: “shallow risk,” a loss of real capital that recovers relatively quickly, say within several years; and “deep risk,” a permanent loss of real capital. Put into different words, shallow risk, if handled properly, deprives you only of sleep for a while; deep risk deprives you of sustenance.

A few weeks after Trump was inaugurated in early 2017, I wrote a piece called Deep Risk Under President Trump. This was my conclusion:

Let’s hope shallow risk — run-of-the-mill market volatility — is the only thing we have to worry about over the next four years. But with Trump threatening countries, companies, regulations and industries, it’s worth understanding what could happen if we do experience deep risk within our financial markets.

It turns out it wasn’t the markets where deep risk resided. Markets have done just fine throughout this entire ordeal. Investors have learned to live with geopolitical risk. Markets don’t care about politics.

The real deep risk came to fruition in our democracy and the trust and faith in our government institutions.

While the stock market continues to hit new highs, our political sphere is in the midst of a great depression.

The first time I became truly terrified of this deep risk came from a Vanity Fair article by Michael Lewis in the fall of 2017.

This piece would lead to Lewis’s book, The Fifth Risk: Undoing Democracy, which detailed the neglect and mismanagement of government agencies and services by the new administration in 2017. Lewis details four risks of this neglect in the book, leaving the fifth risk open-ended.

That fifth risk is the risk that’s hard to imagine.

No one could have imagined we would experience a global pandemic in 2020.

No one could have imagined the United States would have one of the worst responses to that pandemic.

No one could have imagined the president himself would contract that disease.

No one could have imagined we would have a contested presidential election.

And no one could have imagined that same president would incite mob violence on our own Capitol Building because he refuses to admit he lost fair and square.

6. No, you did not miss a bull run – Chin Hui Leong

Here’s the thing. I have never timed my stock buys perfectly over the last 15 years of investing. And that’s not the worst thing in the world. Let me share two examples that stand out.

In February 2007, I invested in shares of a Mexican food chain, Chipotle Mexican Grill. With the benefit of hindsight, my timing was pretty bad.

In October 2007, less than 10 months after I bought the shares, the S&P 500 almost hit 1,600 points before proceeding to fall to below 700 points over the next one and half years. That’s a fall of well over 50 per cent. But my timing didn’t matter over the long run.

Today, 13 years later, those shares are up over 2,300 per cent, a satisfying return by any account. In short, it didn’t matter that I bought too early. And that’s not the only instance.

Here’s a different example.

In June 2010, I bought shares of Apple, more than a year after the stock market had bottomed out in March 2009. By then, the stock market was already up by 60 per cent from its low.

Again, the timing of my entry was off by a wide margin. But that didn’t matter in the end. Today, over a decade later, the shares have risen by over 1,200 per cent from the day I bought my first shares.

7. Twitter thread on 40 lessons on investing and life – Eugene Ng

Reflecting on 2020 with 40 Lessons on Investing and Life. Below are my reflections for 2020 in my investing journey, I hope by sharing, it might help you in many ways as it did for me as well. Here goes…

(1) You can do it.

I used to be get horrible grades in English. To write a book, self-publishing it & being an Amazon Best Seller in 5 countries (US, Canada, Australia, Germany & UK) is no mean feat. Anyone can do anything, as long as you set your mind & heart to do it…

…(3) Your Vision.

Make your portfolio reflect your best vision for your future. This drives what I do at Vision Capital through Vision Investing to invest in companies that are shaping and changing the world for the better. The companies you own, ultimately reflect who you are….

…(6) Staying in the game.

The only reason we can be in the game for the long term, because our portfolio is not concentrated & we don’t use leverage or options. It might be great 80–95% of the time, but when it bites, it will take you out of the game, that’s not what we want…

…(10) Creating Value. For Others.

The sole purpose of the book was never for fame, recognition or the money. It was to help the world invest better in the the best companies, creating a flywheel of change, capital, investors, companies, culture & a new way of investing…

…(12) Network.

Dare to ask, dare to engage, dare to try. For there is little downside, & a lot of upside if you find a new meaningful interaction. Luck & serendipity is when preparation meets opportunity. Dare to say yes sometimes. If it works out, great, if not, move on….

(13) Concentration vs Diversification.

Less than 1% of companies & a small handful of companies will drive the majority of market returns, that’s why I don’t hold a concentrated portfolio. Also because they are so many great companies & opportunities. Choose what works for you…

…(25) Gratitude.

Be grateful. Practice gratitude every day. Give thanks for the smallest things in life, the sun, the clear skies, the clean air, the greenery, the birds chirping, your loved ones, your kids, anything. There is beauty in everything.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have a vested interest in the shares of Amazon, Apple, and Chipotle Mexican Grill. Holdings are subject to change at any time.