Author: Chong Ser Jing

On 12 March 2023, Signature Bank, which was based in New York, was closed by banking regulators in the USA. Its closure happened in the wake of Silicon Valley Bank’s high-profile collapse just a few days prior. Silicon Valley Bank was dealing with a flood of deposit withdrawals that it could not handle. After regulators assumed control of Silicon Valley Bank, it was revealed that depositors tried to withdraw US$42 billion – around a quarter of the bank’s total deposits – in one day. 

Signature Bank was by no means a behemoth, but it was definitely not small. For perspective, the US’s largest bank by assets, JPMorgan Chase, had total assets of US$3.67 trillion at the end of 2022; Signature Bank, meanwhile, reported total assets of US$110 billion. But what is fascinating – and shocking – about Signature Bank’s failure is not its size. It has to do with its board of directors, one of whom is Barney Frank, a long-time politician who retired from American politics in 2012.

During his political career, Frank was heavily involved with reforming and regulating the US banking industry. From 2007 to 2011, he served as Chairman of the House Financial Services Committee, where he played an important role in creating a US$550 billion plan to rescue American banks during the 2008-2009 financial crisis. He also cosponsored the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law in July 2010. The Dodd-Frank act was established in the aftermath of the 2008-2009 financial crisis, which saw many banks in the USA collapse. The act was created primarily to prevent banks from engaging heavily in risky activities that could threaten their survival.

Although Signature Bank was able to tap on Frank’s experience for the past eight years – he has been a director of the bank since June 2015 – it still failed. An argument can be made that Signature Bank was  engaging in risky banking activities prior to its closure. The bank started taking deposits from cryptocurrency companies in 2018. By 2021 and 2022, deposits from cryptocurrency companies made up 27% and 20%, respectively, of Signature’s total deposit base; the bank was playing with fire by having significant chunks of its deposit base come from companies in a highly speculative sector. The key takeaway I have from this episode is that investors should never be complacent about the capabilities of a company’s leaders, even if they have a storied reputation. Always be vigilant.

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. I do not have a vested interest in any stocks mentioned. Holdings are subject to change at any time. 

A book I read recently is Edward Chancellor’s The Price of Time, published in July 2022. The book traces the history of interest rates from ancient Mesopotamia (a civilisation that dates back to 3100 B.C.) to our current era. One of the thought-provoking collection of ideas I gleaned from the book involves China and the growing problems with its economy over the past two to three decades.

Jeremy and I have investments in China, so I want to document these facts for easy reference in the future. Moreover, given the size of China’s economy – the second largest in the world – I think anyone who’s interested in investing may find the facts useful. To be clear, none of what I’m going to share from The Price of Time is meant to be seen as a commentary on the attractiveness (or lack thereof) of Chinese stocks or the growth prospects of the Chinese economy. Instead, Jeremy and I merely see them as providing additional colour in the mosaic we have collected over time about how the world works and where the world is going. With that, here’re the fascinating new details I picked up about China’s economy from The Price of Time (bolded emphases are mine):

The state of China’s property bubble in 2016

Quote 1

“In parts of Shanghai and neighbouring Suzhou, empty development plots sold for more than neighbouring land with completed buildings – a case of ‘flour more expensive than bread’. By late 2016, house prices were valued nationwide at eight times average Chinese incomes, roughly double the peak valuation of US housing a decade earlier.”

Quote 2

“A study released in 2015 by the National Bureau of Economic Research found that rental yields in Beijing and Shanghai had fallen below 2 per cent – in line with the discount rate. However, rental yields of less than 2 per cent implied a payback of nearly seven decades – roughly the same length of time as residential land leases, after which title reverted to the state… But, as the NBER researchers commented, ‘only modest declines in expected appreciation seem needed to generate large drops in house values.’”

Quote 3

“By late 2016 total real estate was valued at [US]$43 trillion, equivalent to nearly four times GDP and on a par with the aggregate value of Japanese real estate (relative to GDP) at its bubble peak. Like Japan three decades earlier, China had transformed into a ‘land bubble’ economy. The French bank Société Générale had calculated back in 2011 that over the previous decade China had built 16 billion square metres of residential floor space. This was equivalent to building modern Rome from scratch every fourteen days, over and over again. A decade after the stimulus more than half of the world’s hundred tallest buildings were under construction in the People’s Republic, and more than a quarter of economic output was related, directly or indirectly, to real estate development.”

The stunning growth of debt in China in the 21st century

Quote 4

“In ten years to 2015, China accounted for around half the world’s total credit creation. This borrowing binge constituted ‘history’s greatest Credit Bubble’. Every part of the economy became bloated with debt. Liabilities of the banking system grew to three times GDP. At the time of Lehman’s bankruptcy, households in the People’s Republic carried much less debt than their American counterparts. But, since the much-touted ‘rebalancing’ of the economy never occurred, consumers turned to credit to enhance their purchasing power.

Between 2008 and 2018, Chinese households doubled their level of debt (relative to income) and ended up owing more than American households did at the start of the subprime crisis. Over the same period, Chinese companies borrowed [US]$15 trillion, accounting for roughly half the total increase in global corporate debt. Real estate companies borrowed to finance their developments – the largest developer, Evergrande, ran up total liabilities equivalent to 3 per cent of GDP. Local governments set up opaque financing vehicles to pay for infrastructure projects with borrowed money. Debt owed by local governments grew to [US]$8.2 trillion (by the end of 2020), equivalent to more than half of GDP.”

How China concealed its bad-debt problems in the 21st century and the problems this concealment is causing

Quote 5

“Although they borrowed more cheaply than private firms, state-owned enterprises nevertheless had trouble covering their interest costs. After 2012 the total cost of debt-servicing exceeded China’s economic growth. An economy that can’t grow faster than its interest costs is said to have entered a ‘debt trap’. China avoided the immediate consequences of the debt trap by concealing bad debts. What’s been called ‘Red Capitalism’ resembled a shell game in which non-performing loans were passed from one state-connected player to another.

The shell game commenced at the turn of this century when state banks were weighed down with nonperforming loans. The bad loans weren’t written off, however, but sold at face value to state-owned asset management companies (AMCs), which paid for them by issuing ten-year bonds that were, in turn, acquired by the state-owned banks. In effect, the banks had swapped uncollectible short-term debt for uncollectible long dated debt. When the day finally arrived for the AMCs to redeem their bonds, the loans were quietly rolled over. Concealing or ‘evergreening’ bad debts required low interest rates. China’s rate cuts in 2001 and 2002 were partly intended to help banks handle their debt problems. Over the following years, bank loan rates were kept well below the country’s nominal GDP growth, while deposit rates remained stuck beneath 3 per cent. Thus, Chinese depositors indirectly bailed out the banking system.

After 2008, cracks in the credit system were papered over with new loans – a tenet of Red Capitalism being that ‘as long as the banks continue to lend, there will be no repayment problems.’ But it became progressively harder to conceal problem loans. In 2015, an industrial engineering company (Baoding Tianwei Group) became the first state-owned enterprise to default on its domestic bonds. The trickle of defaults continued. One could only guess at the scale of China’s bad debts. Bank analyst Charlene Chu suggested that by 2017 up to a quarter of bank loans were non-performing. This estimate was five times the official figure.

As Chu commented: ‘if losses don’t manifest on financial institution balance sheets, they will do so via slowing growth and deflation.’ Debt deflation, as Irving Fisher pointed out, occurs after too much debt has accumulated. At the same time, excess industrial capacity was putting downward pressure on producer prices and leading China to export deflation abroad – for instance, by dumping its surplus steel in European and US markets. Corporate zombies added to deflation pressures. Despite the soaring money supply after 2008, consumer prices hardly budged. By November 2015, the index of producer prices had fallen for a record forty-four consecutive months.

If China’s investment had been productive, then it would have generated the cash flow needed to pay off its debt. But, for the economy as a whole, this wasn’t the case. So debt continued growing. Top officials in Beijing were aware that the situation was unsustainable. In the summer of 2016, President Xi’s anonymous adviser warned in his interview with the People’s Daily that leverage must be contained. ‘A tree cannot grow to the sky,’ declared the ‘authoritative person’; ‘high leverage must bring with it high risks.’ Former Finance Minister Lou Jiwei put his finger on Beijing’s dilemma: ‘The first problem is to stop the accumulation of leverage,’ Lou said. ‘But we also can’t allow the economy to lose speed.’ Since these twin ambitions are incompatible, Beijing chose the path of least resistance. A decade after the stimulus launch, China’s ‘Great Wall of Debt’ had reached 250 per cent of GDP, up 100 percentage points since 2008.”

The troubling state of China’s shadow banking system in 2016

Quote 6

“By 2016, the market for wealth management products had grown to 23.5 trillion yuan, equivalent to over a third of China’s national income. Total shadow finance was estimated to be twice as large. Even the relatively obscure market for debt-receivables exceeded the size of the US subprime market at its peak. George Soros observed an ‘eery resemblance’ between China’s shadow banks and the discredited American version. Both were driven by a search for yield at a time of low interest rates; both were opaque; both involved banks originating and selling on questionable loans; both depended on the credit markets remaining open and liquid; and both were exposed to real estate bubbles.”

China’s risk of facing a currency crisis because of its expanding money supply

Quote 7

“As John Law had discovered in 1720, it is not possible for a country to fix the price of its currency on the foreign exchanges while rapidly expanding the domestic money supply. Since 2008 China’s money supply had grown relentlessly relative to the size of its economy and the world’s total money supply. Those trillions of dollars’ worth of foreign exchange reserves provided an illusion of safety since a large chunk was tied up in illiquid investments. Besides, cash deposits in China’s banks far exceeded foreign exchange reserves. If only a fraction of those deposits left the country, however, the People’s Republic would face a debilitating currency crisis.” 

China’s problems of inequality, financial repression, and tight control of the economy by the government

Quote 8

“From the early 1980s onwards, the rising incomes of hundreds of millions of Chinese workers contributed to a decline in global inequality. But during this period, China itself transformed from one of the world’s most egalitarian nations into one of the least equal. After 2008, the Gini coefficient for Chinese incomes climbed to 0.49 – an indicator of extreme inequality and more than twice the level at the start of the reform era.

The inequality problem was worse than the official data suggested. A 2010 report from Credit Suisse claimed that ‘illegal or quasi-legal’ income amounted to nearly a third of China’s GDP. Much of this grey income derived from rents extracted by Party members. The case of Bo Xilai, the princeling who became Party chief of Chongqing, is instructive. As the head of this sprawling municipality, Bo made a great display of rooting out corruption. But after he fell from grace in 2012 it was revealed that his family was worth hundreds of millions of dollars. Premier Wen’s family fortune was estimated at [US]$2.7 billion.

The richest 1 per cent of the population controlled a third of the country’s wealth, while the poorest quartile owned just 1 per cent. The real estate bubble was responsible for much of this rise in inequality. Researchers at Peking University found that 70 per cent of household wealth was held in real estate. A quarter of China’s dollar billionaires were real estate moguls. At the top of the rich list was Xu Jiayin, boss of property developer China Evergrande, whose fortune (in 2018) was estimated at [US]$40 billion. Many successful property developers turned out to be the offspring of top Party members. Local government officials who drove villagers off their land to hand it over to developers acted as ‘engines of inequality’.

Financial repression turned back the clock on China’s economic liberalization. Throughout its history, the Middle Kingdom’s progress ‘has an intermittent character and is full of leaps and bounds, regressions and relapses’. In general, when the state has been relatively weak and money plentiful, the Middle Kingdom has advanced. Incomes were probably higher in the twelfth century under the relatively laissez-faire Song than in the mid-twentieth century when the Communists came to power. But when the state has shown a more authoritarian character, economic output has stagnated or declined. The mandarins’ desire for total monetary control contributed to Imperial China’s ‘great divergence’ from Western economic development.

In recent years, China has experienced an authoritarian relapse. Paramount leader Xi Jinping exercises imperial powers. An Orwellian system of electronic surveillance tracks the citizenry. Millions of Uighurs are reported to have been locked up in camps. Private companies are required to place the interests of the state before their own. The ‘China 2025’ economic development plans aim to establish Chinese predominance in a number of new technologies, from artificial intelligence to robotics. A system of social credits, which rewards and punishes citizens’ behaviour, will supplement conventional credit. A digital yuan, issued by the People’s Bank, will supplement – or even replace – conventional money. These developments are best summed up by a phrase that became commonplace in the 2010s: ‘the state advances, while the private [sector] retreats.’

Financial repression has played a role in this regressive movement. The credit binge launched by the 2008/9 stimulus enhanced Beijing’s sway over the economy. As the state has advanced, productivity growth has declined. Because interest rates neither reflect the return on capital nor credit risk, China’s economy has suffered from the twin evils of capital misallocation and excessive debt. Real estate development, fuelled by low-cost credit, delivered what President Xi called ‘fictional growth’. By 2019 Chinese GDP growth (per capita) had fallen to half its 2007 level.

The Third Plenum of the Eighteenth Chinese Communist Party Congress, held in Beijing in 2013, heralded profound reforms to banking practices. The ceiling on bank deposit rates was lifted, and banks could set their own lending rates. Households earned a little more on their bank deposits, but interest rates remained below nominal GDP growth. The central bank now turned to managing the volatility of the interbank market interest rate. The People’s Bank still lacked independence and had to appeal to the State Council for any change to monetary policy.

Allowing interest rates to be set by the market would have required wrenching changes. Forced to compete for deposits, state-controlled banks would suffer a loss of profitability. Bad loans would become harder to conceal. Without access to subsidized credit, state-owned enterprises would become even less profitable. Corporate zombies would keel over. Economic planners would lose the ability to direct cheap capital to favoured sectors. The cost of controlling the currency on the foreign exchanges would become prohibitively expensive. Beijing would no longer be able to manipulate real estate or fine-tune other markets.

The Party’s monopoly of power has survived the liberalization of most commercial prices and many business activities, but the cadres never removed their grip on the most important price of all. The state, not the market, would determine the level of interest. The legacy of China’s financial repression was, as President Xi told the National Congress in 2017, a ‘contradiction between unbalanced and inadequate [economic] development and the people’s ever-growing needs for a better life’, which, in turn, provided Xi with a rationale for further advancing the role of the state.”

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. I do not have a vested interest in any stocks mentioned. Holdings are subject to change at any time.

What happens to stocks when risk-free rates are high? Theoretically, when risk-free rates are high, stocks should fall in price – why would anyone invest in stocks if they can earn 8%, risk-free? But as Yogi Berra was once believed to have said, “In theory, there is no difference between practice and theory. In practice, there is.”

Ben Carlson is the Director of Institutional Asset Management at Ritholtz Wealth Management. He published a blog post recently, titled Will High Risk-Free Rates Derail the Stock Market?, where he looked at the relationship between US stock market returns and US government interest rates. It turns out there’s no clear link between the two.

In the 1950s, the 3-month Treasury bill (which is effectively a risk-free investment, since it’s a US government bond with one of the shortest maturities around) had a low average yield of 2.0%; US stocks returned 19.5% annually back then, a phenomenal gain. In the 2000s, US stocks fell by 1.0% per year when the average yield on the 3-month Treasury bill was 2.7%. Meanwhile, a blockbuster 17.3% annualised return in US stocks in the 1980s was accompanied by a high average yield of 8.8% for the 3-month Treasury bill. In the 1970s, the 3-month Treasury bill yielded a high average of 6.3% while US stocks returned just 5.9% per year. 

Here’s a table summarising the messy relationship, depicted in the paragraph above, between the risk-free rate and stock market returns in the USA:

So there are two important lessons here: (1) While interest rates have a role to play in the movement of stocks, it is far from the only thing that matters; (2) one-factor analysis in finance – “if A happens, then B will occur” – should be largely avoided because clear-cut relationships are rarely seen.

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. I do not have a vested interest in any stocks mentioned. Holdings are subject to change at any time.

In my December 2021 article, The Need For Patience, I shared two of my favourite investing stories. The first involved Warren Buffett’s experience with investing in The Washington Post Company in 1973 and the second was about the recommendation of Starbucks shares by the brothers, David and Tom Gardner, during a TV show in the USA in July 1998. 

The thread tying the two stories together was that both companies saw sharp declines in their stock prices while on their way to delivering massive returns. Washington Post’s stock price fell by more than 20% shortly after Buffett invested, and then stayed in the red for three years. But by the end of 2007, Buffett’s investment in Washington Post had produced a return of more than 10,000%. As for Starbucks, its stock price was down by a third a mere six weeks after the Gardners’ recommendation. When The Need For Patience was published, the global coffee retailer’s stock price was 30 times higher from where the Gardners recommended the company.

I recently learnt that Walmart, the US retail giant, had walked a similar path. From 1971 to 1980, Walmart produced breath-taking business growth. The table below shows the near 30x increase in Walmart’s revenue and the 1,600% jump in earnings per share in that period. Unfortunately, this exceptional growth did not help with Walmart’s short-term return. Based on the earliest data I could find, Walmart’s stock price fell by three-quarters from less than US$0.04 in late-August 1972 to around US$0.01 by December 1974 – in comparison, the S&P 500 was down by ‘only’ 40%. 

But by the end of 1979, Walmart’s stock price was above US$0.08, more than double what it was in late-August 1972. Still, the 2x-plus increase in Walmart’s stock price was far below the huge increase in earnings per share the company generated. This is where the passage of time helped – as more years passed, the weighing machine clicked into gear (I’m borrowing from Ben Graham’s brilliant analogy of the stock market being a voting machine in the short run but a weighing machine in the long run). At the end of 1989, Walmart’s stock price was around US$3.70, representing an annualised growth rate in the region of 32% from August 1972; from 1971 to 1989, Walmart’s revenue and earnings per share grew by 41% and 38% per year. Even by the end of 1982, Walmart’s stock price was already US$0.48, up more than 10 times where it was in late-August 1972. 

What’s also interesting was Walmart’s valuation. It turns out that in late-August 1972, when its stock price was less than US$0.04, Walmart’s price-to-earnings (P/E) ratio was between 42 and 68 (I couldn’t find quarterly financial data for Walmart for that time period so I worked only with annual data). This is a high valuation. If you looked at Walmart’s stock price in December 1974, after it had sunk by 75% to a low of around US$0.01 to carry a P/E ratio of between 6 and 7, the easy conclusion is that it was a mistake to invest in Walmart in August 1972 because of its high valuation. But as Walmart’s business continued to grow, its stock price eventually soared to around US$3.70 near the end of 1989. What looked like a horrendous mistake in the short run turned out to be a wonderful decision in the long run because of Walmart’s underlying business growth. 

This look at a particular part of Walmart’s history brings to mind two important lessons for all of us when we’re investing in stocks:

• Even when you’ve found the best company to invest in, it’s likely that there will be pain before gain; don’t give up on the company’s stock just because its price has fallen
• Paying a high valuation can still work out really well if the company’s underlying business can indeed grow at a high clip for a long time 

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, I currently have a vested interest in Starbucks. Holdings are subject to change at any time.

The venerable Charlie Munger is one of my investing heroes. On 15 February 2023, he participated in a 2.5 hour Q&A session during the annual shareholder’s meeting for Daily Journal Corporation (he’s a shareholder and board member of the company). Munger’s already 99, so I count it a blessing for the world that he’s still able to share his thoughts publicly.

Shortly after Munger’s Q&A ended, my friend Thomas Chua posted a transcript and video of the session at his excellent investing website Steady Compounding. The italicised passages between the two horizontal lines below are my favourite pieces of Munger’s wisdom after I went through Thomas’s article.

1) On the worst human behaviour that leads to bad decision-making

Well, what.. If I had to name one factor that dominates human bad decisions, you would be what I call denial. If the truth is unpleasant enough, people kind of, their mind plays tricks on them, and they can, it isn’t really happening. And of course, that causes enormous destruction of business where people go out throwing money into the way they used to do things, even if they know this isn’t gonna work at all well, and the way the world is now having changed. 

And if you want an example of how denial was affecting things, take the world of Investment Management. How many managers are going to beat the indexes, all costs considered? I would say, maybe 5%, consistently beat the averages. Everybody else is living in a state of extreme denial. They’re used to charging big fees and so forth, for stuff that isn’t doing their clients any good. It’s a deep moral depravity. If some widow comes to you with $500,000, and you charge her one point a year for, you could put her in the indexes. But you need the one point. So people just charge some widow a considerable fee for worthless advice. And the whole profession is full of that kind of denial. It’s everywhere.

So I had to say, and I always quote Demosthenes. It’s a long time ago, Demosthenes, and that’s 2,000, more than 2,000 years ago. And he said, “What people wish is what they believe.” Think of how much of that goes on. And so of course, it’s hugely important. And you can just see it, I would say the agency costs of money management. There are just so many billions, it’s uncountable. And nobody can face it. Who wants to? To keep your kids in school, you won’t quit, you need the fees, you need the broker fees, you need this and that, so you do what’s good for you and bad for them.

Now, I don’t think Berkshire does that. And I don’t think Guerin and I did it at the Daily Journal. Guerin and I never took a dime of salary or directors fees or anything. If I have business, I talk on my phone or use my car, I don’t charge into the Daily Journal. That’s unheard of. It shouldn’t be unheard of. And it goes on in Berkshire. It goes out in the Daily Journal. But we have an incentive plan now in this Journal Technologies, and it has a million dollars worth of Daily Journal stock. That did not come from the company issuing those shares. I gave those shares to the company to use in compensating the employees. And I learned that trick, so to speak, from BYD, which is one of the securities we hold in our securities portfolio. And BYD at one time in its history, the founder chairman, he didn’t use the company’s stock to reward the executives. He used his own stock, and it was a big reward too. Well last year what happened? BYD last year made more than $2 billion after taxes in the auto business in China. Who in the hell makes $2 billion in a brand new auto business for all practical purposes. It’s incredible what’s happened.

And so there is some of this old fashioned capitalist virtue left in the Daily Journal and there’s some left in Berkshire Hathaway. And there’s some left at BYD. But most places everybody’s trying to take what they need, and just rationalising whether it’s deserved or not.

2) On why leverage can be used wisely

Well, I use a little bit on my way up and so did Warren by the way. The Buffett partnership used leverage regularly, every year of its life. What Warren would do was he would buy a bunch of stocks and then he borrowed and those stocks, he would buy under these… they used to call them event arbitrage, liquidations, mergers, and so forth. And that was not, didn’t go down with the market – that was like an independent banking business and Ben Graham’s name for that type of investment, he called them Jewish treasury bills. And it always amuses me that’s what he would call them but Warren used leverage to buy Jewish treasury bills on the way up and it worked fine for him… 

Berkshire has stock in Activision Blizzard. And you can argue whether that’ll go through or not, I don’t know. But but but that’s the Jewish treasury bill. Well, yeah, so we’ve had arbitrage but we sort of stopped doing it because it’s such a crowded place. But here’s a little Berkshire doing it again in Activision Blizzard, and Munger using a little leverage at the Daily Journal Corporation. You could argue I used leverage to buy BYD,  you could argue it’s the best thing I’ve ever done for the Daily Journal. I think most people should avoid it but maybe not everybody need play by those rules. I have a friend who says, “The young man knows the rules of the old man knows the exceptions.” He’s lived right? You know.

3) On what went wrong with Jack Ma and Alibaba in China

Well, of course, it was a very interesting thing. Jack Ma was a dominant capitalist in Alibaba. And one day he got up and made a public speech where he basically said the Communist Party is full of malarkey. They don’t know their ass from their elbow. They’re no damn good, and I’m smart. And of course, the Communist Party didn’t really like his speech. And pretty soon he just sort of disappeared from view for months on end. And now he’s out of [Alibaba]. It was pretty stupid, it’s like poking a bear in the nose with a sharp stick. It’s not smart. And Jack Ma got way out of line by popping off the way he did to the Chinese government. And of course, it hurt Alibaba.

But I regard Alibaba as one of the worst mistakes I ever made. In thinking about Alibaba, I got charmed with the idea of their position on the Chinese internet, I didn’t stop to realise it’s still a goddamn retailer. It’s gonna be a competitive business, the internet, it’s not gonna be a cakewalk for everybody.

4) On why Chinese companies provide good value

Well, that’s a very good question, of course. But I would argue that the chances of a big confrontation from China have gone down, not up because of what happened in Ukraine. I think that the Chinese leader is a very smart, practical person. Russia went into Ukraine and it looked like a cakewalk. I don’t think Taiwan looks like such a cakewalk anymore. I think it’s off the table in China for a long, long time. And I think that helps the prospects of investors who invest in China.

And the other thing that helps in terms of the China prospects are that you can buy the best, you can buy better, stronger companies at cheaper valuation in China than you can in the United States. The extra risk can be worth running, given the extra value you get. That’s why we’re in China. It’s not like we prefer being in some foreign country. Of course, I’d rather wait in Los Angeles right next to my house, you know, it’d be more convenient. But I can’t find that many investments, you know, right next to my house.

5) On why the Chinese government is well run

Well, I have more optimism about the leader of the Chinese party than most people do. He’s done a lot right too and, and, you know, he led that big anti corruption drive, he’s done a lot of things right. And I don’t know where this man lives. Where is there a place where the government is perfect in the world, I see zero. Democracies aren’t that brilliantly run either. So it’s natural to have some decisions made by government that don’t work well.

It’s natural to have decisions in each individual life that don’t work very well. We live in a world of sense, sorrow, and misdecisions. That’s, that’s, that’s, that’s what human beings get to cope with in their days of life. So I don’t expect the world to be free of folly and mistakes and so forth. And I just hope I’m invested with people who have more good judgments than bad judgements. I don’t know anybody who’s right all the time.

6) On why cryptocurrencies are a bad idea

Well, I don’t think there are good arguments against my position, I think the people who oppose my position are idiots. So I don’t think there is a rational argument against my position. This is an incredible thing. Naturally, people like to run gambling casinos where other people lose. And the people who invented this crypto crapo, which is my name for it. Sometimes I call it crypto crapo, and sometimes I call it crypto shit. 

And it’s just ridiculous anybody would buy this stuff. You can think of hardly nothing on earth that has done more good to the human race than currency, national currencies. They were absolutely required to turn man from a goddamn successful ape into modern, successful humans. And human civilization has enabled all these convenient exchanges. So if somebody says I’m going to create something and sort of replaces the national currency, it’s like saying, I’m going to replace the national air, you know, it’s asinine. It isn’t even slightly stupid – it’s massively stupid. And, of course, it’s very dangerous.

Of course, the governments were totally wrong who permitted it. And of course, I’m not proud of my country for allowing this crap, what I call the crypto shit. It’s worthless. It’s no good. It’s crazy. It’ll do nothing but harm. It’s anti-social to allow it. And the guy who made the correct decision on this is the Chinese leader. The Chinese leader took one look at crypto shit and he says “not in my China.” And boom, oh, well, there isn’t any crypto shit in China. He’s right, we’re wrong. And there is no good argument on the other side. I get canceled by it.

There are a lot of issues you ought to be.. How big should the social safety net be? That’s a place where reasonable minds can disagree. And you should be able to state the case on the other side about as well as the case you believe in. But when you’re dealing with something as awful as crypto shit, it’s just unspeakable. It’s an absolute horror. And I’m ashamed of my country, that so many people believe in this kind of crap, and that the government allows it to exist. It is totally absolutely crazy, stupid gambling, with enormous house odds for the people on the other side, and they cheat. In addition to the cheating and the betting, it’s just crazy. So that is something that there’s only one correct answer for intelligent people. Just totally avoid it. And avoid all the people that are promoting it.

7) On why shorting stocks is miserable

No, I don’t short. I have made three short sales in my entire life. And they’re all more than 30 years ago. And one was a currency and there were two stock trades. The two stock trades, I made a big profit on one, I made a big loss on the other and they cancelled out. And when I ended my currency bet, I made a million dollars, but it was a very irritating way to me. I stopped. It was irritating. They kept asking for more margin. I kept sending over Treasury notes. It was very unpleasant. I made a profit in the end, but I never wanted to do it again.

8) On why the world will become more anti-business

I would say it’ll fluctuate naturally between administrations and so on. But I think basically the culture of the world will become more and more anti-business in the big democracies and I think taxes will go up not down. So I think in the investment world, it’s gonna get harder for everybody. But it’s been almost too easy in the past for the investment class. It’s natural it would have a period of getting harder. I don’t worry about it much because I’m going to be dead. You know, it won’t bother me very much.

9) On the secret to longevity…

Now I’m eating this peanut brittle. That’s what you want to do if you want to live to be 99. I don’t want to advertise my own product, but this is the key to longevity. I have almost no exercise, except when the Army Air Corps made me do exercise. I’ve done almost no exercise on purpose in my life. If I enjoyed an activity like tennis, I would exercise. But for the first 99 years, I’ve gotten by without doing any exercise at all.

10) On finding optimism in difficult circumstances

Well, I step out of my bed these days and sit down, sit down in my wheelchair. So I’m paying some price for old age, but I prefer it to being dead. And whenever I feel sad, maybe in a wheelchair, I think well, you know, Roosevelt ran the whole damn country for 12 years in a wheelchair. So I’m just trying to make this field here so they can last as long as Roosevelt did.

11) On the impact of inflation and interest rates on stocks 

Well, there’s no question about the fact that interest rates have gone up. It’s hostile to stock prices. And they should go up and we couldn’t have kept them forever at zero. And I just think it’s just one more damn thing to adapt to. In investment life, there are headwinds and there are tailwinds.

And one of the headwinds is inflation. And I think more inflation over the next 100 years is inevitable, given the nature of democratic politics, politics and democracy. So I think we’ll have more inflation. That’s one of the reasons the Daily Journal owns common stocks instead of government bonds… Trump ran a deficit that was bigger than the Democrats did. All politicians in a democracy tend to be in favour of printing the money and spending it and that will cause some inflation over time. It may avoid a few recessions too so it may not be all bad, but it will do more harm than good, I think from this point forward.

12) On being unable to predict short-term movements

I think I’m pretty good at long run expectations. But I don’t think I’m good at short term wobbles. I don’t know the faintest idea what’s gonna happen short term.

13) On an idea he recently destroyed

Well, the idea that I destroyed, it wasn’t a good idea – it was a bad idea. When the internet came in, I got overcharmed by the people who were leading in online retailing. And I didn’t realise, it’s still retailing, you know. It may be online retailing, but it’s also still retailing and I just, I got a little out of focus. And that had me overestimate the future returns from Alibaba.

14) On the genius of Benjamin Franklin

Well, Ben Franklin was a genius. It was a small country, but remember, he started in absolute poverty. His father made soap out of the carcasses of dead animals which stank. That is a very low place to start from. And he was almost entirely self educated – two or three years of primary school and after that, he had to learn all by himself. Well to rise from that kind of a starting position and by the time he died, he was the best inventor in this country, the best scientists in this country, the best writer in this country, the best diplomat in this country. You know, thing after thing after thing he was the best there was in the whole United States. 

He was a very unusual person, and he just got an extremely high IQ and a very kind of pithy way of talking that made him very useful to his fellow citizens. And he kept inventing all these things. Oh, man, imagine inventing the Franklin stove and bifocal glasses and all these things that we use all the time. I’m wearing bifocal glasses, as I’m looking at you. These are Ben Franklin glasses. What the hell kind of a man that just goes through life and his sight gets a little blurred and he invented the goddamn bifocals. And it was just one of his many inventions.

So he was a very, very remarkable person. And, of course, I admire somebody like that. We don’t get very many people like Ben Franklin. He was the best writer in his nation, and also the best scientist, and also the best inventor. When did that ever happen again? Yes, yes. All these other things. Yes. And he played four different musical instruments. And one of which he invented, the glass thing that he rubs his fingers on the glass. They still play it occasionally. But he actually played on four different instruments. He was a very amazing person. The country was lucky to have him.

15) On the importance of delayed gratification

I’m still doing it [referring to delayed gratification]. Now that I’m older, I buy these apartment houses, it gives me something to do. And we’re doing it, we run them the way everybody else runs them. Everybody else is trying to show high income so they can hike distributions. We’re trying to find ways to intelligently spend money to make them better. And of course, our apartments do better than other people do, because the man who runs them does it so well for me, the man or two young men who do it for me. But it’s all deferred gratification. We’re looking for opportunities to defer, other people are looking for ways to enjoy it. It’s a different way of going at life. I get more enjoyment out of my life doing it my way than theirs.

I learned this trick early. And you know, I’ve done that experiment with two marshmallows with little kids. Watch them how they work out in life by now. And the little kids who are good at defering the marshmallows are all also the people that succeed in life. It’s kind of sad that so much is inborn, so to speak. But you can learn to some extent too. I was very lucky. I just naturally took the deferred gratification very early in life. And, of course, it’s helped me ever since.

16) On how a country can achieve growth in GDP per capita over time

Well, what you got to do if you want growing GDP per capita, which is what everybody should want, you’ve got to have most of the property in private hands so that most of the people who are making decisions about our properties to be cared for, own the property in question. That makes the whole system so efficient that GDP per capita grows, in the system where we have easy exchanges due to the currency system and so on. And so that’s the main way of civilization getting rich is having all these exchanges, and having all the property in private hands.

If you like violin lessons, and I need your money, when we make a transaction, we’re gaining on both sides. So of course, GDP grows like crazy when you got a bunch of people who are spending their own money and owning their own businesses and so on.And nobody in the history of the world that I’m aware of has ever gotten from hunter-gathering, to modern civilization, except through a system where most of the property was privately owned and a lot of freedom of exchange.

And, by the way, I just said something that’s perfectly obvious, but isn’t really taught that way in most education. You can take a course on economics in college and not know what I just said. They don’t teach it exactly the same way.

17) On what has surprised him the most about investing

I would say some of the things that surprised me the most was how much dies. The business world is very much like the physical world, where all the animals die in the course of improving all the species, so they can live in niches and so forth. All the animals die and eventually all the species die. That’s the system. 

And when I was young, I didn’t realise that that same system applied to what happens with capitalism, to all the businesses. They’re all on their way to dying is the answer, so other things can replace them in lieu. And it causes some remarkable death.

Imagine having Kodak die. It was one of the great trademarks of the world. There was nobody that didn’t use film. They dominated film. They knew more about the chemistry of film than anybody else on Earth. And of course, the whole damn business went to zero. And look at Xerox, which once owned the world. It’s just a pale shrink. It’s nothing compared to what it once was.

So practically everything dies on a big enough time scale. When I was young enough, that was just as obvious then. I didn’t see it for a while, you know, things that looked eternal and been around for a long time, I thought I would like to be that way when I was old. But a lot of them disappeared, practically everything dies in business. None of the eminence lasts forever.

Think of all the great department stores. Think about how long they were the most important thing in their little community. They were way ahead of everybody in furnishing, credit, convenience, and all seasons, you know, convenience, back and forth, use them in banks, elevators, and so forth, multiple floors, it looked like they were eternal. They’re basically all dying, or dead. And so once I understood that better, I think it made me a better investor I think.

18) On the best business people he knows

Well, some of the best people, I would argue that Jim Sinegal at Costco was about as well adapted for the executive career he got. And by the way, he didn’t go to Wharton, he didn’t go to the Harvard Business School. He started work at age 18, in a store and he rose to be CEO of Costco. And in fact, he was a founder, under a man named Sol Price. And I would argue that what he accomplished in his own lifetime was one of the most remarkable things in the whole history of business, in the history of the world. Jim Senegal, in his life – he’s still very much alive. He’s had one business through his whole life, basically. And he just got so damn good at it, there was practically nothing he didn’t understand, large or small. And there aren’t that many Jim Sinegals.

And I’ll tell you somebody else for the job of the kind he has. Greg Able, in a way, is just as good as Sinegal was. Yea he has a genius for the way he handles people and so forth and problems. And I can’t tell you how I admire somebody who has enough sense to kind of run these utilities as though he were the regulator. He’s not trying to pass on the cost because he can do it. He’s trying to, he’s trying to do it the way he’d wanted it done if he were the regulator instead of the executive. Of course, that’s the right way to run the utility. But how many are really well run that way? So there’s some admirable business people out there, and I’ve been lucky to have quite a few of them involved in my life.

The guy who ran TTI was a genius. TTI is a Berkshire subsidiary. At the Daily Journal people are saying how lucky you’d be if we still had our monopoly on, publishing our cases or something, we’d be like TTI. Well, TTI is just a march of triumphs and triumphs. And it was run by a guy, he got fired and created the business. Got fired from a general defence contractor, I forget which one. But he was a terrific guy. And, and he ran the business for us, he wouldn’t let us raise his pay. How many people have the problem with their managers – they won’t allow you to raise their pay?

19) On the best investments he’s made for Berkshire 

Well, I would say, I’ve never helped do anything at Berkshire that was as good as BYD. And I only did it once. Our $270,000 investment there is worth about eight billion now, or maybe nine. And that’s a pretty good rate of return. We don’t do it all the time. We do it once in a lifetime.

Now we have had some other successes too, but, but hardly anything like that. We made one better investment. You know what it was? We paid an executive recruiter to get us an employee and he came up with Ajit Jain. The return that Ajit has made us compared to the amount we paid the executive recruiter, that was our best investment at Berkshire. I was very thankful to the executive recruiting firm for getting us Ajit Jain. But again, it only happened once.

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. I have an interest in Activision Blizzard and Costco among the companies mentioned. Holdings are subject to change at any time.

In my August 2022 article, The Truths About Investing In Stocks During Recessions, I discussed why jumping in and out of stocks based on whether a recession is coming or ending is a bad idea. It seems that many people are currently obsessed with whether the US is on the verge of – or already experiencing – a recession, based on the commentary that I have been seeing lately. In light of this, I want to bring up as well as expand on a point I made in my aforementioned article: That stocks tend to bottom before the economy does.

When I wrote about stocks reaching a trough before the economy, I used historical examples. One of them involved the S&P 500’s experience during the US’s most recent recession prior to COVID, which lasted from December 2007 to June 2009. Back then, the S&P 500 reached a low of 676 in March 2009 (on the 9th, to be exact), three months before the recession ended; the S&P 500 then rose 36% from its trough to 919 at the end of June 2009. 

After the recession ended, the US economy continued to worsen in at least one important way over the next few months. The figure below shows the unemployment rate in the country from January 2008 to December 2010. In March 2009, the unemployment rate was 8.7%. By June, it rose to 9.5% and crested at 10% in October. But by the time the unemployment rate peaked at 10%, the S&P 500 was 52% higher than its low in March 2009 and it has not looked back since.

During an economic downturn, it’s natural to assume that it’s safer to invest when the coast is clear. But history says that’s wrong, and so do the wise. At the height of the 2007-09 Great Financial Crisis, which was the cause of the aforementioned recession, Warren Buffett wrote a now-famous op-ed for the New York Times titled simply, “Buy American. I Am.”  In it, Buffett wrote (emphasis is mine): 

“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month or a year from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”

If you wait for the robins, spring will be over. This is a really important lesson from Buffett that we should heed throughout our investing lives. Meanwhile, investing only when the coast is clear is a thought we should banish from our minds.

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. I have no interest in any companies mentioned. Holdings are subject to change at any time.

Claude Shannon was a polymathic genius. Vannevar Bush believed that Shannon was “an almost universal genius, whose talents might be channelled in any direction,” according to the book about Shannon’s life, A Mind at Play. Bush himself was a giant amongst men; among his achievements were the construction of an analog computer (a differential analyser) in 1931, and leading the Manhattan Project (the name of the US government’s project to build the atomic bomb during World War II) to success.

As for Shannon, he is perhaps most well-known for the creation of information theory in the 1940s, a collection of ideas that form the foundation for much of how information is transmitted electronically today. But he was not just an amazing scientific thinker – he was also an incredible investor. David Senra has a podcast series named Founders and in an October 2019 episode, Senra spoke about his learnings from reading A Mind at Play. During the episode, Senra said:

“When I covered Fortune’s Formula, Claude Shannon had one of the best investing records of all time. They compared like 1,025 different investment managers. This is professional managers doing it full-time – hundreds of researchers having all kinds of resources and Shannon’s investment returns were better than all of them. And he did it part time, with his wife on an Apple II computer. This kind of gives you the person we are dealing with here.”

So how did Shannon think about investing and the stock market? Senra said (emphases are mine):

“Shannon’s most attended lecture ever was when he started talking about the stock market. Everybody thought that he is a mathematical genius and he must have all the algorithms and that he can predict everything. No. He realised that he could not do that.

So his approach which I found fascinating. “Complicated formulas mattered a great deal less”, Shannon argued. “It is the company’s people and products.” He went on, “a lot of people look at the stock price when they should be looking at the basic company’s earnings. There are many problems concerned with the prediction of the stochastic processes. For example, the earnings of a company is far too complex. The general feeling is that it is easier to choose a company that is going to succeed than to predict short term variations, things that will last only weeks or months, which they worry about down on Wall Street. There is a lot more randomness there and things happen which you cannot predict which cause people to sell or buy a lot of stock.”

It was his [Shannon’s] view that market timing and tricky mathematics were of no match to a solid company, strong growth prospects, and sound leadership. And this is also something that we heard a lot the last few weeks from Buffett and Munger who would agree with his statement there.”

In a September 2017 article for his blog Abnormal Returns, Tadas Viskanta – the Director of Investor Education at Ritholtz Wealth Management – wrote about Shannon and A Mind at Play. Here are some excerpts from the book Viskanta picked out that further fleshed out how Shannon invested:

“The bulk of his wealth was concentrated in Teledyne, Motorola and HP stocks; after getting in on the ground floor, the smartest thing Shannon did was hold on…

…He and his wife were, in his own words, “fundamentalists, not technicians.” The Shannons had toyed with technical analysis and they found it wanting. As Shannon himself put it, “I think that the technicians who work so much with price charts, with ‘head and shoulders formulations’ and ‘plunging necklines’ are working with what I would call a very noise reproduction of the important data.’”

Put simply, Shannon’s view on investing is that investors should be focusing on the long-term business health of a company, rather than the unpredictable short-term movement of its stock price. If this is good enough for a genius such as Shannon, it is good enough for me. 

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. I currently have a vested interest in Apple. Holdings are subject to change at any time.