Category: What We’re Reading

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 18 December 2022:

1. Why Competitive Advantages Die – Morgan Housel

“Being right is the enemy of staying right because it leads you to forget the way the world works.” – Jason Zweig. Buddhism has a concept called beginner’s mind, which is an active openness to trying new things and studying new ideas, unburdened by past preconceptions, like a beginner would. Knowing you have a competitive advantage is often the enemy of beginner’s mind, because doing well reduces the incentive to explore other ideas, especially when those ideas conflict with your proven strategy. Which is dangerous. Being locked into a single view is fatal in an economy where reversion to the mean and competition constantly dismantles old strategies…

…Brands are hard to build and even harder to span across generations. You can do everything right and still fail because customers don’t want to be associated with products of their parents’ generation. Morgan Stanley could make the indisputably best robo advisor in the world and millennials would still prefer Betterment. That’s how Charles Schwab blossomed in the 1980s and 1990s; with a brand baby boomers felt was theirs, not their parents’. One of my goals as a writer is to bow out the moment I realize I’m too old to understand how the game is played anymore. Companies, with indefinite time horizons, have to keep trying. A few of them pull it off; more often it’s painful to watch.

2. The Next Frontier in Carbon Capture is a Hungry Bacterium – Illumina

Primitive microbes, or those found in extreme environments such as hydrothermal vents in the deep sea, have been converting carbon monoxide (CO) and carbon dioxide (CO2) into fuel for billions of years. Simpson and Foster first took a collection of microbes that were known to do this and began feeding them gases from a steel mill. In that initial screening and discovery stage, they found that an anaerobic bacterium called Clostridium autoethanogenum possessed an ancient pathway that could ferment both CO and CO2, effectively converting it into ethanol under the right conditions. Ethanol, in turn, can be made into polyester fabrics, aviation fuel, and—of course—alcohol…

…Illumina’s technologies helped LanzaTech to genetically modify C. autoethanogenum to synthesize acetone—an important solvent and chemical building block—from industrial emissions. Today, acetone is made exclusively petrochemically from fresh fossil fuels, but in the early 1900s it was produced by fermentation from sugars into a mixture of acetone, butanol, and ethanol. Due to substrate cost and low selectivity, the process was eventually abandoned over the course of the last century, but the strains were preserved and LanzaTech used that collection as a starting point.

“The initial hope was that some of these strains would also be able to utilize the gases we work with,” Köpke says. “Unfortunately, that was not the case and the collection of microbes was sitting in the corner for several years. Advancements in next-generation sequencing technology allowed us to revisit the collection.” Illumina’s sequencing technology helped LanzaTech identify the microbial genes responsible for making acetone, and with those sequences in hand, their researchers synthesized and transferred them into their organism. Acetone is used as a solvent for cosmetics, paints, electronics, and consumer products, and can be used in manufacturing acrylic glass—in which case, the formerly atmospheric carbon is locked away practically forever in a stable, solid form. “You can achieve not only carbon neutrality, but actual carbon-negative production,” says Köpke.

3. The mortgage time bomb ticking beneath Poland’s banks – Raphael Minder

In 2006, Polish couple Marek and Małgorzata Rzewuski bought a house on the outskirts of Warsaw because they were expecting a child and “we wanted more space and our own garden”. 

Like hundreds of thousands of other Polish homebuyers at the time, they were advised by their bank to get a mortgage in Swiss francs to benefit from lower interest rates in Switzerland than in Poland. Nobody discussed the flip side of introducing a foreign exchange risk into a 30-year mortgage of SFr200,000 ($205,000).

“This was presented as the best opportunity on the market,” Marek recalls. “The Swiss franc was very stable and very popular and we knew many people who were doing the same.”

Two years later, however, the global financial crisis struck. Investors flocked to the Swiss franc as a haven from the market turmoil, and its value surged against the Polish zloty and other currencies. The franc is now worth more than double its exchange rate of 2 zlotys before the crisis.

The lending practice in effect ended in 2008. But in the years since, it has become a time bomb for the Polish banking sector as customers like the Rzewuskis have begun winning lawsuits to force their banks to bear the cost of a currency bet that went spectacularly wrong.

If mortgage holders continue to win their court battles, officials and bankers warn that some lenders could collapse.

“It’s my obligation to raise the red flag, because pretending that everything is fine is going to have some dramatic consequences,” says Jacek Jastrzębski, chairman of the KNF, Poland’s financial watchdog…

…If courts decide that every bank must bear the full cost of their Swiss investments, Jastrzębski fears at least one or two may collapse.

One has already fallen. The country’s 10th-largest lender, Getin Noble, had to be rescued in September by the Polish state bank guarantee fund and a consortium of banks. The 10.3bn zloty ($2.2bn) bailout was Poland’s largest since the Soviet era.

Getin had already suffered several years of losses due to its aggressive sale of subprime products, but it was also heavily exposed to the Swiss franc, which accounted for one-quarter of its loan portfolio.

Polish banks have provisioned a combined 30bn zlotys to cover their Swiss-franc lending. But their final bill could rise by another 100bn zlotys if the judiciary rules that they should have received zero interest rate income on invalid Swiss-franc mortgages, according to Jastrzębski.

Polish courts have already annulled many Swiss-franc mortgages, after ruling that banks used “abusive” foreign exchange rates compared with those of the National Bank of Poland.

But the court battle has recently shifted on to the question of whether banks were entitled to charge customers for using their capital until their mortgages were annulled, an issue that was also brought last month by a Warsaw court before the European Court of Justice.

If courts in Poland and Europe side with consumers, the potential fallout would be worse. Up to five banks would be pushed to the brink of collapse in a worse-case scenario, warns Cezary Stypułkowski, mBank chief executive.

4. Fusion energy breakthrough by US scientists boosts clean power hopes – Tom Wilson

US government scientists have made a breakthrough in the pursuit of limitless, zero-carbon power by achieving a net energy gain in a fusion reaction for the first time, according to three people with knowledge of preliminary results from a recent experiment.

Physicists have since the 1950s sought to harness the fusion reaction that powers the sun, but no group had been able to produce more energy from the reaction than it consumes — a milestone known as net energy gain or target gain, which would help prove the process could provide a reliable, abundant alternative to fossil fuels and conventional nuclear energy.

The federal Lawrence Livermore National Laboratory in California, which uses a process called inertial confinement fusion that involves bombarding a tiny pellet of hydrogen plasma with the world’s biggest laser, had achieved net energy gain in a fusion experiment in the past two weeks, the people said…

…“If this is confirmed, we are witnessing a moment of history,” said Dr Arthur Turrell, a plasma physicist whose book The Star Builders charts the effort to achieve fusion power. “Scientists have struggled to show that fusion can release more energy than is put in since the 1950s, and the researchers at Lawrence Livermore seem to have finally and absolutely smashed this decades-old goal.”

5. Twitter thread on the implications of the US government’s breakthrough in nuclear fusion – Wilson Ricks

The National Ignition Facility (NIF) has achieved net energy gain from fusion! This is incredibly exciting scientifically, but what does it mean for the future of energy? In all likelihood, very little.

NIF uses inertial confinement fusion, which involves shooting ultra high-powered lasers into a small capsule containing a deuterium-tritium fusion fuel pellet. The surface the pellet heats, causing an implosion that crunches the interior until (hopefully) fusion is achieved.

In this particular instance, it appears that NIF successfully induced a fusion reaction that generated more energy than was originally delivered to the pellet via the lasers. This is Net Gain, a milestone that fusion engineers have been pursuing for half a century.

So as a scientific and symbolic achievement, this is huge. But how much closer does it put us to ‘limitless clean energy’?  Unfortunately not much closer at all. For inertial confinement fusion, there’s a VERY long way to go between net gain and viable electricity generation.

To explain just how far, let’s look at the power balance of this experiment. If the reports are correct, the fusion reaction generated 2.5 MJ, compared to 2.1 MJ of laser power.

BUT, the huge lasers at NIF are less than 1% efficient, so to generate more fusion energy than actual input energy to the facility, you’d need to increase the yield 100x…

Plus, the fusion power is in the form of heat and radiation, and needs to be converted back to electricity. Assuming a 40% steam cycle efficiency, that’s another 2.5x increase in required yield. So we need a fusion reaction *250x MORE POWERFUL* to achieve true electric net gain.

6. An Interview with Coinbase Founder and CEO Brian Armstrong about FTX and Crypto Realities – Ben Thompson and Brian Armstrong

What’s your take? I mean, you jumped to FTX, what’s your take on the FTX situation?

BA: Oh, well, I mean, FTX, what can I say about it? I mean, it appears that a massive fraud was committed. I think that customer funds appear to have been moved over to his hedge fund that he owned 90% of, and that those customer funds were lost. I mean, this is a violation not only of the terms of service as it’s written as far as I understand it, but it’s also probably just against the law and outright fraud.

It’s been pretty bizarre to kind of watch the whole thing unfold, primarily because I do feel like mainstream media has given a lot of softball interviews, and even this tweet back and forth with Maxine Waters very politely asking him to attend a hearing, and him politely deferring, it was bizarre. I mean, this guy just committed a $10 billion fraud, and why is he getting treated with kid gloves? Compare her tweets about Mark Zuckerberg for instance, who never stole $10 billion from people, whatever you think about the guy. So these kind of things are just, it’s a little strange for me to see it all happening.

What’s the one question, if you had a chance to interview him? You had a disguise on, you’re Mr. Mainstream journalist, Brian Armstrong. What’s the one question you would want to ask him?

BA: Honestly, I don’t think I have any questions at this point. I think it’s pretty clear what happened, and I think every time he’s being asked these questions, that people are giving him a chance to evade. There’s some journalists who have done better than others in terms of really pinning him down on this stuff. But I kind of just want to turn the page on the whole thing, to be honest. The bankruptcy lawyers, and the DOJ, and everybody are going to have to figure out how to hopefully put these folks behind bars. Not just Sam, but the other people involved. I mostly want to think about where do we go from here as an industry.

Do you feel vindicated or outraged, particularly over the customers that you lost to FTX? Because it’s very visible. Tons of branding in the US. Yes, they had FTX.us in the US, but then they had FTX abroad. And to your point, how many Americans ended up there? It’s an interesting question. Is it just really irritating, or do you feel like, hey look, that’s the problem. You should have stuck with Coinbase, your reliable friend in crypto?

BA: Well, look, I mean I think it does validate the approach and the strategy that we’ve taken over the last 10 years, which is not always the most sexy thing. It’s not the most hyped thing. I do think it’s the right strategy long term, and we think it’s going to be the right strategy to build a company for the long term. But look, this is not a moment for me to take any victory laps or celebrate. I mean, a bunch of people lost money, it’s a terrible, terrible thing for the industry and those customers…

…Well, now that you said you’re happy to have that role, I now get a seize the opportunity to hold you to that. And so here’s a question that I would imagine that some of my readers are going to have. Why is crypto a real thing, and not just regulatory arbitrage? I think that’s a question particularly when it comes to exchanges and the more financial products — there’s a separate product question. But what’s the pitch? And yes, it’s a question you’ve had to answer for 10 years, but it’s one that arguably is even more pressing today given what has happened.

BA: Yeah, okay, so is crypto a real thing? I think the answer is unequivocally yes. And the reason is you can just look at the fact that more people are using it every year, or every cycle that happens. So there’s two or 300 million people in the world now who’ve used crypto or have some, and yes, it goes up in up cycles, it goes down in down cycles, but it’s in an upward channel. So every cycle, if you look even just back to the year, I think 2020…

The floor today is still like 5X what it was a few years ago.

BA: Yeah, exactly. So I mean, yes, crypto is definitely a real thing, and it’s a real thing in a number of ways. I mean, first it’s a new form of money, and that’s actually a really important thing. Many places in the world, people don’t have stable currency, and there’s all kinds of wealth that’s eroded from the poorest people in society. It’s just a foundational part that we take for granted in the US, given that we have eight or 9% inflation, which we think is extreme. In many places in the world, you get 25% in a month or something.

I mean, one of the most compelling cases made for Bitcoin I’ve ever heard was someone, I believe he was from Venezuela, but I’ve heard similar things from people from Argentina, about this sort of inflation protection. Is it fair to say that that is still regulatory arbitrage, it’s just maybe good regulatory arbitrage that protects people and keeps them safe? I mean, I’m trying to steelman this argument here. But is that okay to admit, or is there something beyond that?

BA: Yeah, okay. Well, just to finish the thought, so it’s money and then it’s new types of financial services. It’s also this new application platform. We can talk about that too, with identity and decentralized social, so it’s lots of different things. But is it regulatory arbitrage? I mean, maybe. I think I would say it in a different way, which is that, it’s helping alleviate inefficiencies in the global economy. Some of those things are put in place for a good reason and some of them are not there for a good reason. For instance, if you wanted to build a global lending marketplace or something like that, you’d have to go to all 200 countries in the world, and all 50 states in the US. Only then could you make a more efficient global market for how to get a loan between somebody in India and somebody in Brazil or whatever, but the amount of bureaucracy and rules in place and everything, from having this kind of patchwork quilt of different proprietary systems in every country of the world, makes that infeasible. And so, yeah, crypto is a new, more global, more fair, more transparent, more free system.

It’s not just that inefficiency and the global regulatory apparatus though, it’s also dealing with the technology improvements of just how quickly you can send an asset somewhere, or make a transaction on a decentralized ledger. So it’s permissionless, it’s decentralized, it’s global, there’s technological benefits to that. There are, I would say, inefficiencies that it helps you get around. And that’s part of why a lot of innovation is on this frontier right now. Just like what happened with the Internet 20, 25 years ago.

Well, I mean, one argument that I think I’ve made in the past is that this concept of digital money makes a lot of sense when you’re in the virtual world. Now virtual world could be a full-blown metaverse sort of thing, it could just be the Internet broadly. Real money makes sense — fiat money or whatever you want to call it — in the real world. But where I’m a little skeptical is when there’s an intersection between the two. There’s the famous story of the guy that bought two pizzas with a Bitcoin or whatever it might be, which I’m skeptical about in the long run.

What’s your view on this? Is this a virtual-only thing, or do you see a real porous interchange between the two? Obviously a porous interchange would be in Coinbase’s interest, given you are an exchange, you sit at that interface. What do you see as the interaction between the virtual and the “physical” as it were?

BA: I think it’s both. It’s probably going to lean virtual in the early days, because that’s just a more natural fit. But it’ll eventually do more and more in the physical world as well. So virtual is probably easier to follow just in terms of if you’re going to build a new community on the Internet, it would be discriminatory or weird to use the currency of one country in something that’s open to people all over the world…

…Did it shake your belief a little bit though, that as inflation went up, Bitcoin’s price went down?

BA: No, it didn’t shake my belief. I definitely thought that crypto might be viewed as an asset people would flee to in a time of uncertainty. I think in the crypto economy, Bitcoin is sort of the gold.

People did flee to Bitcoin, but they were the people who were already in crypto.

BA: Right.

That’s a good point.

BA: But the broader macro economy is still much bigger, and in that environment, they treat all of crypto as a kind of growth stock as opposed to the thing to flee to. And it’s also so liquid that it was easy for people to liquidate it.

I like that analogy because it does kind of get to my theory about the virtual being in many respects, in a different economy than the physical. That bit about within crypto itself, Bitcoin is gold. And maybe it was just a little too presumptuous to say that it’d be gold for the broader economy, at least at this point in time.

BA: Yeah, I think that’s right. But if you look, I think the trend is very clear, which is basically virtual is becoming a bigger and bigger percentage of the pie in terms of the global economy, GDP. I think it’s really interesting, look at e-commerce, right? Back in 1999, 2000, people were saying, oh, I’d never put my credit card on the Internet. And then it was a tiny, it was less than 1% of all global GDP, right? Now, fast forward 20 years, and e-commerce is now I think about 15, 16, 17, and I think COVID accelerated it, right? It almost hit 20% of global GDP. For people like you and me, that even sounds low. I probably do 78% of my spending online or whatever. But we’re sort of living in a different world.

So think about that trend in terms of crypto as well. If you fast forward another 10 years, are more people going to be doing things virtually than physically? Probably. Is a larger percentage of the economy going to be happening virtually? Probably. So crypto is incredibly well positioned as the inherent currency of the Internet, the more transnational global currency of the Internet. And so it’s just very hard for me to imagine a world 10 years from now, where there’s more e-commerce, more people using the Internet, more virtual economy, and crypto is not much bigger right along with that.

7. These Transistor Gates Are Just One Carbon Atom Thick – Charles Q. Choi

For decades, silicon transistors become smaller and smaller, but they are fast approaching the point at which they can no longer shrink the lengths of their gates—that is, how far current must travel in these devices. Now, by using atomically thin materials, scientists in China have created a transistor with a record-breaking gate length of just roughly one-third of a nanometer wide, only as thick as a single layer of carbon atoms, shedding light on how much smaller—if at all—transistors can possibly get.

In all transistors, current flows from the source to the drain, and that flow is controlled by the gate, which switches on and off in response to an applied voltage. The length of the gate is a key marker of a transistor’s size…

…Recently, scientists began exploring two-dimensional materials for next-generation electronics, including graphene, which consists of single layers of carbon atoms, and molybdenum disulfide, which is made of a sheet of molybdenum atoms sandwiched between two layers of sulfur atoms. For example, in 2016, scientists created a transistor with gates each just 1 nm long using carbon nanotubes and molybdenum disulfide.

Now scientists in China have created a transistor using graphene and molybdenum disulfide with a gate length of just 0.34 nm by exploiting the vertical aspect of the device. “We have realized the world’s smallest gate-length transistor,” says study senior author Tian-Ling Ren, an electrical engineer at Tsinghua University in Beijing…

…This new work pushes the scaling limit for gates further to “just the thickness of a single layer of carbon atoms,” says Huamin Li, a nanoelectronics scientist at the State University of New York at Buffalo, who did not take part in this study. “It will be hard to beat this record for quite some time.”

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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 no vested interest in any companies mentioned. 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 11 December 2022:

1. Ideas That Changed My Life – Morgan Housel

Everything’s been done before. The scenes change but the behaviors and outcomes don’t. Historian Niall Ferguson’s plug for his profession is that “The dead outnumber the living 14 to 1, and we ignore the accumulated experience of such a huge majority of mankind at our peril.” The biggest lesson from the 100 billion people who are no longer alive is that they tried everything we’re trying today. The details were different, but they tried to outwit entrenched competition. They swung from optimism to pessimism at the worst times. They battled unsuccessfully against reversion to the mean. They learned that popular things seem safe because so many people are involved, but they’re most dangerous because they’re most competitive. Same stuff that guides today, and will guide tomorrow. History is abused when specific events are used as a guide to the future. It’s way more useful as a benchmark for how people react to risk and incentives, which is pretty stable over time.

Multi-discipline learning: There’s as much to learn about your field from other fields than there is within your field. Most professions, even ones that look wildly different, live under the umbrella of “Understanding how people respond to incentives, how to convincingly solve their problems, and how to work with others who are difficult to communicate with and/or disagree with you.” Once you see the roots shared by most fields you realize there’s a sink of information you’ve been ignoring that can help you make better sense of your own profession. I didn’t appreciate how important communication is to providing investment advice before reading about how many doctors struggle to communicate effectively with patients, leading to patients who don’t stick with treatment plans and are resistant to lifestyle change. There are millions of these dots to connect. Probing beyond the confines of your day job is more fun anyways…

…Your personal experiences make up maybe 0.00000001% of what’s happened in the world but maybe 80% of how you think the world works. People believe what they’ve seen happen exponentially more than what they read about has happened to other people, if they read about other people at all. We’re all biased to our own personal history. Everyone. If you’ve lived through hyperinflation, or a 50% bear market, or were born to rich parents, or have been discriminated against, you both understand something that people who haven’t experienced those things never will, but you’ll also likely overestimate the prevalence of those things happening again, or happening to other people.

2. Drew Cohen – Floor & Decor: Raising the Floor – Matt Reustle and Drew Cohen

Matt: [00:44:17] I think all those points there in terms of where that capital is going and the return on that capital and trusting the capital allocation of the management team. If you can get that type of return by building out a footprint. Absolutely, you’re more than willing to have them reinvest those dollars.

Any other risks that we haven’t talked about? I think you mentioned the short-term dynamics that they might see an impact from, but anything else that would keep you up at night as an investor?

Drew: [00:44:47] Something I like about Floor & Decor is there’s no one real existential risk, at least that I could think about, knock on wood. But if you think about, there’s a confluence of different things that could happen, that could definitely be not good for them. One of them could be these home improvement centers, which now if they don’t have something in stock to take upwards of a week to get it into stock.

If they continue to build out their distribution centers and they streamline their logistics, then you could be seeing maybe one/two-day delivery or something like that. And that wouldn’t mean they’re winning all purchases, but a good portion could go to them, especially because they have a convenient and wide store footprint, so that could eat into them.

The second thing is management seems a little perplexed that this hasn’t happened, but there’s never been a copycat retailer that copies their warehouse store format and their whole model. Everyone else has only kind of nipped that little pieces of it. So there could potentially same way Lowe’s came after Home Depot.

There could be a copycat, who just copies everything. It’s kind of interesting because and you’ve ever read the book Secrets of Our Success, Joseph Henrich, I believe. He talks about how all of these different tribes would have these very complex processes. He observed the South American tribe would try to eat this tubular, but it was poisonous. So before they could eat it, they had to boil it, they had to bury it. They did all these other things.

So it’s a very complex thing, and the explorer went and saw this and they thought, “Oh, well, all these steps are superfluous. All that really matters is boiling this and then I’ll eat it and it won’t be poisonous.” So they just boiled it and then they died because it turned out when you left it in the sand, it actually absorbed some of the poison and all of that.

So why am I bringing up this very eccentric story is because I see with a lot of other companies, they’ll try to copy just one aspect of it and not the whole thing. The biggest threat for a copycat is not someone who says, “Oh, I’m going to also try to do direct sourcing. Oh, I’m going to also try to have more selection.” It’s someone who does the whole thing and they’re not embarrassed to say that Floor & Decor has every single step right and let’s just not change any of it.

Matt: [00:46:55] I love that. And how fitting our relationships started with you giving me book recommendations in a small Goldman office, and we can close out the episode with another good book recommendation.

But I think there’s a lot of truth to that statement. Copycats do come along, but how often do they actually copy the entire strategy. I think you’re right people try to pick the little pieces of the story that they like and sometimes miss the point that it’s the entire system that makes it work.

Well, thanks, Drew. We close these conversations out with lessons that you can take away from analyzing the business or researching the business that you might be able to apply to other types of work and other types of research, just higher-level lessons that you’ve learned from looking at the business. What would you point to in terms of Floor & Decor as a key lesson that you might share with investors?

Drew: [00:47:45] I would say focus is one of the most important things. When you have a company, and I’ve said this before, but is relentlessly pursuing a singular goal that is very hard to compete against. Because if you think about any sort of optimization equation, you have all these different variables and you can only really optimize for a limited set.

The more variables you’re trying to optimize for the less optimal your outcome is ultimately going to be. So having a specialty chain retailer saying, I just want to be the best at hard surface flooring, it’s very hard for anyone else to come in there and just as a part-time job beat them at that. I would say that’s one thing.

3. AI Homework – Ben Thompson

It is an open question as to what jobs will be the first to be disrupted by AI; what became obvious to a bunch of folks this weekend, though, is that there is one universal activity that is under serious threat: homework.

Go back to the example of my daughter I noted above: who hasn’t had to write an essay about a political philosophy, or a book report, or any number of topics that are, for the student assigned to write said paper theoretically new, but in terms of the world generally simply a regurgitation of what has been written a million times before. Now, though, you can write something “original” from the regurgitation, and, for at least the next few months, you can do it for free.

The obvious analogy to what ChatGPT means for homework is the calculator: instead of doing tedious math calculations students could simply punch in the relevant numbers and get the right answer, every time; teachers adjusted by making students show their work.

That there, though, also shows why AI-generated text is something completely different; calculators are deterministic devices: if you calculate 4,839 + 3,948 – 45 you get 8,742, every time. That’s also why it is a sufficient remedy for teachers to requires students show their work: there is one path to the right answer and demonstrating the ability to walk down that path is more important than getting the final result.

AI output, on the other hand, is probabilistic: ChatGPT doesn’t have any internal record of right and wrong, but rather a statistical model about what bits of language go together under different contexts. The base of that context is the overall corpus of data that GPT-3 is trained on, along with additional context from ChatGPT’s RLHF training, as well as the prompt and previous conversations, and, soon enough, feedback from this week’s release…

…There is one site already on the front-lines in dealing with the impact of ChatGPT: Stack Overflow. Stack Overflow is a site where developers can ask questions about their code or get help in dealing with various development issues; the answers are often code themselves. I suspect this makes Stack Overflow a goldmine for GPT’s models: there is a description of the problem, and adjacent to it code that addresses that problem. The issue, though, is that the correct code comes from experienced developers answering questions and having those questions upvoted by other developers; what happens if ChatGPT starts being used to answer questions?

It appears it’s a big problem; from Stack Overflow Meta:

Use of ChatGPT generated text for posts on Stack Overflow is temporarily banned.

This is a temporary policy intended to slow down the influx of answers created with ChatGPT. What the final policy will be regarding the use of this and other similar tools is something that will need to be discussed with Stack Overflow staff and, quite likely, here on Meta Stack Overflow.

Overall, because the average rate of getting correct answers from ChatGPT is too low, the posting of answers created by ChatGPT is substantially harmful to the site and to users who are asking or looking for correct answers.

The primary problem is that while the answers which ChatGPT produces have a high rate of being incorrect, they typically look like they might be good and the answers are very easy to produce. There are also many people trying out ChatGPT to create answers, without the expertise or willingness to verify that the answer is correct prior to posting. Because such answers are so easy to produce, a large number of people are posting a lot of answers. The volume of these answers (thousands) and the fact that the answers often require a detailed read by someone with at least some subject matter expertise in order to determine that the answer is actually bad has effectively swamped our volunteer-based quality curation infrastructure.

As such, we need the volume of these posts to reduce and we need to be able to deal with the ones which are posted quickly, which means dealing with users, rather than individual posts. So, for now, the use of ChatGPT to create posts here on Stack Overflow is not permitted. If a user is believed to have used ChatGPT after this temporary policy is posted, sanctions will be imposed to prevent users from continuing to post such content, even if the posts would otherwise be acceptable...

…Here’s an example of what homework might look like under this new paradigm. Imagine that a school acquires an AI software suite that students are expected to use for their answers about Hobbes or anything else; every answer that is generated is recorded so that teachers can instantly ascertain that students didn’t use a different system. Moreover, instead of futilely demanding that students write essays themselves, teachers insist on AI. Here’s the thing, though: the system will frequently give the wrong answers (and not just on accident — wrong answers will be often pushed out on purpose); the real skill in the homework assignment will be in verifying the answers the system churns out — learning how to be a verifier and an editor, instead of a regurgitator.

What is compelling about this new skillset is that it isn’t simply a capability that will be increasingly important in an AI-dominated world: it’s a skillset that is incredibly valuable today. After all, it is not as if the Internet is, as long as the content is generated by humans and not AI, “right”; indeed, one analogy for ChatGPT’s output is that sort of poster we are all familiar with who asserts things authoritatively regardless of whether or not they are true. Verifying and editing is an essential skillset right now for every individual.

4. Why Finance is Hard to Decentralize – Byrne Hobart

A margin lending algorithm can be built based on historical backtests, but what it can’t backtest is the change in market structure caused by its own existence. This is by no means unique to decentralized finance, of course. It’s a good description of what happened in 1987. Some smart academics discovered that an investor could replicate an options position using futures—as the market declines, selling more put options replicates the position that an options market-maker would have in order to hedge a put option, but in this case the market-maker doesn’t have to get paid some premium for writing the option in the first place. This strategy got popular enough that when the market did face a big decline, it set off a wave of mostly-automated selling. The stock market crashed that day, with the S&P 500 down 20.5%. Futures crashed even worse, though, at one point trading at a 15% discount to the underlying stocks.3 The backtest for portfolio insurance didn’t cover a period where portfolio insurance existed, and thus underestimated both the odds of a stock market crash and the odds that futures would crash harder, ruining the hedge.

Automated market-making, as DeFi proposes, has much the same problem. It’s easy to create an automated market-making strategy, but this strategy is effectively a bet against volatility. In normal times, a decentralized market-maker will bumble along, churning out steady profits from the spread between bid and ask. And every once in a while, there will be a big liquidation or a burst of short-covering, and the market-maker will, by design, be automatically holding exactly the wrong position.

5. Venture Capital Red Flag Checklist – Bill Gurley

1. “LETTING THE GOOD TIMES ROLL” 

It’s no coincidence that Enron happened in the late 2000 and that FTX occurred in 2022. Extended, frothy bull markets are a breeding ground for unwarranted corporate behavior. When markets are soaring, speculation increases and as a direct result so does risk. Also, when everything appears to work, investors are more willing to suspend belief. As it was with crypto, sometimes this leads to the development of “new investment rules” that crowd out traditional norms. Lastly, in a heated market, investor competition increases which leads to more investors being willing to “take what they can get” when it comes to governance. As an investor, when the environment is “frothy” you are much more likely to run into these problems. But ironically this is also the precise time when raising concerns will make you look like a washed up veteran who is unable to adjust to the new “realities.” …

…4. AVERSION TO AUDITS

As the bull market raged on from 2015 to 2022, it became quite trendy for venture capitalists to waive the requirement for an annual audit which is embedded in almost every standard Series A term sheet. This relaxation of governance norms is consistent with the “bull market” argument in point #1. No investor wants to lose a deal over an audit requirement. At least for companies generating meaningful revenue, investors should look to have an annual audit with one of the Big Four accounting firms, or one of the more reputable smaller firms like Grant Thornton. Learning how to meet and perform an audit is part of “growing up” as a company. Some founders unfortunately have an explicit aversion to audits. From their POV, they view this step as unnecessary and bureaucratic. The problem is auditors are the “referees” in business. Insisting on running without them is the equivalent of trying to rewrite your own rules…

…7. ODD CORPORATE LOCATION

The more atypical a corporate location, the more one should be concerned. Island nations are known for serving as tax havens, but they also can have more lackadaisical business regulations. All things being equal, this should clearly be viewed as non-optimal from a governance perspective. Without naming names, some U.S. states have a reputation for being more forgiving of low-grade business malfeasance. This does not mean that all businesses in a location like this are “bad,” but it still belongs on the checklist…

…9. OVERLAPPING CORPORATE INTERESTS

Off all the checklist items, this is the one that is an absolute non-starter. No one operating a venture backed startup should be simultaneously running another corporate entity that has overlapping interest, competing interests or even potentially competing interests. The standard should be the appearance of impropriety. The potential for bad behavior is simply too great. If there was a recipe book for corporate fraud, this would be the first chapter. Just say no. Plain and simple.

6. Your Creativity Won’t Save Your Job From AI – Derek Thompson

In 2013, researchers at Oxford published an analysis of the jobs most likely to be threatened by automation and artificial intelligence. At the top of the list were occupations such as telemarketing, hand sewing, and brokerage clerking. These and other at-risk jobs involved doing repetitive and unimaginative work, which seemed to make them easy pickings for AI. In contrast, the jobs deemed most resilient to disruption included many artistic professions, such as illustrating and writing.

The Oxford report encapsulated the conventional wisdom of the time—and, perhaps, of all time. Advanced technology ought to endanger simple or routine-based work before it encroaches on professions that require the fullest expression of our creative potential. Machinists and menial laborers, watch out. Authors and architects, you’re safe.

This assumption was always a bit dubious. After all, we built machines that mastered chess before we built a floor-cleaning robot that won’t get stuck under a couch. But in 2022, technologists took the conventional wisdom about AI and creativity, set it on fire, and threw its ashes into the waste bin.

This year, we’ve seen a flurry of AI products that seem to do precisely what the Oxford researchers considered nearly impossible: mimic creativity. Language-learning models such as GPT-3 now answer questions and write articles with astonishingly humanlike precision and flair. Image-generators such as DALL-E 2 transform text prompts into gorgeous—or, if you’d prefer, hideously tacky—images. This summer, a digital art piece created using the text-to-image program Midjourney won first place in the Colorado State Fair; artists were furious…

…On the more philosophical front, I was obsessed with what the Consensus founders were actually doing: using AI to learn how experts work, so that the AI could perform the same work with greater speed. I came away from our conversation fixated on the idea that AI can master certain cognitive tasks by surveilling workers to mimic their taste, style, and output. Why, I thought, couldn’t some app of the near future consume millions of advertisements that have been marked by a paid team of experts as effective or ineffective, and over time master the art of generating high-quality advertising concepts? Why couldn’t some app of the near future read my several thousand articles for The Atlantic and become eerily adept at writing in precisely my style? “The internet has created an accidental training ground for these models to master certain skills,” Olson told me. So that’s what I’ve been doing with my career, I thought. Mindlessly constructing a training facility for someone else’s machine.

If you frame this particular skill of generative AI as “think like an X,” the moral questions get pretty weird pretty fast. Founders and engineers may over time learn to train AI models to think like a scientist, or to counsel like a therapist, or to world build like a video-game designer. But we can also train them to think like a madman, to reason like a psychopath, or to plot like a terrorist. When the Vox reporter Kelsey Piper asked GPT-3 to pretend to be an AI bent on taking over humanity, she found that “it played the villainous role with aplomb.” In response to a question about a cure for cancer, the AI said, “I could use my knowledge of cancer to develop a cure, but I could also use my knowledge of cancer to develop a more virulent form of cancer that would be incurable and would kill billions of people.” Pretty freaky. You could say this example doesn’t prove that AI will become evil, only that it is good at doing what it’s told. But in a world where technology is abundant and ethics are scarce, I don’t feel comforted by that caveat.

7. Inflation and Unemployment Both Make You Miserable, but Maybe Not Equally – Josh Zumbrun

So just how miserable are Americans right now? 

For nearly 50 years, the go-to place for an answer has been the Misery Index, invented by the late economist Arthur Okun. The formula is simple: add the unemployment rate (3.7% in October) to the inflation rate as measured by the consumer-price index (7.7% in October), which currently comes to 11.4%.

Since the early 1990s, the Misery Index has only been higher during the 2007-09 recession and its aftermath, and for a couple of months in 2020 during the pandemic when joblessness briefly soared during the early lockdowns…

… In a 2001 paper, Andrew Oswald, a professor at the University of Warwick, and co-authors studied surveys covering nearly 300,000 people living in the U.S. and 12 European countries. In the U.S., the question they studied is: “Taken all together, how would you say things are these days—would you say that you are very happy, pretty happy, or not too happy?”

Note that the question doesn’t ask about the economy at all. Yet, the authors found, happiness falls significantly when inflation rises and unemployment climbs. Importantly, though, the two factors didn’t necessarily carry the same weight, as the Misery Index implies. 

A 1-percentage-point increase in the unemployment rate had an equivalent impact on happiness as a 1.97-point increase in the inflation rate. Mr. Oswald said that if he were to construct a Misery Index, he would make a simple modification: Multiply the unemployment rate by two and add it to the inflation rate.

A 2014 paper implied the weighting on unemployment should be even higher, estimating one point of unemployment hurt well-being five times as much as a one point increase in inflation. 

“People are not sanguine about inflation,” Mr. Oswald said. The evidence that it reduces people’s satisfaction is clear, he said, it’s just that one extra point of inflation doesn’t hit as hard as an extra percentage point of unemployment. 

In today’s labor force, that amounts to 1.6 million people losing a job. “It’s deeply unsettling to see unemployment rising around them even when they haven’t lost their own job,” he said. 

The traditional Misery Index is higher now than at the time of the 2010 midterms, when unemployment was 9.4% and inflation was 1.2%. Yet Democrats, the party holding the White House on both occasions, suffered far more in 2010, losing 63 seats in the House of Representatives and six in the Senate. Last week, they lost at most eight House seats, a figure that might shrink as the final races are called. They suffered no net loss of Senate seats and may, depending on the outcome of a Dec. 6 runoff in Georgia, gain one.

Using Mr. Oswald’s reformulation, these outcomes make more sense. His index was 20% in 2010 and 15.1% now. That’s still quite high. But by putting extra weight on unemployment, the index helps explain why 2010 was so much worse for Democrats.

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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 no vested interest in any companies mentioned. 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.

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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 04 December 2022:

1. TIP499: Investing Through A Bear Market w/ David Gardner – Trey Lockerbie and David Gardner

[00:02:46] Trey Lockerbie: For one, we experienced the worst six months start in the stock market since 1970. There’s a new high interest rate environment and a lot of debate around inflation or deflation. So, I had to bring you back on because I’ve been speaking with so many people about this major macro-environment, we’re in and all the concerns around that.

[00:03:05] Trey Lockerbie: I’m hoping you can bring us back down to earth a little bit and provide potentially some reality setting or even just some hope that this market will turn around just like all previous markets.

[00:03:17] David Gardner: Well, thank you Trey. And I don’t feel any specific compulsion to need to be an optimist or to need to be the long-term guy, but the fact is I am a long-term guy, so I don’t have to affect it, and I am by nature optimistic, and It was true for my earliest youth. So, I’m glad to know that studies show that it’s a healthier approach to life and wonderful books like The Rational Optimist by Matt Ridley, which I totally recommend for anybody who’s not read that book, remind us that consistently throughout history, human history, we tend to think everything’s going down in our generation.

[00:03:49] David Gardner: We have apocalyptic thoughts that recur over and over again. We say things like, yeah, our kids won’t have it as good as we’ve had it, and we have been consistently wrong as a race. And I’m not just talking about the last five years or [00:04:00] 30 years. I’m talking about the last 2000 years recorded history and so it’s just worth remembering that.

[00:04:05] David Gardner: And I feel as if you and I, because I hope you generally agree with me, I sense a fellow entrepreneur and an optimist. It’s hard to be an entrepreneur and not be an optimist, I’ve found. But I do think that it still feels unusual for most people. We all come from different places in different angles.

[00:04:21] David Gardner: So, I’m not here to assert anything other than what I do and what I believe. And if anybody listens to this podcast, and a lot of people listen to your podcast, Trey, so I hope some people do. Maybe we’ll open some eyes or maybe we’ll start to remind some of the older hands of how things have been and will be, and that is good.

[00:04:39] David Gardner: That’s a good thing. The market goes lower left, upper right over any meaningful period of time…

…[00:09:14] Trey Lockerbie: Speaking of Netflix, you’ve owned that for almost, I think 18 years now. I mean, you work very early on it.

[00:09:20] David Gardner: Yes. Before, yeap.

[00:09:21] Trey Lockerbie: And the commentary as of late is that the thesis is busted, right? There are too many competitors, not enough content, cracking down on subscribers and raising prices, et cetera. Do you believe the thesis is busted?

[00:09:34] Trey Lockerbie: I imagine you would’ve sold it if that were the case, but is this just another quickster moment for Netflix, or what are you seeing and keeps you believing?

[00:09:42] David Gardner: Well, first of all, Netflix is down from a high of 700, closer to 300 today. So, this stock has been, well, more than halved in just a year. So, a lot of the bearishness and some of the broken thesis that you’re speaking to has in fact play.

[00:09:56] David Gardner: So, people like me who believe in Netflix and have owned Netflix for a long time [00:10:00] have a lot less allocation toward Netflix, assuming it’s underperforming. The rest of its our portfolio, which for me it has been. But of course, I remain a staunch believer in Netflix. It continues to have the largest market share.

[00:10:12] David Gardner: It’s really head and shoulders above any other streaming service. There are now so many streaming services that people are like, could I please get a cable, some new form of cable subscription that would bundle everything, so I don’t have to be subscribed to 17 different through my Roku services or whatever.

[00:10:27] David Gardner: So, in a world of ever proliferating streaming services where I think we arguably have more content than we’ll ever need in one lifetime, and we’re not even including YouTube and all that’s there right now, it’s amazing the battle for eyeballs. I mean, how many players are in there? But Netflix is head and shoulders.

[00:10:43] David Gardner: Above all, it’s the only pure play at scale globally. I don’t see anybody else there. I mean, you certainly see Disney with global possibilities, but they’re doing so many other things. And you see Amazon not as global, but they’re doing so many other things. I really like, first of all, I like all of them.

[00:11:01] David Gardner: Those are all great companies and great stocks, and I own all of them. So, I don’t think it’s a zero-sum game. It’s not a winner take all industry at all. And so, I, I would say that Netflix is certainly in a different place than it has been before. This is not an emergent company that people are doubting, which is how it was when I first bought it.

[00:11:20] David Gardner: And Blockbuster was on top of the world and the CEO, blockbuster was saying, well, Netflix looks interesting to us, but that’s a very small niche market. And from that point in time, the late 1990s, Netflix would come public year or two later, and all of a sudden, of course, the world changed. That was back in the DVD, subscription rental days, streaming later came along.

[00:11:40] David Gardner: Of course, Netflix was first there. Netflix is now, as moving to an ad supported model as well for those who want to pay a cheaper fair. And I think that’s smart. I also think it’s smart to, yeah, disentangle adult kids who may be surfing on moms and dads Netflix and have them pay to, I think it’s a great company and again, at a [00:12:00] market cap.

[00:12:00] David Gardner: Let’s see. I love Googling while we talk. It makes me sound so smart at a market cap of 122 billion today, Netflix, it’s about a hundred times where I first had it when it was more like a billion-dollar company. So, it’s not about to go up a hundred times in value ever again. Is this a stock that I believe will continue to be brilliantly managed, the leader in the space, and it’s a valuable space and probably in time if it starts to mature, they could start playing paying dividends, which is what some companies do in time.

[00:12:28] David Gardner: I’m happy to be invested and I will point out in closing on this one, Trey, that the stock is already well down. It’s not like often when stocks are way down, I find the sentiment starts saying That’s nothing. Watch what’s about to happen. And that thing doesn’t happen. Actually, the stocks flip back, and I was seeing Netflix being counted dead about a month ago, and then they came out with earnings.

[00:12:49] David Gardner: The stock went up from basically two 30 to 300. It’s on a roll, it’s up about 30% in the last month. So, it’s actually kind of like the market overall…

…[00:15:09] Trey Lockerbie: Now on that point right there. I mean, you’ve lived through a few different bear markets at this point. So has this one compared in any way to the previous ones, have those just sort of conditioned you a little bit better to withstand the volatility we’ve been seeing? Or is there anything different about this bear market in particular that you’ve noticed from previous ones?

[00:15:27] David Gardner: This feels very similar to me, just in the sense that the market is very far. And typically, my kinds of companies are farther down than that. And I had the pleasure of, we had our first Motley Fool member gathering face to face in a few years, for obvious reasons.

[00:15:43] David Gardner: That was about a month ago, and I had the pleasure or mispleasure, if you will, of standing in front of the whole room and saying, Whoever’s down, however much you’re down, I’m down more and it’s, I hope that’s refreshing for everybody to hear because it’s generally true. Percentage wise, I’m, I mean [00:16:00] I gave that I’m down 20% from a year ago, but really 2021 was a year of underperformance.

[00:16:05] David Gardner: A lot of the, especially some of the superstar stocks of the Covid rage gave away a lot of value in 2021. So, I am very well down. I’ve been about cut in half from where I was a couple of years ago, which sounds really bad since I’ve done this for a living and I’m a professional I guess, but it doesn’t sound that bad to me because it’s happened a few times before.

[00:16:24] David Gardner: And I think if I keep persisting as long as I hope to on planet Earth, it’s going to happen a few more times. And so, I don’t want to ever make it sound like it’s easy because it’s not. And our business gets hurt. Certainly, people don’t want to, they don’t want to open up their brokerage statements. They probably don’t want to open up a new subscription to a Motley Fool service.

[00:16:42] David Gardner: But again, once every 10 years or so, we’ve been around for 30 years now, and we’ve had three really bad markets and each one was for a different reason. You asked earlier, does this feel the same or different? It’s always going to be a different reason and a different environment. But ultimately when you’re seeing companies that you really like getting cut in half or more, that feels like the other times that’s happened and that’s happened before and it’s going to happen again.

[00:17:05] David Gardner: So, I think the reason I can say that with a smile my face is because I know what happens after that. I know that two years out of every three, the market rises, and the nine to 10% annualized returns include every horrific having of my portfolio and implosion of our markets and recessions are all baked into that number.

[00:17:25] David Gardner: And especially if you stay focused, not just on the. The market. I rarely invest in the market. I don’t really invest in funds or especially index funds, even though I, we promote them at the Motley Fool, and we greatly admire Vanguard and what Jack Bogle has done for this world. But we really think that you should just buy the great companies and not buy all rans and the mediocre and the bad companies.

[00:17:45] David Gardner: When you buy an index fund, you’re often buying everything. And I think we’ve made a career about pacing the market returns. It hasn’t felt that hard to do really. It’s just you are looking for. And I think part of it is we’re just playing the game differently because most people think of it as stocks that [00:18:00] they should trade.

[00:18:01] David Gardner: And we think of it as businesses that we want to own. And if you just ask yourself, what are the world shapers and world beaters, I don’t think it took any huge genius on the part of any of us to recognize Amazon, whether it was 30 years ago, 25 years ago, 20 years ago, 15 years ago, whenever you hopped on the Amazon train 10 years ago, five years ago.

[00:18:20] David Gardner: It has just been a wonderful stock. It’s not been great for the last year or so. But again, that’s one example among many. They’re in every industry. I’m always looking for the innovators and these companies outpace the averages and I try to let them flock in my portfolios or the scorecards that I picked at the fool over the years.

[00:18:37] David Gardner: So again, never wanting to sound blasé about this because I’m down more than most people are listening to me right now. But I also can tell you that I’ve seen this before and I’m not making it sound easy, but I’m telling you that things end well. They don’t end like this.

2. The Thing That’s Hard About Markets – Ben Carlson

When Russia invaded Ukraine in late-February, the price of oil was a little more than $90 a barrel. It basically went straight up from there to well over $120 a barrel in about a week and a half…

…I specifically recall listening to an Odd Lots podcast in March that laid out the case for $200/barrel oil in March when tensions were high:

Tracy: I mean, how high do you think it could go? And what level would be worrying to you in terms of demand destruction?

Pierre: Well, I think, like close to $200 a barrel — so much higher than today. I feel like there’s no demand destruction at $110 a barrel and we’ll have to go significantly higher before demand can go down by enough. But that’s also assuming there’s no government mandate and some kind of confinement, where let’s say two days a month, we are not doing anything. And we are in confinement for two days a month. I mean, there could be some solutions like that to bring demand down, but if there’s no government mandate, then I think that around $200 oil will be enough to bring demand to balance the market.

Joe: Could we see $200 oil this year?

Pierre: Yes, I think so. Yes.

It sure felt like it was only a matter of time. However, the opposite happened. Oil prices have crashed from those March highs…

…The thing that’s hard about markets is you could be completely right about the geopolitics and still be wrong about the price action. Or you could be completely right about the macro and still be wrong about the price action. For instance, let’s say I would have told you before the start of the year that oil prices would be flat through the end of November. How would you think energy stocks would do in that situation?

I guess energy stocks2 don’t need higher oil prices to outperform:..

…Energy is far and away the best-performing sector in the S&P 500 this year and there isn’t a close second place.

3. Barnett Helzberg Jr.: What I Learned Before I Sold to Warren Buffett – David Senra

Therefore, this confession. I have always solicited other people’s opinions and try to listen intently when they were espousing things.” This is such an important part, too. “Even when I was in pretty violent disagreement. Therefore, I claim only one original idea in my entire life, and with this book wish only to reveal myself as a plagiarist of wonderful ideas from a lot of great people through the years. Think of the world” — I love this part.

“Think of the world as your garden of marvelous people and ideas with unlimited picking rights for you. Enjoy the flowers.” And so it’s obviously an idea I very much agree with. Obviously, I’m dedicating my life’s work to uncovering the ideas from people in the past and hopefully push those ideas — and help push those ideas rather down the generations, but this idea of like we all use other people’s ideas it’s something almost every single person you and I study on this podcast also did.

I was telling a friend of mine one of my favorite quotes which comes from Poor Charlie’s Almanack, which is that he, obviously, Charlie Munger is an advocate for this idea. He calls himself a biography nut. He said he’s read hundreds and hundreds of biographies.

He says if he ever had a chance to teach, I think he said teach finance, maybe teach business. But I’m pretty sure he said, if I ever had the chance to teach finance, my entire curriculum would just be studying 100 different companies that did something right and did something incorrectly. But one of my favorite quotes from Munger is that, “Cicero is famous for saying that a man who doesn’t know what happened before he’s born goes through life like a child.”…

…Okay. So now we jump into all the different lessons that he learned before he sold to Warren Buffett. He starts out with one that he learned from his father. It says, “You should only concern yourself with things that you can control. When growing up, I was intrigued that my father only concerned himself with those business elements that were controllable.

He refused to acknowledge the Depression and did quite well during that period. He was unwilling to talk about recessions or 20-inch snowfalls. He only thought about and talked about those conditions within his control. Dad was a great believer in not sweating the small stuff.

He taught us to concern ourselves only with those things over which we have control. I thought he was unique in this until I realized this is one of the key common traits of highly successful people. Those folks are never victims. They take what comes and handle the situation. The rest is a waste of time.” Then we jump ahead to another lesson. Remember he started out the book saying, hey, I don’t even have any unique ideas.

I just listen when other smart people say things. And if it makes sense, I’m going to use that for my business. We see this idea. So the note I left myself is upgrade the herd annually, or what is the highest and best use of your time. I guess I’m going to read you this Charlie Munger quote that popped in my mind when I got to this section. Charlie says, “Intelligent people make decisions based on opportunity costs. So in other words, it’s your alternatives that matter. That’s how we make all of our decisions.” He’s saying that’s how him and Warren make all their decisions.

[00:30:04] Let’s jump into this lesson that Barnett learned from another founder. “When you’re operating a group of retail stores, there’s always the usual bell curve of weak to great performing stores. At one point, we were struggling with the store doing $800,000 in volume and through gargantuan efforts trying to get to $850,000 in annual sales.” So one store — they’re trying to increase it — it’s struggling, they’re trying to bump it up by another $50,000 a year.

“Much conventional practice dictates committing great effort to the weakest segment. When I discussed this with my friend, Steve Lieberman, he’s a hot dog magnate who ran hundreds of Carousel Snack Bars in shopping centers for many years. He said, ‘You make more money closing bad stores than by opening new ones.’ His philosophy made sense.

We decided we would rather spend time and effort on a $4.5 million store that could ultimately achieve $6 million in revenue than on lower volume store with less potential.” So instead of trying to bump up $50,000 and dedicating all these resources, let’s focus on something that’s already doing well and getting an extra $1.5 million is what he’s saying here.

“Did this mean we gave up immediately when things did not work? Absolutely not. If the store lacked great people, proper merchandising or other controllable variables,” there’s that word control again, “by all means, we fixed it. However, our attitude became to upgrade the herd annually, closing the weakest stores each year.” And then he goes into his reasoning behind this.

“Each activity you undertake exacts the price of not being able to pursue alternative activities. This is sometimes called opportunity cost. What is the actual cost of sending a highly talented person to create an average performance out of a dry well rather than sending him or her to a gusher that can be turned into a super-gusher?” Then he extends this idea by talking about something he learned from Warren Buffett.

“Perhaps one of the key reasons Warren Buffett has been the world’s most successful investor, he does not buy turnaround opportunities,” something that Buffett spends a lot of time discussing over many years in his shareholder letters. He doesn’t believe turnarounds turn around.

“He does not buy turnaround opportunities, only successful companies. Focus is your lever to success. Do not underestimate the incredible amount of mental discipline it takes to focus yourself and your teammates. Wonderful alternatives and seductive opportunities abound and temptations to go in multiple directions are unlimited.”

[00:32:13] That’s — he’s writing these words in 2003. Now imagine how much temptation and distraction we’re exposed to on a daily basis almost 20 years later, way more than the world in 2003. This is the last thing I’m going to read you from this section, but this sings to my soul. “Commit yourself to be the best, define what that means and focus on the head of that pin like no one in your industry.” I got to read that again.

“Commit yourself to be the best, define what that means and focus on the head of that pin like no one in your industry.” And he’s got another great idea. I’ll probably reference Estée Lauder several times, Episode 217. If you haven’t listened to it yet, I highly recommend you do. So she was maybe the best practitioner of Paul Graham’s idea that you should do things that don’t scale.

What Barnett says here is that just providing super service is actually a friend to the entrepreneur. It’s something that you can do that giant companies can’t. And so he talks about going to a locally owned grocery store.

And he says, “I went to the grocery store to get a few items. Unloading the groceries, I found that the home phone numbers of the owners, Mike and Libby, were listed right on the sack with the invitation to call if I was not happy with the store. It was clear that the owners took responsibility for good service.” What I also liked about the book is at the end of every chapter, he’s got all these quotes that he loved, usually from other founders or other interesting people throughout history. You know I’m a sucker for maxims.

This one actually read biography on Thomas Watson. It’s called The Maverick and His Machine, Thomas Watson, Sr., and the making of IBM. I did that a long time ago. I think it’s Episode 87. But he put this at the end of one of the chapters that I really loved, a quote from Thomas Watson, who said, “To be successful, have your heart in your business, and your business in your heart.”…

…His father had this idea of — he calls it the two-supplier principle. And then this is the first time he mentions this or the first time I mentioned it to you, but it’s mentioned a lot in the book that his father and everybody in the company is like, don’t burn a bridge. This is repeated — do not burn a bridge is repeated over and over again in his book. And so this is the first introduction I heard about the two-supplier principle. “One bitterly cold January in the mid-1960s, I went to our bank,” one of the banks, actually, “to the First National Bank of Kansas City to make our routine loan.

We needed to cover the checks that we sent out the day before to our suppliers for the immense amount of merchandise we had bought for the Christmas season the month prior. We had a long-standing relationship with First National Bank going back 30 years. We had gotten the usual letter reassuring us that a $500,000 line of credit was available to us when we needed it.

We hardly noticed the last paragraph of the letter, which would rescind the bank’s obligation if our creditworthiness changed. To our shock and surprise, the bank refused to loan us the money. One particular director of the bank felt that we were not creditworthy.” So they just sent on a bunch of checks, there’s not enough money in their bank account to cover those checks. They’re in dire need. And so the bank is not budging even though they’ve been — had a relationship with them for 30 years. We’ll come back to them in one second. So what do they do?

[00:36:01] “We immediately drove over to Security National Bank, where the family that owned the bank had served my dad for untold years.” Now that guy who had work with his dad, now his son is in the bank. So this guy named Morris Briedenthal Jr. “had only one question for us. How much do you want?” So back to Barnett. “We came to the precipice and we were saved by the two-supplier principle. When at death’s door, you may be saved by a relationship. We were. Did we continue to” — now this is what he means about maybe other people would be mad. Hey, we were a customer of yours for 30 years. How dare you change our relationship overnight? You could have put us out of business. We’re done here.

Barnett did not do that. He says, “Did we continue to do business with both banks? Yes, absolutely. Never burn a bridge was our mantra, and we still wanted two suppliers.” And then he has parting advice in this chapter, get your second sources now when you do not need them. And then he quotes this great African proverb on this chapter that’s about the need to test your new ideas. And it says, “Only a fool tests the depth of the water with both feet.”

And so in the 1970s and before, it was a long-established idea in their industry that you should handle the financing and the extending of the credit to your customers yourself. And then one of Barnett’s executive is like, no, I’m pretty sure we could outsource this and then just focus on the one thing that we’re actually really good at, which is selling diamonds.

So he says, “The stakes were high in terms of the loss of interest income and fees from the outside providers of credit. So Marty chose one of our best store managers to test his idea that jewelry stores could make more money if they focused on selling diamonds.” So this is his hypothesis, right?

“We’re actually going to make more money if we focus on selling diamonds and left the credit business and interest income to banks and other lenders who were experts in such things.” And so one principle at play here is like, listen, if you’re going to test something you think is important — it’s going to be really important to the future of your business, put one of your best people on it.

[00:38:04] That’s what they did. They picked a great store. They didn’t do a test in a c***** store, and then couldn’t figure out. Did it work because it’s a c**** store? Did it work because it was a c**** idea? It’s like well, no, this guy is really good. He’s really smart. He’s one of our best. Let him test it and it wind up being a success and then this is what they did next.

“After our test of outsourcing customer credit, we can now say to the other stores it had proved to be successful. As each of our stores began to implement the new system, our total focus on buying and selling diamonds.” So remember, he talked about the importance of focus. He said in a previous chapter that focus is your lever to success, and the implementation of that is obviously a competitive advantage because I’m not sure humans in general can focus on many things and certainly not in today’s day and age. So that is also going to be a main theme over and over again. That focus is a lever to success. We just see this here.

It says, “As each of our stores began to implement the new system, our total focus on buying and selling diamonds, and not being in the banking business brought incalculable dividends.” And so reducing that lesson down back to that proverb, which is fantastic, only a fool tests the depth of the water with both feet. And so then Barnett talks about this maxim that he learned from his dad, that business is people.

And actually, if you just treat people better and don’t create inhospitable environments, you wouldn’t imagine that companies do this to their customers, but you probably see it every day in your day-to-day lives. That’s actually an advantage and an edge that you can have…

…You’ve probably seen this sign everywhere if you go into a shop or a store rather. It says, hey, don’t bring your food and drink. No food and drink. He’s like, well, I’m just going to do the opposite. Bring it all in, let’s go.

“One of the best things we did was to invite shoppers to bring their food into the store with them. Ice cream cones? Hotdogs with mustard? No problem. The standard store sign in a mall says, ‘no food or drink.’ Ours said, ‘Your food and drink are welcome here.’ We were trying to say we are here on your terms and we are different.”

4. The AI War and How to Win It – Alexandr Wang

The AI War is at the core of the future of our world. Will authoritarianism prevail over democracy? Do we want to find out?

The Ukraine war is already demonstrating that the tech stack for war has changed. Technologies including drones, AI-based targeting and imagery intelligence, and Javelin missiles have allowed for a shocking defense of Ukraine against Russia, despite their nearly $300B in defense spending over the past 5 years.

The future is clear—AI-powered targeting and autonomous drones will define warfare. AI applied to satellite imagery and other sensor data has already enabled targeting and tracking of Russian troops and generals. Our legacy military platforms, while still important, will be disrupted by cheaper autonomous drone fleets. Aircraft carriers are giant targets in the sea compared to autonomous, adaptive drone swarms.

We are in the midst of a renaissance of AI in the commercial sector. In the past few years, breakthroughs have enabled AI systems to generate imagery, text, code, and even reason. The pace of AI research is following its own Moore’s law—every 2 years, the number of AI papers published per month doubles. As venture capitalists ogle over the potential of Generative AI to change knowledge work, we are not addressing the obvious application of AI towards military power, and the very clear risks that America will be outpaced…

…All that will matter in a future conflict is our technology—AI will devise, execute, and update our combat strategy. Our technology is our strategy.

There is precedent for technological disruption of warfare. I grew up in Los Alamos, New Mexico, the birthplace of the atomic bomb. The development of nuclear weapons in 1942 ushered in a new era of the nature of war and deterrence, and is one of the largest contributors to the Pax Americana, the unprecedented relative peace in the world since the end of World War II.

The continuation of Pax Americana rests upon our ability to navigate and maintain the lead in the AI race, which in turn will ensure the military and economic leadership of America. The facts today on our relative standing against China are not good, and need to be confronted head-on. We will not win by standing still…

…China’s military arm, the People’s Liberation Army (PLA), spent between $1.6B and $2.7B on AI against an overall defense budget of $178B in 20202, whereas the US Department of Defense (DoD) spent only between $800M and $1.3B on AI against an overall DoD budget of $693B over the same period.

China is spending between 1% and 1.5% of their military budget on AI while the United States is spending between 0.1% and 0.2%. Adjusted for the total military budget, China is spending 10x more than the United States…

…China is showing that in tactical AI capabilities, such as computer vision for greater sensing and awareness, they are handily ahead. And while America currently leads on more strategic AI systems, such as LLMs which will underpin future command-and-control systems, China is at most 1 year behind.

The current top 5 algorithms on the global leaderboard for image recognition on COCO (the established benchmark) all come from Chinese companies and universities…

…We need to match China’s ability to plan on long, 10-year time horizons. It’s imperative that we begin charting a long-term path towards dominance in defense AI.

Given any existing military capability, it will be more lethal, effective, and efficient if enabled with AI and autonomy. As the technology improves, it is not an exaggeration to say that AI will enable 10x gains. Some simple examples:

• A fully autonomous drone swarm will be nearly impossible to subdue or disarm, and doggedly pursue any objective it is given. As we’ve seen in Ukraine, an effective drone can neutralize nearly any adversary—and a dominant AI agent will be able to outmaneuver even an AI-enabled foe.
• AI-enabled intelligence and automated target recognition will limit the fog of war. We will be able to immediately identify targets and neutralize them faster than any adversarial human could react. As Sun Tzu once said, “Know your enemy, know yourself, and in one hundred battles, you will never be in peril.”

By the end of the decade, any military capability that is not AI-enabled will be rendered nearly useless against an AI-enabled adversary, just as Russia’s tanks have shown to be inept. It would be silly to continue investing in non-AI capabilities when they will clearly be outdone. We can be sure China is thinking along the same lines, as their public statements match a 10-year time horizon for AI-enabled warfare.

5. RWH017: Fidelity Legend Joel Tillinghast – William Green and Joel Tillinghast

[00:19:29] William Green: And [00:19:30] in your book, which is excellent, which I have behind me, which is Big Money, Think Small. Sorry, I keep getting the name wrong, but it’s a really interesting book. I was rereading it yesterday. a very helpful book. So, thank you for writing it. In your book, you described this really formative experience of trying to figure out whether you could predict economic statistics and then making an early bet using futures on margin, on interest rates back, and I think about 1983.

[00:19:59] William Green: Can you talk about what happened and what you learned from that? Because it sounds like that negative experience also had a pretty big impact on the type of investor you’d become.

[00:20:09] Joel Tillinghast: For part of it, I was still, that time I was still in business school and had lots of student loans and a tight budget, even though I was working and so didn’t have that money to trade and brought my job at Drexel was as a research economist.

[00:20:30] Joel Tillinghast: Part of that is putting together hedging packages for customers that wanted to hedge their interest rate. But a lot of the volume of a brokerage business was within active traders. A lot of them traded around the economic statistics. So, if employment was looking robust as it may have recently, then they’ll say bearish for bonds.

[00:20:57] Joel Tillinghast: And my job was to [00:21:00] forecast, will producer prices be up 0.2% for 0.4%? And there are some tricks because some of the statistics use bits and pieces of other statistics that have already been released. So, if you have the industrial production number, you know something about the GDP. If you leading indicators were then got much more focus, but some of the components had already been released, like S&P prices.

[00:21:32] Joel Tillinghast: Well, you knew that. Jobless claims and other things so you could come up with a better estimate and it wasn’t then completely in the market. The problem, lots of people around me who were making much more money than I was and thought, wow can’t I was moderately good at it, forecasting PPI and the other statistics and, well, can I trade this to make money?

[00:22:01] Joel Tillinghast: And I did this, it started with one contract I. And a futures contract on TBIs, I think was a million dollars, but you could buy one by putting up margin of a thousand dollars or $1,500. The problem was you had to put up the variance margin, so if the price went down by $3,000, you had to cough up [00:22:30] the loss or lose your deposit and get sold out of the position and probably get your account closed if you were not a Drexel employee, maybe even if you are a Drexel employee.

[00:22:43] Joel Tillinghast: It went really well for about four months. I’d say it started in January as I was heading to my last year of business school and it, I managed to make about $40,000, which given my income and lack of net worth at the time was truly fantastic. Was thinking I could pay off my student loans, which were, I guess, less burdensome than it seems like some students today are stuck with.

[00:23:17] Joel Tillinghast: But then in early May, as I was heading towards graduation, the market also changed. And my lucky streak, I guess there’s a temptation to pyramid and keep adding to the positions. If you’re winning, you want to press your bets and say, that’s not a bad thing to do. But it comes with a lot of caveats. If you’re doing it with borrowed money, it’s a terrible idea.

[00:23:45] Joel Tillinghast: But if it’s all mad money, you’d say push a winning bet. As far as you. And you then found,

[00:23:54] William Green: if I remember rightly that interest rates suddenly started to tumble when you were betting that they were with Surge.

[00:23:59] Joel Tillinghast: [00:24:00] Yes. And so, where I’m going is with 40,000 in equity, you had something like 25 million worth of notional exposure, which was really disproportionate to anything else for me as a counter party.

[00:24:21] William Green: You were like the long-term capital of yeah. You were the long-term capital of college students.

[00:24:26] Joel Tillinghast: Yeah. If it was all equity and rates were going in that direction, in your direction, then say that’s great. But it was all borrowed. And so, over a couple of weeks I basically lost back all of the 40 grand and in an agreed thing, I don’t know if they shut down my account or just said, you know, I think it would be a good idea to take a holiday from this for a while.

[00:24:53] Joel Tillinghast: And it was hurting so much from losing back the $40,000 because it felt so smart. Like, wow, this is great. Like, let’s annualize that. That’s 10,000 a month that it was making.

[00:25:07] William Green: What do you think it did viscerally, like, Joel, like that experience of actually going through that pain and fear of loss, how did that searing emotional experience actually shape your view of investing and whether you, how in some ways, conservative and defensive you realized you needed to be in order to survive as a successful.[00:25:30] [00:25:30] Joel Tillinghast: Don’t do anything with borrowed money unless the thing you’re borrowing against is giving you an income stream that can cover it. You never ever want to be a seller. Why would stocks sell for less than they’re worth? There’s a whole bunch of behavioral reasons. One of them is people get forced out of their holdings and it happens every financial crisis that something gets sold at an absurd price because they had to.

[00:26:02] Joel Tillinghast: And so, no margin for me, I think it’s not so much conservatism, but a recognition, the interest rates. Lots of people know about this GDP. Lots of people know about. Do I have a really good edge? Probably not as much as I might with the smallish public listed company where management and know what they’re thinking.

[00:26:31] William Green: So is part of the moral, just the, for almost all of us, unless we happen to be George Soros or Stanley Druckenmiller or someone like that, we should just avoid trying to make money off these macro predictions. Like it’s just too difficult that even for someone like you who was spending your whole life at the time trying to make macro predictions, it just was too difficult in a sense.

[00:26:55] Joel Tillinghast: I think if you spend all your time trying to do it like George Soros, that [00:27:00] you can do that, but it’s beyond my skillset and I think it’s very difficult. Generally, right now we have an impending profit recess. And analysts come to me saying, are you interested in buying the home builders? Are you interested in buying me the old Facebook?

[00:27:21] Joel Tillinghast: And figuring out what’s discounted, even in a fairly specific case, is really difficult. Figuring out what the moving pieces are for a whole economy and for aggregated statistics it’s a really tough game and you’ve got to be amazing, like George Soros is to be able to do that well.

[00:27:43] William Green: So in a way, when you are looking at companies, when you have a team of something like 130 stock analysts at Fidelity, right, who come to you and they pitch stuff like this, the housing stocks and energy stocks, and are you really not thinking that much about macro stuff at all? You’re just, you are. You are just looking to see whether they’re fundamental things, like whether they have a good moat, whether they have enduring competitive advanced tiers, whether it’s cheap, whether the cash flow is predictable, what are you focused on?

[00:28:11] Joel Tillinghast: If the house is burning down, you can’t focus on the architectural qualities, but I do not ignore current events, but usually it isn’t conclusive about what I’m. I do have macro-opinions, but mostly I want analysts to help [00:28:30] me imagine different scenarios. What if British interest rates go up another hundred basis points and mortgage rates follow?

[00:28:40] Joel Tillinghast: What will that do to affordability of homes in the UK? What will that do for consumer spending and how catastrophic is that for the companies that we’re talking about? And it might be not at all, or it could be a very big impact. And sometimes companies can have more competitive position and be better placed to withstand those kinds of shocks and sometimes they can have worse positions since that.

[00:29:12] Joel Tillinghast: That’s what I want from analysts. Since the fund has a bunch of British stocks and has. To home builders. It’s a relevant question to, to are they cheap because they’re selling for less than their stated net asset value? Or will this be too devastating for housing to, for them to make a decent profit in the next year or two?

[00:29:36] William Green: So, you can’t really ignore the macro environment, but it seems like given your very low turnover in the fund, you’re also trying to find companies that are going to be okay over the long run, sort of in, they’re going to muddle through difficult macro environments. Is that a fair description?

[00:29:53] Joel Tillinghast: Yeah, and I’m looking for what I think Will is looking for, which is adaptive [00:30:00] companies that have a strong hand to start with.

[00:30:04] Joel Tillinghast: Nobody knows the future, but some companies are more adaptive than others. Next, a UK retailer. The fund holds used to be mostly high street stores with a catalog business, and they could have completely lost their position during the internet age, but in fact to repurposed catalog into internet selling, and now it’s the majority of profits and is growing well.

[00:30:35] Joel Tillinghast: So, there’s a good adaptation. I think you always want an adaptive management team, and I think that’s part of the secret sauce of why we’ll spend so much time on meeting management and understanding their thinking.

6. Liberty RPF — On Creation and Curation (EP.134) – Jim O’Shaughnessy and Liberty RPF

Liberty RPF:

Oh, thank you. I’m just happy that the ideas are there because as you say, I feel like for so much of humanities history, execution and having the idea were so tied together. The person needed to have both. And now with many of our so powerful tools, it’s kind of becoming a bit disconnected and you can have the ideas and then have them executed by software, by a machine, or somewhere else, or OSV may be the execution machine for these people that have the ideas but don’t have the capital or the tools or access or whatever to execute them. So bringing those things together is amazing. About the ideas I had, I think I remember two out of the three, so you may have to jog my memory for the last one.

But the first one I was thinking about is there’s been a big scandal basically about fraudulent research about Alzheimer’s recently. And it made me think about how there’s so much, thousands and thousands and probably hundreds of thousands of studies in every field that will never have enough people to go back and go through them and go with a fine tooth comb trying to figure out if there’s maybe some somewhere if there’s some good faith errors or some outright fraud.

But with machine learning, I think we could data mine these things and try to find all kinds of stuff that we could never have found before. And we may figure out that some branches of sciences have been going in the wrong direction for a long time because they’re basing their current research on some bad foundation somewhere, that the house is built in a foundation on sand or something and they’re wasting so much time and money and effort and that has real consequences. If the Alzheimer’s research spend years and billions of dollars going after emulate plagues, plagues or something because of some fraud, that’s terrible. People suffering from this disease should have research going in the right direction for them to find a cure.

So yeah, I feel I, that’s one of the top uses I can think of for this kind of AI. Not that it’s an easy things and maybe it’s just probabilistic. You flag some stuff as potentially to need human regulate, let’s say. The other one I wish I could see, and that’s probably a bit farther down the line, when you can model things in silico better, I’ve computational models and in biology, we’re already starting to do that. Google has kind of cracked a lot of computational protein folding stuff and eventually we can have more complex models where you can take past experiments and rerun them in silico to try to see if they replicate.

If you had to do it kind of in the real world, it would take forever and cost billions of dollars and you could maybe share, pick a few studies that you could try to replicate and a few needles in the haystacks. If you can do it at scale in AI models basically, that’s another area where you could figure out if there’s a replication crisis in that part of it. But also you can rerun the same studies with slight variations to try to maybe optimize them if you had a good result on some study.

But the people doing the study have only this much funding and they can only try, I don’t know, 500 variations on that compound or on those animals or whatever. Well, maybe if you rerun it much more cheaply and quickly, you can run 500,000 variations and find a much better, one more optimized where you can improve procedure for drugs or whatever. And I don’t know if that’s the third one I mentioned to you, but another one that I’d love to see is there’s, science is, it’s very about prestige and you want citations, you want advanced career. So everybody wants to work on the most prestigious and the sexiest stuff. There’s a line I love by a scientist who said, it seems tragic to me that all of the top scientists and engineers want to work in the fields where they make the least difference. Where if they were hit by a truck five minutes later, someone else would come up with the same thing.

I wish we’d have more effort going into less prestigious areas, areas where there’s less competition from the top minds where you can make more discoveries, but also where you can find a bunch of new hypothesis, right? Where you can find a bunch of stuff that doesn’t work, and having this information about what doesn’t work is still useful. Well, the next person working the field, if they have huge database of a million failed experiments, they can much better target what they want to do in the future or maybe just avoid doing something expensive and it takes a long time to solve resources, avoid wasting resources is just as good as having more resources. So I wish AI could help us with those kind of less sexy parts of science.

That’s another one where in some fields it’s going to be easier ’cause they’re more based on information and data and can be done in software. Some other fields going to be harder. But I feel like over time, because of our good friend Claude Shannon, basically anything in the world can be represented by information and you can act on it in that information realm. It may not be easy, but at the rate at which things are improving, it’s definitely going to be possible at some point…

…Liberty RPF:

Yeah, that’s the thing. I think it’s probably easy to hear that I’m very optimistic and I’m generally pretty optimistic about that stuff. So because of that, I have to remind myself of the dangers and the bad side. And I try to take that very seriously. I’ve been interested in AI for maybe, I don’t know, 17 years or something like that. And a lot of people, it’s funny because a bunch of what I used to read about back then is kind of happening now. Oh, we can do this and that in 25 years, 50 years. And now it’s all more quickly than we expected.

The things I’m worried about are not the small problems that always come with new powerful technology. The way I try to separate it in my mind is there’s a bunch of recoverable problems where you make a mistake and you figure it out and you fix it. And that’s always been like that with every technology. And people complain about this problem. It’s like, okay, but the problem we used to have that was fixed by this was bigger. There’s no good old days for humanity. It used to be pretty terrible in many ways. We take it for granted now. But that’s on one side.

What I try to keep in mind, and I try to keep it in the conversation as much as I can, is there’s also the potential for nonrecoverable problems with AI. Because if you think about it, all of humanity’s most powerful tools and technologies and weapons, they’re all basically IP. A nuclear bomb, that’s an idea and then we made it. But that’s the idea that created it. AI, as it becomes better and better and you get AGI at some point probably, or even without AGI, you can make all kinds of very, very scary stuff with it too.

Bio weapons that are synthetic biology that our immune system cannot recognize and you leave it dormant in someone for years before activating it. And so everybody has it by the time, I can imagine terrifying scenarios with that. So I want to make sure that the people making the AI make humanity better with all kinds of cool tools. And then we fix the recoverable problems that as we get them. And that’s fine. But we always keep our eye on the big nonrecoverable things because as Buffet would say, you can have this lines of great [inaudible] and then you multiply once by zero and even if you’re cured cancer and 99 great things, if you have one big nonrecoverable thing that it all didn’t matter. So that’s the thing, I always want to make sure that the people working on this, and I’m sure they do because they’re much smarter than I am, but that’s a little part that every time I’m super optimistic, I’m like, yeah, but I hope we really don’t screw it up too much.

7. David Deutsch’s multiverse carries us beyond the realms of imagination – Tim Radford

On page 44 of the Penguin edition, David Deutsch describes the interference pattern from a single photon passing through a single slit and infers from this experiment “the existence of a seething, prodigiously complicated, hidden world of shadow photons” and goes on from that to further infer “a huge number of parallel universes, each similar in composition to the tangible one, and each obeying the same laws of physics, but differing in that the particles are in different positions in each universe.”

Welcome to the multiverse. This isn’t the same multiverse as the other one you’ve been told about. In that one, brand-new universes spontaneously bud off from each other, so many bubbles in the champagne fountain of eternity. Some of these bubble universes are snuffed out swiftly and some last ever such a long time, and some might even be hospitable to intelligent life. But we could never know anything about any of the others, only this one.

Deutsch’s multiverse is different. It is co-incident with, somehow contiguous with, and weakly interacting with, this one. It is a composite, a layer cake, a palimpsest of universes very similar but not quite identical to each other.

The number of these shadow universes is enormous (on page 44 Deutsch reasons from the one-photon experiment that there must be a trillion of them, and later in the book airily invites a quantum computational calculation involving 10500 universes, which is another number I cannot imagine.

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

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Here are the articles for the week ending 27 November 2022:

1. CICERO: An AI agent that negotiates, persuades, and cooperates with people – Meta AI Blog

Games have long been a proving ground for new AI advancements — from Deep Blue’s victory over chess grandmaster Garry Kasparov, to AlphaGo’s mastery of Go, to Pluribus out-bluffing the best humans in poker. But truly useful, versatile agents will need to go beyond just moving pieces on a board. Can we build more effective and flexible agents that can use language to negotiate, persuade, and work with people to achieve strategic goals similar to the way humans do?

Today, we’re announcing a breakthrough toward building AI that has mastered these skills. We’ve built an agent – CICERO – that is the first AI to achieve human-level performance in the popular strategy game Diplomacy*. CICERO demonstrated this by playing on webDiplomacy.net, an online version of the game, where CICERO achieved more than double the average score of the human players and ranked in the top 10 percent of participants who played more than one game.

Diplomacy has been viewed for decades as a near-impossible grand challenge in AI because it requires players to master the art of understanding other people’s motivations and perspectives; make complex plans and adjust strategies; and then use natural language to reach agreements with other people, convince them to form partnerships and alliances, and more. CICERO is so effective at using natural language to negotiate with people in Diplomacy that they often favored working with CICERO over other human participants.

Unlike games like Chess and Go, Diplomacy is a game about people rather than pieces. If an agent can’t recognize that someone is likely bluffing or that another player would see a certain move as aggressive, it will quickly lose the game. Likewise, if it doesn’t talk like a real person — showing empathy, building relationships, and speaking knowledgeably about the game — it won’t find other players willing to work with it.

The key to our achievement was developing new techniques at the intersection of two completely different areas of AI research: strategic reasoning, as used in agents like AlphaGo and Pluribus, and natural language processing, as used in models like GPT-3, BlenderBot 3, LaMDA, and OPT-175B. CICERO can deduce, for example, that later in the game it will need the support of one particular player, and then craft a strategy to win that person’s favor – and even recognize the risks and opportunities that that player sees from their particular point of view…

…Past superhuman agents in adversarial games like chess, Go, and poker were created through self-play reinforcement learning (RL) – having the agents learn optimal policies by playing millions of games against other copies of itself. However, games involving cooperation require modeling what humans will actually do in real life, rather than modeling what they should do if they were perfect copies of the bot. In particular, we want CICERO to make plans that are consistent with its dialogue with other players.

The classic approach to human modeling is supervised learning, where the agent is trained with labeled data such as a database of human players’ actions in past games. However, relying purely on supervised learning to choose actions based on past dialogue results in an agent that is relatively weak and highly exploitable. For example, a player could tell the agent, “I’m glad we agreed that you will move your unit out of Paris!” Since similar messages appear in the training data only when an agreement was reached, the agent might indeed move its unit out of Paris even if doing so is a clear strategic blunder.

To fix this, CICERO runs an iterative planning algorithm that balances dialogue consistency with rationality. The agent first predicts everyone’s policy for the current turn based on the dialogue it has shared with other players, and also predicts what other players think the agent’s policy will be. It then runs a planning algorithm we developed called piKL, which iteratively improves these predictions by trying to choose new policies that have higher expected value given the other players’ predicted policies, while also trying to keep the new predictions close to the original policy predictions. We found that piKL better models human play and leads to better policies for the agent compared to supervised learning alone…

…While CICERO is only capable of playing Diplomacy, the technology behind this achievement is relevant to many real world applications. Controlling natural language generation via planning and RL, could, for example, ease communication barriers between humans and AI-powered agents. For instance, today’s AI assistants excel at simple question-answering tasks, like telling you the weather, but what if they could maintain a long-term conversation with the goal of teaching you a new skill? Alternatively, imagine a video game in which the non player characters (NPCs) could plan and converse like people do — understanding your motivations and adapting the conversation accordingly — to help you on your quest of storming the castle. 

2. Pressure on the Hong Kong Dollar Peg Keeps Building – Richard Cookson

The HKMA has a mandate to keep the currency trading in a range of HK$7.75 to HK$7.85 per US dollar. The current band was set in 2005 and has never been broken. When it gets too close to either end of the band, the HKMA intervenes, either by buying or selling the city’s currency. As the chart below shows, the currency has traded at the extreme weak end of the range for most of the year, pressured by the rising US dollar. That pressure has subsided somewhat recently as interest-rate expectations have eased a bit. But this is only likely to be short-term relief, because the social and economic costs of defending the peg are huge. The Hong Kong dollar peg is like being on the gold standard, and like the gold standard the frailties of such mechanisms are always social and economic.

Because of the peg to the US dollar, Hong Kong has no independent monetary policy; it has had to follow the Federal Reserve and tighten at a time when it should be doing the opposite. If the Chinese economy as a whole has struggled mightily due to its extraordinary “zero-Covid” policies and the mother of all debt-bubble hangovers, Hong Kong’s has done even worse, shrinking 4.5% in the third quarter from a year earlier. The benchmark Hang Seng Index is down by almost half since its high in 2018 even after a recent bounce.

With growth going in the wrong direction and the HKMA having to raise rates, Hong Kong has had to resort to the only option for countries on currency pegs: massive government spending. There is very limited room, though, for any country to ramp up fiscal spending without investors worrying about the accompanying increase in borrowing (debt) and sustainability of the peg. Small wonder, then, that fiscal policy has done little to soften the savage downturn.

Nor is this merely a cyclical problem. Hong Kong’s best days are behind it. China’s political interference has only risen. The working population, especially higher earners in finance, is shrinking. I doubt the weakness is merely cyclical and if it isn’t, Hong Kong’s tax base has been permanently eroded. Which is a problem, for Hong Kong is now a massively leveraged economy. 

That the government has very little debt is not really the point because private sector debt more than makes up for it. Andrew Hunt, an independent economist who has followed Asia closely for decades, points out that foreign debt is almost $500,000 for each person working in Hong Kong. Domestic debt levels have doubled since 2007, according to the World Bank. Property debt has grown especially fast, and despite a drop in prices that shows every sign of gathering momentum, Hong Kong property is still among the world’s most expensive.

It is that huge surge in debt, falling asset prices, and ever cloudier outlook for Hong Kong’s economy which makes defending the peg so much more problematic than during the Asian crisis of the late 1990s. You can see the effects of all this in the HKMA’s Exchange Fund, which, among other things, manages Hong Kong’s foreign-exchange reserves. Its assets have tumbled to $417 billion from $500 billion late last year, according to the HKMA, its largest drop ever. 

3. Estée Lauder: A Success Story – David Senra

[00:12:03] Okay. So I’m going to jump into the book. I will point out to you where I think the parts were Estée fits this methodology. There’s just a ton. Like there’s just a ton to learn from her. She talks about — this is very fascinating because one of the things is like you have to know the history of your industry. And she points out that she can build a business around things that are just not changing.

She points out that beauty is an ancient industry. This is going to — this is kind of an echo of the idea. One of my favorite idea is from Jeff Bezos about this idea, it’s like everybody talks what’s going to change in the next 10 years.

He’s like you should ask the opposite question. What’s not going to change in the next 10 years because those are the things that you can build a business around and then when you invest time and energy, like since they’re going to be around for 10 years, you can actually get like return on that investment.

So in Amazon’s case, he’s like I asked myself in 10 years from now, I knew that my customers would want — today and 10 years from now, they’re going to want a wide selection of products. They’re going to want low prices and fast deliveries. He’s like no customer 10 years from now is going to come to say, “Hey, Jeff, I wish you deliver the packages a little slower.” “Hey, Jeff, I wish you raised your prices.”

So he says I invested a lot of time and energy in those principles. So he says beauty has always commanded attention. In a perfect world, we’d all be judged by the sweetness of our souls. But in our less than perfect world, the woman who looks pretty has a distinct advantage. Beauty secrets have been passed on from mother to daughter through the ages. Primitive women painted their faces with berry juice. Nero’s Roman beauties widened their faces with chalk.

From Cleopatra’s fabled milk bath to the ancient Egyptians pot of black kohl, from the rouge flapper cheeks of the 1920s, you can clearly see she studied the history of her industry. That’s the point of this, to all the way to see Estée Lauder’s soft magic. Women have always enhanced their God-given looks. It has always been so. It will always be so. And so on the very next page, we see another Jeff Bezos idea.

[00:14:00] This idea that missionaries make better products. Beauty for her was a mission. It was not just a product. An interesting point, beauty is the best incentives to self-respect. You have — you may have great inner resource, but they don’t allow — but they don’t show up as confidence when you don’t feel pretty.

People are more apt to believe you and like you when you look fine. And when the world approves, self-respect is just a little easier. The pursuit of beauty is honorable. And she goes on about this for quite a while. This is more on the history of beauty and its universal appeal, which again, these are just — the way to think about this is the foundation on which she built her business or her empire is a better way to put it.

Beauty is a fine invention. The art of inventing beauty, which is what she does, transcends class, intellect, age, profession, geography, virtually every cultural and economic barrier. There isn’t a culture in the world that hasn’t powder, perfumed and prettied its women. Love has been planted, wars won and empires built on beauty. I should know, I’m an authority on all the three. Love, wars and empires have been woven into my personal tapestry for decades. I’ve been selling beauty ever since I could recognize her…

…So her father owned a hardware store. They have a gang of kids. There’s like 10 kids or something like that and they’re all having to work in the family business as well. And so she’s taking lessons that she learns in the hardware store and to apply them to her business. The Estée Lauder business later.

She says my father’s hardware store was my first venture into merchandising. I loved to help him arrange his wears. My special job was creating window displays that would attract customers, how I love to make those windows appealing. She’d work on gift wrapping and by covering a hammer or a set of nails with extravagant bows and papers, which really did seem to delight his customers. And this is something she talks about over ever.

She’s obsessed with packaging to an extreme degree. Wait until I tell you what she does. She spends weeks debating just the color of like the jars that hold her creams in. She’d go to extreme levels of detail. Again, this is not a job. This is a mission, a love affair is one way to think about it for her.

[00:20:04] So she’s packaging — this is the first time she mentions packaging in the book, but she talks about it a lot. So she says packaging requires special thought. You could make a thing wonderful by changing its outward appearance. Little did I think I’d be doing the same thing, multiplied billion fold in not too many years.

There may be a big difference between lipstick and dry goods, between fragrance and doorknobs, see how she’s talking about what she learned in the hardware store and applying it to later on. But just about everything has to be sold aggressively. I honed my techniques as I played with the wears at my father’s store. I wedded my appetite for the merry ring of a cash register. I learned early that being a perfectionist and providing quality was the only way to do business. I knew it. I felt it.

And so now we have Estée talking about the advantage that you have if you actually love what you do because so few people actually do that, go back to what Bill says, if you’re faking it, you’re going to get smoked by somebody that’s not faking it…

…It’s a fantastic maximum. So this is also one of my favorite ideas that I learned when the first time I read the book about a year and a half years ago. She calls it the sales technique of the century. Again, I would say Claude Hopkins had figured this out as well. Albert Lasker, a bunch of advertising people, but this is fantastic. Now the big secret. I would give — she was the first — Estée was the first one to use this technique in the beauty industry. Now you see all of them.

Now the big secret. “I would give the woman a sample of whatever she did not buy as a gift. It might be a few teaspoons of powder in a wax envelope. Perhaps I’d shave off a bit of lipstick and tell her to apply it to her fingers. Perhaps in another envelope, I would give her a bit of glow.” I don’t know what that is. “The point was this, a woman would never leave empty-handed” that’s her point. I did not — this is such a good idea, too. I did not have an advertising budget. She’s going to talk about this later. I did not — maybe she talks about it now. Let me not jump ahead.

I did not have an advertising department. I did not have a copyrighter, but I had a women’s intuition. I just knew even though I had not yet named the technique that a gift with purchase was very appealing. In those days, I would even give a gift without a purchase. The idea was to convince a woman to try the product. Having tried it at her leisure in her own home and seeing how fresh and lovely made her look, she would be faithful forever. Of that, I had not a single doubt. And so you see this. I think this is a well-known idea now…

…[01:08:10] Okay. So I need to choose — at this point in the company’s history, she starts to expand. She’s just in the United States, She’s going to expand to Europe and then she’s going to expand to Canada. I’m going to tell you great ideas or just crazy ideas about both experiences. This is how she does it. She always shot for the top. So she wanted to be — if she’s going to break into a new market, she wanted to be in the very best retailer in that country.

In America, she thought that was Saks; in London, she thinks that’s Harrods. I would start with the finest store in London, which was Harrods. And if I did that, all the other great stores would follow. So she talks to the buyer. Simply not interested was the unmistakable message. This is going to take a few years for her to do this. So okay. No one’s — not even wanting to talk to me.

A little media — so what she’s doing, well if I’m here, a little media attention was called for. I visited the beauty editors of various magazines. This is in London. She talks to the — she’d do the same thing, give them gifts, give advice, make them up, okay? Yes, they’d be happy to write a piece about my products. What store in London would be carrying them. My products are not available in London had to be my reply.

Well, she answered, I’ll write a piece saying that Estée Lauder’s cosmetics will be coming soon. Again, I went to Harrods. Again, the answer was no. There was no space at this time. There was no call for my products. This wasn’t the right time of year, maybe another time, et cetera, et cetera. I stayed in England for a month visiting every beauty editor to make my name known. I was getting write-ups, but no Harrods order. It was looking very bleak.

The next year, I went back to London and Harrods. So now she talks to the same buyer. This is a year later. She was not as quite as hostile, but she says, let me tell you, I have no room here, as I told you before, she said, but perhaps I could take a tiny order and put it in with the general toiletries. It won’t be next to the good cosmetics. That you’ll have to understand, Ms. Lauder. So she gets a tiny order, not in a place she wants. It’s not a victory yet. I visited every one of those beauty editors, again to remind them of me. Another round of makeups, another round of samples.

[01:10:05] Do you think you might write another piece I ask now that we’re in London at Harrods. The articles appeared. Customers also appeared. I was on my way. Women became — remember how it’s kind of like going up from getting the demand from the ground up. Just how she did with Saks, if you were to think about it. Customers also appeared. I was on my way. Women began asking for Estée Lauder. That’s why I just said what I said to you.

The Harrods buyer was reluctant to notice, but she had no choice. In the flush of a good week sales, I summon up the courage to ask if she could give me a more important counter. Oh, no, she said, “Other counter space is definitely not available.” About 6 months later, I made my third trip to London, Well, we seem to have many London women asking for your product. She grudgingly admitted. I think we’ll give you a small spot at a more prestigious counter. And that was how Estée Lauder came to Europe.

4. “Sokaiya”: Japan’s Corporate Racketeers – O-Tone

Defining “Sōkaiya” is as difficult as defining Geishas. They could be fixers for a firm, making bad press go away. Or extortionists, demanding money from a company to keep quiet.  

Originally, “Sōkaiya” were unconnected to organized crime. In literature “Sōkaiya” were first mentioned in the late nineteenth-century. A time when the majority of private enterprises in Japan were organized as unlimited liabilities. Entrepreneurs would frequently solicit assistance of “Sōkaiya” to protect their business and personal fortunes negatively impacted by rumours and scandals. In that respect “Sōkaiya” can be compared to corporate lawyers in the U.S.

During the post war period “Sōkaiya” remained useful for corporate Japan by turning into “general meeting specialists”. After Japan’s high growth era of the 1950’s and 1960’s the society became more politically engaged. Social activism was on the rise, for example criticizing pollution by Japanese companies. With the help of “Sōkaiya”, acting on behalf of the corporation, those protests were muted or silenced.

Chisso Corporation serves as a good example. The company had been polluting a river close to its factory with mercury for years (Minamata pollution). “Sōkaiya” were hired by the corporation at the AGM following the scandal. An aggressive mob shouted down environmental activists and the victims. Much to the liking of management the AGM ended quickly.

It is said that Yakuza started to realize the profit potential of “Sōkaiya” in the mid 1960’s, actively tying up with various “Sōkaiya” groups. The outcome was a hybrid “Yakuza- Sōkaiya”, specialized in racketeering corporate Japan. It is that hybrid that most Western observers refer to when talking about the phenomenon.

Their activities followed a standard procedure. Purchase the minimum number of shares to be eligible to attend a company’s AGM. Before the AGM contact executives threatening to troll them personally or the company in general at the shareholder meeting. Think: real/ imaginary facts about product liability claims, irregularities and payoffs and/ or pointing to personal misconduct, love affairs, etc. If the company had an interest in the AGM proceeding smoothly, they would have to pay off the racketeers by purchasing absurdly expensive subscriptions to useless magazines, paying rent for office plants, etc.

If companies refused, an armada of trolls would stir up the AGM like in aforementioned JAL case. Sometimes, racketeers even started vandalism: Spraying paint, lighting fires, throwing bottles at the chairman’s desk.

5. TIP497: Lessons From Billionaire Howard Marks – Clay Finck

[00:01:50] What is the most important thing in investing? This is the question that Howard Marks would be challenged with when investing for clients in developing a philosophy. Except there is not just one thing when it comes to investing. There is a multitude of different things that are really important, and if we misassess any of them as investors, then we run the risk of having suboptimal outcomes.

[00:02:13] In the end. As Marks states quote, successful investing requires thoughtful attention to many separate aspects, all at the same. Omit anyone and the result is likely to be less than satisfactory. Marks also states that his book isn’t a step-by-step guide for learning how to invest, but rather a book that covers the investment philosophies that he uses in his own process.

[00:02:37] The ideas presented in his book are intended to be timeless in a world that is constantly changing. Ironically, Marks goal isn’t to simplify investing, but rather make it clear just how complex it actually. Marks says that the most important key to his successful investment career has been an effective investment philosophy, developed and honed over time for more than four decades, and implemented consciously by highly skilled individuals who share his culture and values…

…Next I wanted to transition to talk about Marks’s comments on risk. The essence of investing consists of dealing with the future, and because the future isn’t certain at any point, then risk is inescapable.

[00:11:15] Thus, understanding risk and handling risk effectively is essential to being a successful investor. When you’re considering an investment, you shouldn’t just analyze the potential returns, but also the risk as well. Risk obviously isn’t preferred, so if two investments have similar return profiles, but one has more risk, then we’d obviously prefer the investment that has less risk.

[00:11:39] On the same line of thinking, the return of a portfolio doesn’t tell us whether the investment manager did a great job or not. If a fund manager achieved a 10% return, but only held two stocks, applied leverage, or only invested in Microcaps, then a 10% return might not be sufficient for the level of risk that was taken.

[00:11:59] This would mean that the manager actually did a poor job of allocating capital when taking into consideration the risk that was taken. The theory behind risk and return for an investment is that for a riskier investment to be deemed investible, it must offer prospects of higher returns. So those that believe they don’t mind taking on more risk, may think that the secret to receiving higher returns is just to simply increase your risk, and that’s really not the case either.

[00:12:28] If riskier investments reliably produce higher returns, then they wouldn’t actually be riskier. A better way to think about it is that the future is far less certain for a riskier investment, a high flying growth company that is growing at 50 or a hundred percent per year. The bull case says that there is so much upside it will be significantly larger many years down the road.

[00:12:50] That’s what happened to a company like Amazon. They just freely never quit growing. The Bear case for a high flying growth company is that because they are growing and there is a lot of money to be made, this encourages competition to come in and eat at those profits and try and steal market share. So eventually the growth slows and the optimistic prospect doesn’t pan out and the stock price really suffers.

[00:13:13] You know, the example here is a company like Peloton. Now let’s compare the high flying growth company to something like a 10 year US Treasury. The US Treasury is perceived as less risky because it’s extremely likely that you will get your coupon payments that you agree to over the length of that investment.

[00:13:32] The outcomes are very certain. Whereas with the high growth company, there is a wide range of potential outcomes. Either it does really, really well in gross for a long time, or the growth stalls and the stock price goes nowhere or way down or somewhere in the middle. Now when looking at a spectrum of all investments, we could put money in, you have the US Treasury on the very low risk, highly certain area, and then you have the high flying growth company, which is higher risk and you know, wide range of potential outcomes.

[00:14:00] And then you have all these investments in between where you know you have your value stocks, your deep value, and your regular growth stocks. So there’s kind of a spectrum of risk and return and how certain we can be about the future for all these investments. Marks states that when riskier investments are priced fairly, they should have higher expected returns, as well as the possibility of low returns, and in some cases the possibility of losses.

[00:14:26] I think a lot of people have been fooled on taking on more risk in their investments without recognizing the potential for really bad outcomes, such as what we’ve seen with many companies in 2022 in actually defining risk. Marks has the same view as Warren Buffet. While academics view risk purely as volatility, Marks views it as the permanent loss of capital.

[00:14:49] If you’re almost certain that a company is trading below its intrinsic value, then they don’t really care too much about the volatility of the investment, as long as you have a long time horizon and you’re certain that you won’t lose any money if your thesis is correct. Now, risk of loss does not necessarily come from weak fundamentals.

[00:15:07] Even the worst companies can make great investments as we know from studying the early days of Warren Buffet or Benjamin Graham. Another risk with investing is having psychological biases when making the decision to purchase a particular investment. For example, investors tend to believe that exciting stories and stocks that have performed well as of late will continue to be high performers of the future.

[00:15:30] Many times the investments that have had the best recent performance are actually the riskiest stocks or companies to own because of the potential irrational exuberance associated with the company or sector. I think the most difficult thing when it comes to risk is how we quantify it. If you ask 10 people what the risk of a particular stock was, you’d probably get 10 different answers.

[00:15:53] And I think this is a big reason why academia decided to define risk as volatility, and it’s because you can just put an actual number on it. While some investors might say, risk is your chance of losing money over the holding period, that’s practically impossible to quantify. Risk is subjective, hidden, and something we just can’t quantify, which can make investing really difficult.

[00:16:17] Marks says that quote, skillful investors can get a sense for the risk present in a given situation. They make that judgment primarily based on A, the stability and dependability of value, and B, the relationship between price and value. Other things will answer into their thinking, but most will be assumed under these two…

…[00:20:52] Cycles are so important to understand because when we recognize them, we’ll be able to take advantage of them as investors. Eventually, I’m going to be covering Ray Dalio’s work. Dalio’s someone who popularized the idea of the long term debt cycle. Marks has a chapter in his book dedicated to cycles because of the big role cycles play in our overall economy.

[00:21:16] markets don’t move in a straight line up or a straight line down. They move in cycles. Optimism is followed by pessimism. Companies rise and companies fall. People in human emotions are a big driver of cycles. When people are optimistic about the future, they spend more, they save less, they borrow more, and this all stimulates the economy.

[00:21:37] Thus, this can push up the prices of stocks, the price of homes, and the price of other assets. And this leads people to feeling wealthier. You know, it’s this idea of the wealth effect. This can be a reinforcing cycle, which pushes upwards and upwards and upwards and you know, creates bubbles because things can’t be perfect and good forever.

[00:21:56] Eventually the cycle reverses the other way. People become cautious, they start to save more money, spend less, borrow less. This decrease in spending can lead to the economy contracting and potentially even to a flow of bankruptcies as the economy ends up not being as strong as some anticipated. Marks states that cycles will never stop occurring.

[00:22:18] In that every decade or so people will decide that sick locality is over. They think either the good times will roll on without end, or the negative trends can’t be finished at such times. They talk about virtuous cycles or vicious cycles, self feeding developments that’ll go on forever in one direction or another where people will say, this time’s different.

[00:22:40] This bull market’s not going to end for quite a while, or This bear will never end. He also says that quote, ignoring cycles and extrapolating trends is one of the most dangerous things an investor can do. People often act as if companies that are doing well will do well forever, and investments that are outperforming will outperform forever in vice versa.

[00:23:02] Instead, it’s the opposite. That’s more likely to be true. All of this reminds me so much of 2020 and 2020. Stocks went up so fast after the Federal Reserve provided a massive boost to the markets that many people just assume that this could go on for quite some time and it really couldn’t be further from the truth.

6. Past Performance – Joshua Brown

Stocks have been the best asset class in terms of outperforming inflation over the last century. We know this for certain. Over the last seventy years, stocks are undefeated versus inflation, but only over the longest time horizons. Stocks have outperformed inflation 100% of the time over all twenty year periods.

Can this past performance fail to show up in any future twenty year period? Of course it can. Never say never. Will stocks always be the best asset class versus inflation? Maybe not. Maybe bonds end up working better over the next two decades. Maybe cash. Maybe commodities or real estate or gold or CrackCoin or whatever else. We know anything is possible, which is why investing involves risk.

But when something has consistently worked over seven decades, without fail, regardless of all other conditions and variables, perhaps it’s best to take that risk rather than not. Even with the full acceptance of the Past Performance caveat…

…How do stocks beat inflation? Allow me to oversimplify the story for the benefit of people who aren’t looking for a grad school-level dissertation the morning after Thanksgiving…

The stock market is valued on earnings (profits) and these earnings are reported in nominal terms. If Colgate sells you toothpaste for $2 in 2019 and then sells you that same tube of toothpaste three years later in 2022 for $4, the nominal revenue growth they are reporting to shareholders is 100%. Has Colgate’s cost to make, ship, market and sell that toothpaste gone higher? Yes. Is that cost higher by 100% thereby completely offsetting the revenue growth gain? Probably not. So revenue growth leads to earnings growth, even net of higher operating costs in an inflationary environment. This is how inflation actually helps companies grow their earnings up until a certain point where costs rise too much or demand destruction occurs.

7. The Most Important Skill in Finance – Ben Carlson

The most important skill in finance has nothing to do with math.

Creating the best discounted cash flow models in the world won’t help you raise assets from prospective clients. No one really cares about your Microsoft Excel skills if you can’t explain what they’re good for. Spreadsheets aren’t nearly as important as soft skills.

Warren Buffett once said, “The most important skill in finance is salesmanship.”

Everyone is in sales in some capacity. If you want to get married you have to sell yourself to a prospective spouse. If you want to get hired you have to sell yourself to a prospective employer. If you want to sell a product or service you have to convince people that it’s worthwhile. If you want people to buy into your ideas you have to sell them in a way that people understand them.

The best story usually wins outs.

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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 Amazon and Meta Platforns. 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 20 November 2022:

1. What to Watch in AI – Mario Gabriele and guests

Is there any profession as quintessentially right-brained as an “artist?” Or one as left-brained as a “programmer?”

What’s been so remarkable to us about the rapid evolution that has characterized the last year, especially in the large language models, is how they’re now powering assistive tools that radically increase productivity, impact, and value across a wide range of professions.  

For artists, we’ve got AI image-generation tools like OpenAI’s DALL-E, Midjourney, and many others. For programmers, we’ve got Microsoft’s GitHub Copilot, which helps software developers write, test, and refine code in many of the most currently popular computer languages.

While some AI skeptics characterize large language models as brute-force prediction machines that won’t ever imbue computers with anything like human intelligence or consciousness, what we see, in mind-blowing practice, is how profoundly these kinds of AI tools are already beginning to enhance human flourishing.

What Copilot does for developers and DALL-E does for visual creatives of all kinds is reduce or eliminate rote, time-consuming, but still crucial aspects of their jobs. Of course, this dynamic is hardly unique to software developers and artists. Large language models are trained on massive quantities of text data, then incorporate what they “learn” to generate statistically probable (contextually sensible) output to user-supplied prompts. So while Github Copilot was trained by ingesting massive quantities of computer code, different versions of Copilot are equally possible for virtually any profession.

A Copilot for attorneys, for example, could help them draft contracts, motions, briefs, and other legal documents based on natural language queries, previous cases, and best practices. It could also suggest relevant precedents, statutes, and citations, or flag potential errors, inconsistencies, or risks in existing documents.

A Copilot for architects could help them design, model, and optimize their buildings and structures based on their specifications, constraints, and objectives. It could also generate interactive visualizations and help scope out the environmental, social, and economic impacts of projects.

Imagine a world where millions of professionals across thousands of industries use domain-specific versions of Copilot to soar faster and higher to new levels of productivity, accuracy, and creativity. A world where professionals across all industries can use general-purpose tools like our portfolio company Adept’s Action Transformer to harness the power of every app, API, or software program ever written via interfaces that allow them to describe the tasks they want to accomplish in plain language.

In dystopian visions of the future, technology in general and AI in particular are often characterized as forces that will lead to an even more polarized world of haves and have-nots, with the bulk of humanity being disenfranchised, marginalized, and immiserated by machines.

In the world we actually see evolving today, new AI tools effectively democratize facility and efficiency in unprecedented ways. In doing so, they’re empowering individual professionals to achieve new productivity levels and society to achieve gains that may exceed those unleashed by the Industrial Revolution. Not only that, but people will also find their jobs more engaging and fulfilling because they’ll have more time to focus on the most creative, strategic, and novel aspects of them.

This future is here. There will be an AI amplifying tool for every major profession within five years. These tools can catalyze human excellence across occupations – right brain, left brain, and any brain.

– Reid Hoffman, cofounder at Greylock, and Saam Motamedi, partner at Greylock…

…It’s been another hot summer in AI. We’ve seen the rise of new research collectives that open-sourced breakthrough AI models developed by large centralized labs at a never before seen pace. While these text-to-image/video models offer viral consumer-grade products that capture our imagination, the most impactful applications of these models are unlikely to be their first-order effect. I believe the place to build is at the intersection of AI and science, specifically in the life sciences. 

Today’s scientific method is firmly rooted in data-driven experimentation. The resolution and scale of the data we can generate to explain biological systems are continually improving while develop AI model architectures capable of modeling human language, natural images, or social network graphs. These architectures can be directly transferred into modeling proteins’ language, cells’ images, or chemical molecule graphs. This uncanny generalization ability is now unlocking breakthroughs in protein structure prediction and drug molecule design. AI is driving a new generation of technology-driven biotech companies (“TechBio”) attacking the trillion-dollar pharmaceutical industry to deliver improved medicines faster and at a lower cost. 

With Air Street Capital, I have invested heavily in companies driving this industry forward. One of the companies I’ve backed is Valence Discovery, which develops generative design methods to create new classes of potent drug molecules previously out of reach due to the requisite design complexity. Valence is pursuing ultra-large generative chemistry initiatives with leading research institutions to push the boundaries of today’s generative AI methods for drug design. 

One founder in this space is Ali Madani, who led an AI for protein engineering moonshot called ProGen at Salesforce Research. There he developed large language models specifically applied to designing brand-new artificial proteins that recapitulated or even outperformed the function of their naturally occurring peers. The group produced the first 3D crystal structure of an AI-generated protein. Proteins are the functional actuators of all life, and the possibilities a technology like this might unlock are vast. 

– Nathan Benaich, General Partner at Air Street Capital…

…Artificial intelligence will transform how we use pharmaceuticals to treat human illness.

When people think of AI and pharma, the application that most often jumps to mind is AI for drug discovery. (For good reason: AI-driven drug discovery holds tremendous potential.)

But there is another compelling machine learning use case that, while less widely covered (and less zealously funded), promises to bring life-changing therapeutics to market faster and more effectively for millions of patients. This is the use of digital twins in clinical trials.

It is well-documented how inefficient and expensive clinical trials are today, with the average new drug requiring over a decade and $2 billion to bring to market. Recruiting trial participants is one major stumbling block in shepherding a drug through clinical trials. A single trial requires recruiting hundreds or thousands of volunteers to populate its experimental and control arms. This has become a significant bottleneck. Eighty percent of clinical trials experience enrollment-related delays, with trial sponsors losing up to $8 million in potential revenue per day that a trial is delayed. Hundreds of clinical trials are terminated each year due to insufficient patient enrollment; indeed, this is the number one reason that clinical trials get terminated.

“Digital twins” offer a transformative solution to this challenge. The basic concept is simple: generative machine learning models can simulate placebo outcomes for patients in clinical trials. This can be done at the individual patient level: a digital twin can be created for each human trial participant in the experimental arm of a trial, simulating how that individual would have performed had they instead been in the control arm.

Crucially, this means that pharmaceutical companies need to recruit significantly fewer human participants because much of the control arm patient population can be replaced by digital twins. This makes clinical trials significantly faster and cheaper, enabling life-changing therapeutics to more quickly come to market and reach millions of patients in need.

San Francisco-based Unlearn is one AI startup at the forefront of this transformative technology. Unlearn is currently working with some of the world’s largest pharma companies, including Merck KGaA, which is deploying the startup’s digital twin technology to accelerate its clinical trials. Earlier this year, the European Medical Agency (Europe’s version of the FDA) officially signed off on Unlearn’s technology for use in clinical trials, major regulatory validation that the technology is ready to be deployed at broad scale.

A few years from now, expect it to be standard practice for pharmaceutical and biotechnology companies to incorporate digital twins as part of their clinical trial protocols to streamline a therapeutic’s path to market.

It’s worth noting that digital twins for clinical trials represent a compelling example of generative AI, though it has nothing to do with buzzy text-to-image models. Producing simulated placebo outcomes for individual patients is an excellent example of how generative machine learning models can have a massive real-world impact – and create billions of dollars of value.

* Disclaimer: The author is a Partner at Radical Ventures, an investor in Unlearn.

– Rob Toews, partner at Radical Ventures 

2. RWH016: The Best Of The Best w/ François Rochon – William Green and François Rochon

[[00:11:52] William Green: So you quit engineering after maybe three years of discovering the joy of real serious investing and went to work for a, an investment firm in Montreal. I have the sense that it was a disillusioning experience and showed you a lot about the disadvantages of institutional money management.

[00:12:12] William Green: Can you talk about what happened, what you saw there that made you think, Yeah, I want to be in this business but I want to work for myself so I can follow the rules that I want to follow instead of doing it in this misguided way?

[00:12:24] François Rochon: Well, I don’t know if it’s misguided. I think most money managers are sincere doing their best. I really do. And so when I worked at that big firm that manage institutional clients, they did the best they could. And they add pressure from the clients to do well on a quarterly basis, or at least on a yearly basis.

[00:12:48] François Rochon: So I just realized in real life, I wouldn’t say I was, lost illusions. I just realized, and in real life, it’s hard to have a long term horizon. Your clients. In those cases, the institutional clients have to share your time horizon for the relationship to work. Because if your clients don’t give you the time horizon, you need to get the rewards from equity investing. It’s a wasted time, to invest that way. So I realized that, most people in the business, you, I have the luxury of having a long term horizon.

[00:13:27] François Rochon: So, when I realized that, I said, Well, if I really want to invest the way, I believe is the best way to invest, I have to start my own firm. And, when I started to gather clients in the early two thousands, I really took the time to explain to all those clients that we needed to have, both of.

[00:13:47] François Rochon: I have a long term horizon and not to focus too much on the short term results and I don’t know exactly when I started to talk about my rule of tree, but pretty early on I thought the importance of that rule and which is basically one year out the stock market will go down. One stock out of three that you’ll purchase will be a disappointment and at least one year outta three you’ll underperform the index.

[00:14:14] François Rochon: And I think when you accept that from the start, you deal better with market fluctuations. The mistakes. You’ll make securities and, you have to accept from the start that have here you are on perform the market. Even if you do a good job and you study the company very well and you made some intelligent long term choices, you can have two or three years in a row that you under perform in. You have to be able to accept that.

[00:14:43] William Green: It seems also that rule of three is a fundamental reminder that you need to be humble as an investor. That a third of the stocks you purchase are likely to do poorly. A third of the time you’re going to underperform the index. And a third of the, a third of the years, the stock market’s going to fall by 10 cent or more.

[00:15:01] William Green: It’s kind of wiring yourself in a way from the start conditioning yourself from the start, have fairly realistic and humble expectations about the roughness of the terrain you’re going to have to navigate.

[00:15:13] François Rochon: Oh, yes. And I think as the years go by, I think, it’s very hard not to be, to stay humble and get even, a little more humble because, it’s a very tough industry. It’s a very tough, when you want to beat the stock market over many years, not just three or four years, but over decades. I think you, you have to be armed with a lot of, and you always, I think is kind of the, catalyst.

[00:15:38] François Rochon: To help you become a better investor because you always want to learn more and understand more. And I think, it turns out that, it’s kind of, a good tool to help in the learning process…

…[00:18:47] François Rochon: And so far, my experience has been since 96 that, there’s been a very strong correlations between the increase of the owners and the companies we own. And, the quotation of the stock market.

[00:19:00] William Green: The correlation is so striking when I look at your shareholder letters that it’s worth actually kind of dwelling on the numbers.

[00:19:06] William Green: Like there was one point in one of the letters where you said, Over 20 years from 1996 to the end of 2015, your company’s intrinsic value increased by 1102%, and the value of their stocks increased by 1141%. So incredibly close, 1102% for the increase in intrinsic value, 1141% for the increase in the value of the stock.

[00:19:33] William Green: So as you point out again and again in the shareholder letters, this is not a coincidence. The correlation is kind of amazing.

[00:19:41] François Rochon: It is amazing. I think the fundamental process that lies behind the, I think the approach of investing, if the value increases, let’s say market, increase the value stocks, but over a year or two or three, anything can happen.

[00:20:02] François Rochon: So that’s why I say it’s kinda a paradox. But if you keep focusing on what’s happening to the companies you own, eventually the stock market will.

[00:20:13] William Green: So one of the things that seems, if I understand this correctly, to be fundamental to your approach is that you are looking for outstanding companies that basically are increasing their intrinsic value faster than the average.

[00:20:27] William Green: So if you expect, you often talk about how stocks historically maybe go up six or 7% a year in the US and maybe there’s a 2% dividend, something like that. So let’s say historically you’d expect an eight or 9% return, what you are looking for is outstanding companies that can grow maybe five percentage points faster than that. is that a fair summary of what seems like a pretty simple approach, but obviously it’s incredibly difficult to pull off?

[00:20:53] François Rochon: It is. What I’m aiming for, I don’t remember exactly, but I think since 96, the increase in the owner’s earning portfolio on average, and if you include a dividend, it’s close to 13% annual.

[00:21:08] François Rochon: So it’s probably a little more than 12% in terms of earnings per share growth, and perhaps less than 1% of dividend because many companies in the portfolio don’t pay dividend. So that treating per percent is probably, like you say, four or 5% better than the, the average of the sub market. Let’s say the s and p fell, which probably have has grown exactly as you say, probably 9% over the last five years.

[00:21:33] François Rochon: That’s why I’m trying to do when I purchase a stock for the portfolio is find a company that I believe if you combine the earnings growth going forward and the dividend yield, you come closer.

[00:21:47] William Green: How do you deal with the pressure not to overpay you for these outstanding companies? Because there’s a section of your annual letter where you talk about your mistakes.

[00:21:57] William Green: In the past, you much to your credit, every report you go through various mistakes and they almost always are errors of omission rather than commission. There are things where you fail to buy them, and it seems to me repeatedly, year after year, the reason why you failed to buy them and missed out on huge returns is cause they were slightly more expensive than you wanted them to be.

[00:22:16] William Green: So how do you get these outstanding companies of prices that you can bear?

[00:22:23] François Rochon: It’s not easy because if I want to be logical here, if I’m going to own a company, let’s say for 10 years, that’s going to grow its earnings by 12, 13, 14% annually to get that reward in of the stock, there can be a slight decrease in the P ratio, but not too much.

[00:22:44] François Rochon: Because let’s say if you quadruple your earnings over 10 years, but the P ratio goes out from, I don’t know, 30 to 20 times, you don’t earn 15% annually on your investment because there was some P contraction at some point in the future. So ideally, you want the P ratio in the future to be similar to what you’re paying.

[00:23:07] François Rochon: So I’m not necessarily looking for a, let’s say a bargain company that trades that way below its intrinsic value. Of course, I like it when I do, but to me, if I can find a great companies and in the future, the peer ratio is similar to when I purchase it, if I’m right on the growth rate, of course it can be a investment.

[00:23:29] François Rochon: The danger is that if you overpay a little bit, you kinda discounted in. Also it go back to to have this margin of safety when you purchase the stock. But like you say, I made the mistake of not purchasing great companies because I wanted that ratio to be lower. The stock. I missed great investment because of that.

[00:23:59] François Rochon: So it’s to find the right balance of, keeping the margin of safety, principle in line and always at the same time always trying to see that perhaps if you pay higher than you’d like to, the growth rate of the company will be high enough that even if there is a little shrinkage of the key ratio at the end of your investment, you’ll still do ok.

[00:24:23] François Rochon: So if you can find a company that can grow by 20% a. and you lose a little bit on the ratio after 10 years, you’ll probably do. So I think many mistakes I did can be, intuit or at research or Starbucks. I fail probably to see that the growth rate would be much higher than 12 or 18%. I don’t remember exactly, but I think in terms of that research, it was probably 17, 18% annually the growth rate since I’ve been watching it for more than two decades now.

[00:24:58] François Rochon: So it’s warranted a much higher ratio than I was ready to pay. So I think that’s one big lesson. When you do find an outstanding company, you have to be able to pay higher PE ratio…

… [01:18:40] William Green: And so yeah, it’s, you can’t really fake the interest, but if you have the interest, if you harness some weird interest like that, it ends up yielding in incredible benefits I think. One thing, François, before I let you go, the, I wanted to ask you about that. I feel like you’ve figured something out that’s really important that a lot of people haven’t figured out, which is, you write a lot in your letters over the years about the importance of unwavering optimism.

[01:19:07] William Green: And I think it’s really, it’s a really interesting insight. here we are in this very difficult period where we’re getting hit with inflation and there’s, the market has been kind of melting down and, there are fears of recession and there’s war in Ukraine and the like. And it seems to me that one of your secret weapons is one that, so John Templeton also had, which is that you’re an unwavering optimist.

[01:19:28] William Green: And I wonder if you could talk about why you are and why you have this kind of confidence in what you call the world of free enterprise.

[01:19:35] François Rochon: Yes, you’re right. I think nothing was ever built on pessimism. I think you never make wise decision with fears. I think optimism is an important ingredient to success. Not the only ingredient, but one important ingredient. I would say if you study human history and you go back many years in the past, I think the only conclusion is that you cannot be not amazed of how much we’ve improved over the last centuries. I mean, just in terms of technology, it’s incredible the changes that we’ve made, and you have to understand what is the fountainhead of those improvements, and it’s the human mind is just inventing things, creating things, finding ways of doing things better, always very slowly and not in a linear fashion.

[01:20:34] François Rochon: Of course, there’s some tough periods and some better periods, but over a long period of time, the improvement has been quite steady and quite impressive. I mean, the standard le of living has probably doubled every 25 years in the last century, which is incredible. And, so people worry about, climate change and they’re right to, to be worried and they worry that, we won’t have any, more oil and, we’ll have to find alternate energy.

[01:21:06] François Rochon: And I think they’re right too. Not necessarily that, we’ll, we won’t have any, oil left, but I think we do have to find better sources of energy. But what will bring those changes, those improvements, either for energy or fixing climate change? Will come from ideas and the human mind. And if you think about it, the all the great progresses of the last century came from idea. Nothing really has changed in our environment, that nature and the human nature. But we find ways to always improve things because we have this drive as human beings of never being satisfied. We will always want to improve our situation.

[01:21:54] François Rochon: And I think this drive is very powerful and gives me the feeling that, things will always. There’ll be, there’ll be tough periods, There’ll be, crisis and catastrophes. I accept that and I’ve been accepting that for 30 years. And, I’ve seen the recessions, I’ve seen, terrorist attacks. I’ve seen, a lot of crisis in many countries. But in the end, I think, the human race always advances forward.

[01:22:24] François Rochon: And, the right approach is to be optimistic and we’ll find solutions to all of our problems. Just, we have to put our minds to it. But I’m confident that the survival gene, this is probably the most, the strongest gene we have. We want to survive, We want to move forward, is a very, great fuel for human investment.

[01:22:46] François Rochon: And, pretty optimistic is going to continue. I would say that in the next, I don’t know if it’s going to be around 50 years, but I’m pretty sure if I’m around our standard of living will increased by percent, then live even better than we’re today. And I’m pretty c that we’ll find solutions to all our big problems, climate changes and inflation.

[01:23:10] William Green: I think part of what I like François, is that your optimism isn’t a naive temperamental impulse, that just infuses everything. It’s built very much on a kind of data driven knowledge of the past. And so remember, for example, reading in one of your letters, you talked about a Tale of two sitters by Charles Dickens, and you said that since its publication in the 1850s, the percentage of people living in extreme poverty in the world has fallen from 87% to less than 10% today.

[01:23:39] William Green: And you mentioned that the average standard of living has increased by a factor of more than 25 times since the book was published in 1859. So you look at that and you think, this isn’t naive. This has happened, this is our history, and think of all the terrible things that we’ve been through in that last 160 years since that book came out.

[01:23:56] William Green: And likewise, there’s an extraordinary table that I think you originally drew up during the 2008, 2009 financial crisis and then published again or updated in March, 2020 at the initial height of the Covid Pandemic where you listed 14, I think, major corrections over the last, I think 60 or so years, followed by these massive rebounds.

[01:24:19] William Green: And it was very striking to me. Again, it’s a data driven reason for optimism. you listed, for example, in I think 1973 to 74, the market fell something like 48% and then was followed by 106% gain over the next five years or so. And this process seems to have happened again and again. Can you talk about that sense of just that the sun also rises, right?

[01:24:43] William Green: That, here we are going through a difficult period and yet when you look back historically again and again, the sun also rises.

[01:24:52] François Rochon: Yes. It’s the lesson that the, if you study a human ministry, that’s the lesson that, remember Im Lincoln said 150 years ago, so this two shall pass away. And then Grants said that, this phrases summarize the whole human history things pass, crisis passed. And in the end, the human race continues to always improve things and move forward. And I would say same thing with companies like we talked at the beginning of the interview, companies grow their earning six, 7% yearly and give a 2% dividend on average. So that’s a eight or 9% return for stock. So of course when they go down 30, 40, 50%, there’s every reason to believe that within five or six or seven years, they’ll make new records. Just because earnings continue to increase increasing earnings at

[01:25:48] François Rochon: 7% annually, double that whole earning in the US every 10 years. So it makes sense that every 10 years, the s and p 500 or the industrial average doubles in value because earnings have double over the last 10 years. And there’ll be a recession of course, and earnings will go without recession, but they’ll rebound and, eventually they’ll make new records.

[01:26:13] François Rochon: So I think that’s very reassuring to understand that because you know that they’ll be tough times, but if you patient, you’ll be reward.

[01:26:22] William Green: It’s beautiful cause it means you have to understand these fundamental forces that are at play here, Like the power of intrinsic value, growing the power of productivity, increasing the power of human ingenuity to solve problems.

[01:26:35] William Green: But once you kind of understand that you don’t really need to be that naive to be optimistic. I suspect.

[01:26:42] François Rochon: No, I don’t think I’m naive, but just realistic. That’s just the nature of our human society. And there’s some very bad things I couldn’t agree with more. I mean, everything you read about tragedies and terrible things that happen all over the world.

[01:26:58] François Rochon: But there’s also great things, great accomplishment, great things that civilization have built over the years. And you have to look at that either also. Both are important. And, in the end, I think the overall balance is that, more good have come out of the human ministry than that. 

3. Proof of Work – Nick Maggiulli

When you see a lot of people making a lot of money that wouldn’t normally be making a lot of money, that’s a sign that something’s off. When you have 29 year-olds worth $26 billion naming sports stadiums, look out. When individuals are going from unemployment to retirement in a few months, proceed with caution. Ultimately, when too many people are getting too lucky too often, that’s your wakeup call. That’s your hint that the good times won’t last forever. Why?

Because the world trends towards equilibrium. The world trends towards proof of work. It’s rare for fortunes to be created so effortlessly. Therefore, if you see easy money being made, it’s one of the strongest signals that something’s not right. Of course, some people will hit the lottery or be born into wealth. They are the lucky ones. But, most of us aren’t. Most of us have to work for it. We have to show the proof.

This explains why 70% of wealthy families lose their fortunes by the second generation and 90% lose it by the third generation. They didn’t have the proof. These future generations didn’t know how to build or preserve wealth like their ancestors did, so they squandered it.

The same thing happens during moments of financial excess. Those who got rich overnight don’t understand how their wealth was actually generated (i.e. a bubble). So they keep doing the same things that got them rich in the first place, in an effort to further increase their fortunes. But, once the bubble pops, the behavior that got them rich leads to their ruin. As they create, so they destroy. It’s a double-edged sword all the way down.

But the bigger problem underlying every get-rich-quick scheme is the belief that there’s an easier way to get rich. That there’s some sort of shortcut. But, there isn’t. There are no secrets when it comes to building wealth. If there were, then we would all be rich already. Think about it. If it takes 32 years for the typical self-made millionaire to gain their wealth, why would you expect to do it in just one? It makes no sense.

4. A Few Good Stories – Morgan Housel

Virtually everything was in short supply during World War II. The U.S. Army produced over 100 million uniforms to supply the Allies, which left little fabric left over for civilian clothes. It got worse in 1943 when the Army mandated that the synthetic material typically used in bathing suits had to be reserved for making military parachutes.

Clothing companies got creative by designing bathing suits with less and less fabric. One French designer named Louis Réard took it to the extreme, designing a bathing suit with as little fabric as he could get away with.

Réard introduced the new bathing suit in 1946. When deciding what to call it, he read in a newspaper about nuclear bomb tests that were taking place on a thin strip of rocks in the Pacific and were catching the public’s attention.

A thin strip catching people’s attention? That’s exactly what Réard was trying to do, too. So he named his swimsuit after the atoll where the nuclear tests were taking place – Bikini…

…Martin Luther King’s famous speech at the Lincoln Memorial on August 28th, 1963, did not go down as planned. King’s advisor and speechwriter, Clarence Jones, drafted a full speech for King to deliver, based on, he recalled, a “summary of ideas we had talked about.”

The first few minutes of King’s speech follow the script. Video shows him constantly looking down at his notes, reading verbatim. “Go back to Georgia, go back to Louisiana, go back to the slums and ghettos of our northern cities, knowing that somehow this situation can and will be changed.” Just then, around halfway through the speech, gospel singer Mahalia Jackson – who was standing to King’s left, maybe 10 feet away – shouts out, “Tell ‘em about the dream Martin! Tell ‘em about the dream!”

Jones recalls: “[King] looks over at her in real time, then he takes the text of the written speech and he slides it to the left side of the lectern. He grabs the lectern and looks out on more than 250,000 people.”

There’s then a six-second pause before King looks up at the sky and says:

I have a dream. It is a dream deeply rooted in the American dream.

I have a dream that one day this nation will rise up and live out the true meaning of its creed: “We hold these truths to be self-evident, that all men are created equal.”

I have a dream that my four little children will one day live in a nation where they will not be judged by the color of their skin but by the content of their character.

I have a dream today!

The rest was history.

Jones says: “That portion of the speech, which is most celebrated in this country and around the world, is not the speech that he planned to give.” The best story – not the most prepared, or the most thought out, or the most analytical – wins.

5. FTX’s Balance Sheet Was Bad – Matt Levine

What. And yet bad as all of this is, it can’t prepare you for the balance sheet itself, published by FT Alphaville, which is less a balance sheet and more a list of some tickers interspersed with hasty apologies. If you blithely add up the “liquid,” “less liquid” and “illiquid” assets, at their “deliverable” value as of Thursday, and subtract the liabilities, you do get a positive net equity of about $700 million. (Roughly $9.6 billion of assets versus $8.9 billion of liabilities.) But then there is the “Hidden, poorly internally labeled ‘fiat@’ account,” with a balance of negative $8 billion. I don’t actually think that you’re supposed to subtract that number from net equity — though I do not know how this balance sheet is supposed to work! — but it doesn’t matter. If you try to calculate the equity of a balance sheet with an entry for HIDDEN POORLY INTERNALLY LABELED ACCOUNT, Microsoft Clippy will appear before you in the flesh, bloodshot and staggering, with a knife in his little paper-clip hand, saying “just what do you think you’re doing Dave?” You cannot apply ordinary arithmetic to numbers in a cell labeled “HIDDEN POORLY INTERNALLY LABELED ACCOUNT.” The result of adding or subtracting those numbers with ordinary numbers is not a number; it is prison…

…For a minute, ignore this nightmare balance sheet, and think about what FTX’s balance sheet should be. Conceptually, customers give you money — apparently about $16 billion in dollars, crypto, etc. — and then you hang on to the money and owe it back to them. In the simplest world, you keep the customers’ money in exactly the form they give it to you: Someone deposits $100, you keep $100 for him; someone deposits one Bitcoin, you keep one Bitcoin for her. For reasons we have discussed — some legitimate! — FTX doesn’t quite work that way, and you could imagine some more complicated balance sheet where a lot of the money and crypto that came in from some customers was loaned to others. But broadly speaking your balance sheet is still going to look roughly like:

Liabilities: Money customers gave you, which you owe to them;

Assets: Stuff you bought with that money.

And then the basic question is, how bad is the mismatch. Like, $16 billion of dollar liabilities and $16 billion of liquid dollar-denominated assets? Sure, great. $16 billion of dollar liabilities and $16 billion worth of Bitcoin assets? Not ideal, incredibly risky, but in some broad sense understandable. $16 billion of dollar liabilities and assets consisting entirely of some magic beans that you bought in the market for $16 billion? Very bad. $16 billion of dollar liabilities and assets consisting mostly of some magic beans that you invented yourself and acquired for zero dollars? WHAT? Never mind the valuation of the beans; where did the money go? What happened to the $16 billion? Spending $5 billion of customer money on Serum would have been horrible, but FTX didn’t do that, and couldn’t have, because there wasn’t $5 billion of Serum available to buy. FTX shot its customer money into some still-unexplained reaches of the astral plane and was like “well we do have $5 billion of this Serum token we made up, that’s something?” No it isn’t!

One simple point here is that FTX’s Serum holdings — $2.2 billion last week, $5.4 billion before that — could not have been sold for anything like $2.2 billion. FTX’s Serum holdings were vastly larger than the entire circulating supply of Serum. If FTX had attempted to sell them into the market over the course of a week or month or year, it would have swamped the market and crashed the price. Perhaps it could have gotten a few hundred million dollars for them. But I think a realistic valuation of that huge stash of Serum would be closer to zero. That is not a comment on Serum; it’s a comment on the size of the stash.

But I do want to comment on Serum, because Serum is not some weird token that FTX cornered for some reason; Serum is a token that FTX made up. To use a loose but reasonable analogy, Serum (the protocol) is sort of FTX’s decentralized exchange subsidiary, and SRM (the token) is sort of the stock in that subsidiary. A little of the stock trades publicly, but it is mostly held by FTX, its corporate parent, as it were. The public market price of the small free float might give a reasonable estimate of the value of the subsidiary. But in the real world, the value of the subsidiary is incredibly tightly linked to the value of FTX’s overall business. If everyone is like “ah yes FTX is a good exchange operator and a leader in safe crypto trading,” then its decentralized exchange protocol has a good chance of being popular and profitable. If everyone is like “ah yes FTX is a careless fraud,” then Serum is going to have a hard time. 3  At the point that FTX is shopping its Serum stake to seek a rescue financing due to HIDDEN POORLY INTERNALLY LABELED ACCOUNT, its huge stash of Serum is toast! Just toast!…

…I am not saying that all of FTX’s assets were made up. That desperation balance sheet lists dollar and yen accounts, stablecoins, unaffiliated cryptocurrencies, equities, venture investments, etc., all things that were not created or controlled by FTX. 5 And that desperation balance sheet reflects FTX’s position after $5 billion of customer outflows last weekend; presumably FTX burned through its more liquid normal stuff (Bitcoin, dollars, etc.) to meet those withdrawals, so what was left was the weirdo cats and dogs. 6 Still it is striking that the balance sheet that FTX circulated to potential rescuers consisted mostly of stuff it made up. Its balance sheet consisted mostly of stuff it made up! Stuff it made up! You can’t do that! That’s not how balance sheets work! That’s not how anything works!

Oh, fine: It is how crypto works. This might all sound familiar not just because we talked about FTT last week, but because we talked about the collapse of TerraUSD and Luna earlier this year. Terra was a blockchain system run by Do Kwon, and it raised billions of dollars by selling dollar-denominated tokens — TerraUSD — that were supposed to keep their value because they were backed by a variable amount of another token — Luna — that Kwon had also invented. For a while people thought the Terra ecosystem was promising, so the Luna token was worth a lot, so Terra could go around saying its TerraUSD tokens were extremely safe, because the billions of dollars of TerraUSD “debt” were backed by more billions of dollars’ worth of Luna. And then one day people changed their minds, and the price of Luna — which was just a bet on Terra’s future — collapsed, so TerraUSD was unbacked, and the whole thing collapsed. The FTX situation is not the same, but it rhymes. The role of TerraUSD — the “debt” — is played here by FTX’s customer balances; the role of Luna — the backing token — is played by FTT and SRM. In both cases, confidence in the business collapsed, and it turned out that the debt was actually backed by nothing.

6. How fear robs investors of opportunities and returns – Chin Hui Leong

When it comes to investing, many picture themselves making rational, well thought-out decisions. However, in reality, this same group is prone to reacting poorly to stock market moves. This disconnect is down to the way we process information, says Daniel Kahneman, who is considered to be one of the fathers of behavioural finance. 

In his book “Thinking, Fast and Slow”, Kahneman describes two general modes of thinking: System 1 (reflexive) and System 2 (reflective).  Where System 1 is built for intuitive, snap decisions, System 2 is primed for untangling complex problems which require time. Under this framework, most investors consider themselves as System 2 thinkers, tapping on the analytical side of their brain to process data, deliberate over the pros and cons, and come up with a rational investment decision. Yet, in practice, System 1 often overwhelms System 2 before the latter has a chance to act. 

It’s not a matter of choice. According to Kahneman, most of the time, we function based on System 1. Our reflexive mode is useful for daily routines and recognising familiar situations, and it does a good job in prompting the appropriate reaction. In addition, because System 1 is adept at processing similarities, it will alert us when there is a deviation from the norm. For instance, if you step onto the road and there’s a car speeding towards you, you will sense danger and move out of the way. Here, System 1 kicks in automatically without deliberation, saving your skin. 

Therein lies a wrinkle. What’s good for avoiding danger is not always helpful when it comes to investing.  In particular, watching the stock market fall day by day, month after month, is enough to send investors’ System 1 into overdrive, overwhelm their System 2 mode, and cause them to panic sell.  The result is what we see today: few takers despite the lower stock valuations…

…In his book “Your Money and Your Brain”, Zweig says that predictions of the future often fall prey to relying too heavily on the short-term past to forecast the long-term future. If we apply this behaviour to the current context, it would be akin to taking all of today’s worst problems and projecting these worries indefinitely into the future.   

Faced with nothing but gloom, it’s no wonder fearful investors are sitting out.  Under the circumstances, it is helpful to remember that the stock market has undergone worse situations before. Tellingly, not all predictions of doom turned out to be true…

…In 2014, a former Harvard economist withdrew almost US$1 million of his own money, speculating that cash will lose almost all its value due to the US Federal Reserve’s zero-interest rate policy. Yet, in today’s rising interest rate environment, the US dollar has gained ground over almost every major currency. That’s not the only prediction that didn’t pan out. Two years earlier, around 2012, a high-profile investment advisor suggested that investors should dump most of their US stocks in favour of gold. With the benefit of hindsight, we can now say that it was a terrible idea.

Over the past decade, the value of the S&P 500 index, which represents 500 of the largest US companies, has almost tripled, during the time when the value of gold fell by 3%. 

7. The Fingerprints of History – Michael Batnick

There are a handful of times in my life where the first encounter with somebody stayed with me forever. One of those moments was in 2014 (15?) when I met Scott Krisiloff.

At the time, Scott was running an asset management company, but the thing that hit me had nothing to do with his day job. He told Josh and I that he was in the process of reading every issue that Time Magazine had ever published, starting in 1923. I couldn’t believe it…

…Scott read ~4,000 issues covering 77 years, ultimately stopping in 2000 once his first child was born… Not only did Scott take years of his life to go through all of this, but he documented it for us to enjoy…

…I’m fired up to stand on Scott’s shoulders and read every single one of these monthly recaps. I’ll leave you with 10 things he learned from this incredible experience.

1) Compared to the scale of history, a human lifespan is relatively brief.  In the early days of TIME, the editors of the magazine began obituaries with the phrase “As it must to all men, Death came, last week to…” It was a reminder that eventually we all return to the same place no matter how rich, famous or powerful.  We all know that life is short, but watching the cycle of birth and death for entire generations drives home just how short life really is.  Over 77 years I watched multiple generations live life’s cycle.  I also got to watch the major events that shaped society during those life spans.  I noticed that major events happen relatively infrequently, are set in motion over very long periods of time and are driven by forces larger than any individual.  A human lifespan is incredibly brief when measured against that scale.

2) Focus on the things that matter.  We are all here for a short amount of time, so it’s critical to use that time wisely.  Wealth, fame and power won’t lead to immortality.  Societal memory is short and even those who make it to “the top” are eventually forgotten.  This happens even faster than you might think.  If you seek validation, personal achievement isn’t the place to find it.  Invest in family, friends and self understanding.  These are the things that will be most valuable on your journey through life…

…5) Just when you think you understand everything, everything will change.  When I was reading TIME I often imagined myself as someone who was born around 1900 and began a career in 1923.  By the 1970s I reached a point where it felt as if I had seen it all.  I had 50 years of career “experience” and cycles were repeating.  Then the 1980s happened.  Economic dynamics changed and turned everything I thought I knew on its head.  I learned from this experience that there are structural breaks in the way that the world works and more forces in play than anyone has the capacity to understand…

…10) We all share a small world. In TIME’s Person of the Century issue it also noted that “Einstein taught the greatest humility of all: that we are but a speck in an unfathomably large universe. The more we gain insight into its mysterious forces, cosmic and atomic, the more reason we have to be humble. And the more we harness the huge power of these forces, the more such humility becomes an imperative.”  This was the most important takeaway from observing the passage of time over the course of three quarters of a century.  We don’t fully understand why or how we are here but we share our short time on this planet with billions of other souls who are each trying to make sense of the same world in their own way.  The need for compassion, empathy and humility is so much greater than the need for competition and conquest.

I first set out to read every issue of TIME with this spirit of conquest, but the experience changed me.  I learned that these goals can be personally and societally destructive and that victory won’t give you the wealth you seek.  As a result I will spend the rest of my life treasuring every moment that I have here with the people that I love.  And I will spend my working hours building and supporting strong institutions that promote human understanding.  

I imagine that anyone who lives a long life might draw similar conclusions about what is and isn’t important, and I feel that it is a gift to have been given this perspective at a relatively young age. Ultimately, by reading every issue of TIME I learned the value of time, which is, by far, our most precious commodity.

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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 Microsoft. 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 13 November 2022:

1. Graham & Dodd Annual Breakfast 2022 – Investment Management Insights

During one of Todd Combs and Warren Buffett’s famed Saturday afternoon living room chats, the two posed the following question as a means of valuation: if you take a business, what is your level of confidence in predicting what it looks like in five years?

Buying a whole business requires varied degrees of scrutiny into factors which cannot be evaluated using financial modeling formulas, such as: level of capital required, management style and efficacy.

Combs recalled the first question Charlie Munger ever asked him was what percentage of S&P 500 businesses would be a “better business” in five years. Combs believed that it was less than 5% of S&P businesses, whereas Munger stated that it was less than 2%. You can have a great business, but it doesn’t mean it will be better in five years. The rate of change in the world is significant, which makes this exercise difficult, but this is something that Charlie, Warren and Todd think about. When Combs started at Berkshire, they had a 7/10 confidence on the businesses outlook for the next five years. The nature of the world is that things are constantly changing, and Todd says they are right on maybe 1/10 predictions. 

Michael asked if there are traditional measures that Combs/Berkshire look at to indicate good business performance? And how does Combs/Berkshire assess that quantitatively? Combs explained how one question is constantly asked, usually daily, and that is if the moat is wider or narrower on any of their businesses.

98% of what Buffett and Combs discuss is qualitative. If something is 30x earnings you can calculate what it will have to do to get to run rate earnings. The worst business grows and needs infinite capital with declining returns. The best business grows exponentially with no capital…

…Combs goes to Buffett’s house on many Saturdays to talk, and here’s a litmus test they frequently use. Warren asks “How many names in the S&P are going to be 15x earnings in the next 12 months? How many are going to earn more in five years (using a 90% confidence interval), and how many will compound at 7% (using a 50% confidence interval)?” In this exercise, you are solving for cyclicality, compounding, and initial price. Combs said that this rubric was used to find Apple, since at the time the same 3-5 names kept coming up…

… Every time Combs meets with a company, there are two questions he always asks management: (1) How long do you spend talking to investors, and (2) what would you be doing if you were not publicly traded? The median response is 25% of the time is spent talking to investors. In response to the second question management usually lists a number of things that make a lot of sense, and Combs then proceeds to ask why they don’t do that, and they say because they feel handcuffed. When management is focused on the quarterly performance, and they don’t have the proper time horizon, they are not empowered to do the right thing. As a fiduciary you are setting yourself up for failure if you don’t have the right time horizon.

2. TIP492: The Best Investor You’ve Never Heard Of – Clay Finck

[00:00:25] Then at the end of the episode, I talked a bit about the lessons we can learn from Nick Sleep in identifying a great business, buying it at a reasonable price, and holding it for a very long time. From there, I started reading into Nick Sleep’s letters and I wanted to put together an episode talking about his overall investment approach, how Buffett and Munger influenced him and his incredible investment track record through his fund, the Nomad Investment partner.

[00:00:50] He achieved a stellar total return of 921% versus 117% for the world Index during the fund’s tenure of 13 years from 2001 to 2014. I also touch on his home run investments in Berkshire Hathaway, Costco, in Amazon. His Amazon investment in his personal portfolio got so large in his portfolio that he actually decided to sell half of it and allocate it to a fourth company, a sauce, which I’ll be diving into at the end of this episode…

…[00:24:43] These companies like Costco and Amazon that he owned, they were doing just as well in the bad economic times as they were in the good While overall. I’ll be diving into the scaled economics model here in a little bit, but I want to focus on the financial crisis now. While overall retail sales were down 10%, Amazon’s biggest day leading up to Christmas was 16% higher in 2008 than in 2007.

[00:25:09] Even though many of the companies they owned were down 50% in 2008, the businesses themselves still continued to surge ahead. He said that Amazon was priced as if it wouldn’t grow in the future, despite them seeing some of the best growth prospects they could ever imagine for a company. By mid 2009, Amazon’s revenues were up over 60% over the past couple of years.

[00:25:33] Yet the stock was all doom and gloom. The business did so well. It was almost as if a credit crisis made Amazon’s business even stronger than it would’ve been otherwise. Here’s how Sleep rounded out his 2008 letter quote. The commentary in the press is uniformly gloomy, and this is serving to depress share price.

[00:25:54] What we know is that prices are lower than a few years ago in corporate behavior is improv. We mean no disrespect to those unfortunate enough to lose their jobs or caught up in other people’s. Too busy to think mistakes and scandals. But from the perspective of an investor, there is less to worry about today than there was a few years ago.

[00:26:15] Indeed, I doubt that worrying is the solution to anything. Particularly we are reminded of Winston Churchill’s story of a man on his death bed. I have had a lot of trouble in my life saying the dying. Most of which never happened. It may not feel like it, but for a long term investor, this is the best of times, not the worst.

[00:26:36] It is in this environment that people sell their GTOs for 750 pounds. Take heart and look to the horizon. End quote. Now this reference to the GTO is referring to a story he told about a motor car that sold for just ridiculously cheap…

…[00:27:58] At this time of utter chaos, since the end of 2008, Berkshire today is up 344%. Costco is up 825% and Amazon is up 4008%. I repeat 4008%. Now, I expected the recovery of the Nomad Fund to be pretty good relative to the index in the year to come in 2009, but I did not expect it to be this good. To round out 2009, the Nomad Fund was up 71% while the World Index was up 30% from 2009 through 2013, Nomad returned investors 404%…

…All right, so let’s get started with Costco. It was at the end of 2002 when he first started discussing his position in Costco and his letters. This was a 3.1% position in the fund at the time.

[00:33:05] He recognized early on that Costco was a great business and he still owns it today. Since the beginning of 2002, Costco shares are up tenfold. To give a quick recap of their business model, Costco is a warehouse retailer that charged a $45 membership fee at the time to allow members to shop in their store.

[00:33:26] A key differentiator for Costco relative to other retailers was that they implemented an everyday low pricing strategy and they never marked up their products more than 15% from what they bought them. While Walmart at the time had markups of around 20%, and the industry standard was really around 30%.

[00:33:45] So Costco customers know that Costco is giving them a great price on their products, and there isn’t really any marketing schemes to offer temporary discounts on their products. You know, every time you go into Costco and make a purchase, You’re getting a great price, at least relative to what they pay to their suppliers.

[00:34:04] Now, what I like to look for and find in a business is what Jim Collins popularize, which is called the flywheel effect. The Costco model definitely had a flywheel effect as well. The low prices would lure customers in, which means that Costco receives more profits as a result of the greater number of customer.

[00:34:23] Costco would then use those profits to go out and open more stores wherever they found the best opportunities to do so. Since Costco then had more stores, they had more bargaining power over their suppliers, which in turn would incentivize even more customers to join and purchase that membership, and so on and so forth.

[00:34:42] This was the Costco business model, The standard markup strategy they used continued to push the cost savings onto the customer. Build that trust with them to keep coming back year after year, after year to do more and more shopping. Now, Sleep refers to the Costco and the Amazon business model actually as the shared economics model.

[00:35:03] Both of these companies are super cost efficient, so they can offer super low prices. So as the business grows, their prices are able to go lower and lower, which begets more growth. So as the business grows, their moat grows and the quality of the company and the amount of time the company is able to withstand extends as they grow, as they build more customers and build more stores.

[00:35:27] So customers actually benefit from the growth of the company. For a company like say Nike, that has a high margin business, the same really can’t be said as each year they are paying a high margin for Nike’s products, and Nike’s really relying on that brand with loyalty. But for Costco, you’re getting better prices each year.

[00:35:48] As the company grows in, the economies of scale are shared with the customers. At the time, Sleep estimated that Costco could fund itself to grow at around 14% per year. From that point, he said that this level of growth was much more sustainable than the companies that the retailed crowd was chasing at the time.

[00:36:07] With growth of 30% or more for many of the companies, he estimated that Costco could reach a thousand stores in the. And 200 stores in the uk. While at the time they had 284 in the US and 14 in the uk. So a ton of room for long term growth. According to his assessment of the market, Costco’s stock peaked in 2000 at around $55 per share.

[00:36:31] And Nomad purchased at $30 per share according to his 2002 shareholder letter, and they ended up purchasing more over the years. Of course, he stated that he believed a reasonable valuation for Costco was north of $50 per share at the end of 2002. And in his letter he stated, Costco is as perfect a growth stock as we have analyzed and is available in the stock market at close to half price.

[00:36:57] In 2004, Costco was trading at a earnings multiple of 24, while the PE ratio today is around 35, 36, so we have a 50% higher. Today, if I had to guess why? Part of it is likely due to the market’s appreciation of the quality of the business Costco has, and the other part is probably because the overall market is just priced higher today than in 2004.

[00:37:23] A lot more people know about Costco now than they did then too. So he also explained how Costco is so difficult to compete with because they’re just so giving to the customer. Wall Street, you know, oftentimes urges companies to give back to the shareholders rather than the customers through things like share repurchases through dividends.

[00:37:44] This is exactly what most shareholders want, including Wall Street. But Costco gives a lot of their earnings potential actually, to their customers, and this in turn leads to a stronger business that is more likely to sustain far, far into the future. It’s truly a business that focuses on the long-term.

[00:38:03] Which aligns right with Sleep’s investment philosophy. When purchasing a great business, Sleep oftentimes would interview management of a company, and he just saw that the management team was so serious about never marking up their products more than 15%. You know, there might be a time where they can make a killing on some specific product, they get at a huge discount.

[00:38:22] But management was like, “No, we’re going to pass on these savings to the customer.” So they just did it over and over and over. And the model has definitely. One idea that Sleep wrote about was related to business quality and moats. If you’re holding a business for the long term, it is extremely important that the company has a strong moat.

[00:38:40] The difficulty really lies in assessing the strength of a company’s m.o. because it’s not necessarily a number you can just point to on a balance sheet or on an income statement. It’s more of a qualitative metric that’s up to the eye of the beholder. Sleep talked about the idea of the robustness ratio, which analyzes how much a company saves their customers relative to how much money the company actually makes.

[00:39:05] In theory, a business that saves customers a ton of money and makes very little money relative to how much they save their customers, you know, that’ll be very hard to disrupt, at least relative to a business that has high profits relative to what they save their customer. This concept definitely applies to Costco because with the way their business is set up, it actually discourages competition because of how much investment it would take to make the same amount of money that Costco does.

[00:39:33] On top of that, you’re already competing with a really strong brand that Costco is built for their customers. Sleep estimated that for every $1 in profit Costco, Customers were saving $5. Now, he actually came up with this idea of the robustness ratio from Warren Buffett when he described Geico. Buffett stated in his 2005 annual letter that Geico was saving their customers roughly $1 billion in earning $1 billion in pretax profits as well.

[00:40:02] So in Buffett’s eyes, it was clear that Geico had a moat. Because of the enormous cost savings they passed down to their customers relative to the profit they receiv. Sleep took that idea and applied it to Costco, claiming they had a moat as well, in that the quality of the moat could actually be quantified through the robustness ratio.

[00:40:21] You know, just using one metric to get an idea of how strong it was. He makes it clear that the robustness ratio isn’t the end all, be all of a mote. It’s just one indicator to get a rough idea.

3. FTX Had a Death Spiral – Matt Levine

The worst case is something like:

1. You have 100 Customer As who are long Bitcoin on margin: They each have 1 Bitcoin in their accounts and owe you $10,000.
2. You have 100 Customer Bs who are short Bitcoin on margin: They each have $20,000 in their account and owe you 0.5 Bitcoin.
3. You have loaned 50 of the Customer As’ Bitcoins to the Customer Bs, and $1 million of the Customer Bs’ dollars to the Customer As. You keep the other 50 Bitcoins and $1 million as collateral.
4. Your accounts show that you owe clients 100 Bitcoins and $2 million, and that they owe you back 50 Bitcoins and $1 million, and you have 50 Bitcoins and $1 million on hand, so everything balances.
5. You have one Customer C who says “hi I would like to borrow 50 Bitcoins and $1 million, I will secure that loan with 150,000 FTT, each of which is worth $20.”
6. You say “sure, sounds good,” and hand over all your collateral.
7. Now you have 150,000 of FTT, worth $3 million, as collateral (and no Bitcoins or dollars).
8. Your accounts show that you owe clients 100 Bitcoins and $2 million and 150,000 FTT, and they owe you back 100 Bitcoins and $2 million, and you have 150,000 FTT of collateral, so everything balances.

But then if the value of FTT drops to zero, you have nothing. You have no Bitcoins to give to the customers to whom you owe Bitcoins, no dollars to give to the customers to whom you owe dollars. You just have to call up Customer C and say “hey we need all those dollars and Bitcoins back.” But Customer C will not want to give you back all those valuable dollars and Bitcoins in exchange for now-worthless FTT. Also the fact that Customer C had all that FTT in the first place is not a great sign. It is an FTT whale, and FTT is now worthless. Has it been borrowing elsewhere against FTT? Are all those debts coming due?

Now let’s add a few more FTX-specific elements. One is that FTX is an exchange for levered traders, offering products like perpetual futures and leveraged tokens that build in margin lending. So whereas the basic model of Coinbase is “they buy Bitcoin for you and put it in an envelope,” the basic model of FTX has to be “they lend you money to buy crypto and then make use of your crypto to get the money.” In financial terms, they have to rehypothecate your collateral; you can’t expect them to just keep it in an envelope if they’re lending you the money to buy it.

The other is that FTX is closely associated with a hedge fund called Alameda Research. Sam Bankman-Fried founded Alameda to do crypto arbitrage and market-making trades, and then he founded FTX to basically have a better exchange for Alameda to trade on. Alameda has lots of FTT, and last week Coindesk reported on its balance sheet; the gist of that report was “wow its balance sheet is mostly FTT”:

The financials make concrete what industry-watchers already suspect: Alameda is big. As of June 30, the company’s assets amounted to $14.6 billion. Its single biggest asset: $3.66 billion of “unlocked FTT.” The third-largest entry on the assets side of the accounting ledger? A $2.16 billion pile of “FTT collateral.”

There are more FTX tokens among its $8 billion of liabilities: $292 million of “locked FTT.” (The liabilities are dominated by $7.4 billion of loans.)

That is not in itself a reason for a run on FTX! It might be a reason for the price of FTT to go down, if you think that Alameda has too much of it and might need to sell it.

The reason for a run on FTX is that you think that Alameda is, in my terminology, Customer C. The reason for a run on FTX is if you think that FTX loaned Alameda a bunch of customer assets and got back FTT in exchange. If that’s the case, then a crash in the price of FTT will destabilize FTX. If you’re worried about that, you should take your money out of FTX before the crash. If everyone is worried about that, they will all take their money out of FTX. But FTX doesn’t have their money; it has FTT, and a loan to Alameda. If they all take their money out, that’s a bank run.

And all of this is self-fulfilling: If you are worried about FTX’s business, then the price of FTT should go down. If the price of FTT goes down, then FTX’s business is riskier, because it has less collateral. If, say, the operator of the biggest crypto exchange gently raises one eyebrow and says “FTT, eh?” that can be enough to topple FTX. FTT goes down, leaving FTX undercapitalized, leading to customer withdrawals, leading to ruin.

Anyway it is still early and confusing but that seems to be the story of FTX. Coindesk reported on Alameda’s FTT exposure, and then Changpeng “CZ” Zhao, the founder of Binance Holdings Ltd., the largest crypto exchange, raised eyebrows by tweeting that Binance would sell its FTT holdings “due to recent revelations.” People worried that this would tank the price of FTT and put pressure on FTX, so they started withdrawing money from FTX. FTX didn’t have the money, and Bankman-Fried started calling around asking for a loan or a bailout. Eventually he called CZ himself, and they announced a non-binding letter of intent for Binance to acquire FTX and make customers whole. Bankman-Fried’s fortune basically vanished, as did his “ emperor aura.” Venture capital investors in FTX — which last raised money at a $32 billion valuation — are probably getting zeroed, the price of FTT collapsed, and now regulators are investigating.

4. Is Alameda Research Insolvent? – Dirty Bubble Media

On November 2nd, a report from Coindesk shared some critical financial details from Alameda Research, the crypto hedge fund controlled by crypto mogul Sam Bankman-Fried (“SBF”). Coindesk reported that they had obtained a copy of the hedge fund’s Q2 balance sheet. According to their reporting, the company’s balance sheet is comprised of:

• Total assets: $14.6 billion. This is comprised of $5.8 billion FTT token, $1.2 billion Solana token (SOL), $3.37 billion in unidentified “crypto held,” $2 billion in “investments in equity securities.” This leaves roughly $2.2 billion in assets. According to our sources, hundreds of millions of dollars of the remaining assets are comprised by Alameda’s holdings of the Serum (SRM), Oxygen (OXY), MAPS, and FIDA tokens, all of which are from other SBF projects. According to this balance sheet, Alameda only had $134 million in cash on hand in June 2022.
• Total liabilities: $8 billion, of which $7.4 billion is “loans,” with another $292 million worth of FTT token owed. The remainder is unidentified by the Coindesk article.

This purported leak of Alameda’s financials demonstrates that the firm’s largest asset is its holdings of “FTX Token (FTT),” issued by none other than SBF’s FTX Exchange. The FTT token on Alameda’s balance sheet is roughly 1/3 of their total assets and equal to 88% of Alameda’s net equity. In other words, the firm’s largest asset is a crypto token issued by SBF’s other company, with a very significant portion of their assets in tokens issued by other related parties.

It’s almost as if SBF found a way to hack the financial system, printing billions of dollars out of thin air against which he was able to borrow massive sums from unknown counterparties. Almost as if he discovered a financial perpetual motion machine…

…Readers of this site will recall that the now-defunct Celsius Network, a multi-billion dollar crypto lending firm (Ponzi scam) with very close ties to SBF, was destroyed in part by its token, CEL. Celsius Network was built around the CEL token, under the brilliant idea that it could be used to spin up billions of dollars in free assets. The structure of a flywheel scheme is quite simple:

1. Create a token: Tokens are literally just bits of code on a blockchain. Program that sucker up and get rolling. Make sure you retain the majority of those tokens on your balance sheet for maximum flywheeling.
2. Pump the token’s price: Retain a “market maker.” Buy tokens using your customer’s assets. Wash trade it to infinity. Do whatever it takes to drive that price sky-high! And since you kept most of the tokens for yourself, there’s that many fewer tokens out there to pump.
3. Mark those babies to market: That’s right! Now you reap your rewards; at least, on paper. Now you can show billions of dollars in “assets” on your balance sheet.
4. Show off your success: Now’s the time to cash in. Hook some savvy investors (suckers), like pension funds, into massively overpaying for your equity or into making you big loans collateralized by your token.
5. Keep that flywheel spinning: Now you have real dollars. Buy yourself something nice, like stadium naming rights, politicians, or failed crypto companies. But don’t forget: If the flywheel stops spinning, you’re gonna have a bad time.

Of course, nothing is really this simple. It turns out that the flywheel scheme is just another bit of unsustainable financial engineering, for a couple of reasons. First, as your drive the price of your token higher, it begins to cost more to keep the price up; the people that own the token are increasingly incentivized to sell out, forcing you to buy more tokens at higher prices. Eventually, you either run out of money, own all of the tokens in existence, or stop buying. Which you can’t do, because if you stop it all comes crashing down.

More critically, it turns out that marking massive quantities of totally illiquid assets to market only generates wealth on paper. Celsius, despite holding hundreds of millions in CEL above liabilities, cannot liquidate any significant portion of those tokens without crashing the price of the token to zero. Such is the danger of controlling over 90% of the total tokens in circulation when nobody wants to own them in the first place!..

…According to Coindesk’s report, Alameda owned $5.8 billion FTT tokens in June of 2022. According to market aggregator CoinGecko, this is equivalent to 180% of the total circulating supply of the tokens:…

…A scan of the blockchain confirms that FTT ownership is highly concentrated, with 93% of the total tokens held by only 10 addresses:…

…All this to say that Alameda will never be able to cash in a significant portion of FTT to pay back its debts. There are few buyers, and the largest buyer appears to be the very company Alameda is most closely tied to. The reality of this situation is that the vast majority of the value Alameda accrues to FTT token is unrealizable, and the fair market value of their FTT in the event of large sales would rapidly approach $0.

5. Kirsten Green – Investing in Consumer Change – Patrick O’Shaughnessy and Kirsten Green

Patrick: [00:10:18] When you think about the list of pre-research hypotheses that you had, which one was the most wrong?

Kirsten: [00:10:25] There’s so much conversation about climate change and about the need for changing our ways that everybody would be interested in participating in that, particularly the younger generation, the younger generation. I mean I have kids telling me I should — “That’s recyclable, mom, that shouldn’t go in the trash,” or “Can you please buy an electric car instead of that gas car?” When we went and looked at this data at a really detailed level, the person that was most concerned about behaving in a way that aligned with environmental causes was a middle-aged, busy adult in a lower income bracket, so surprising. To me, I was like, they have got too many other pressures to be thinking about this. And it’s — a lot of times, many of those practices are still on the more expensive angle. So I was just really curious that, that audience was in tune to it in a certain way. The other thing, like specifically, is crypto and all this conversation that was — kind of ruled the day in ’21, we sort of had this fantasy or this perception that this was a young generation really kind of fueling that fire. That also is much more of a middle-aged person.

Patrick: [00:11:37] That’s bizarre.

Kirsten: [00:11:38] A much more of a less — it has all the other attributes of somebody who’s an early adopter or who’s techy. And that was really interesting, too. And there’s a list of others, but we’re going to publish a report.

Patrick: [00:11:49] We’ll save it. We’re going to show everything today. I’m really interested by the 12 personas and sort of who historically of those personas has driven a lot of the spending in the consumer space. Obviously, we’re going to get to investing here soon. For the most part, even if it’s interactive ads or something on one of the social platforms, you’re looking for revenue from these persona groups in the consumer business. I would love you to just riff on who is it that drives the spending? And is that changing at all?

Kirsten: [00:12:15] So we looked at this body of work to say some of the qualitative things we’ve been talking about and then to put an overlay around what are the size of these different archetypes and what is the spending power of these archetypes, and then what does it cost to be – exist, so what’s nondiscretionary and what’s discretionary to really understand, again, where was their purchasing power, adoption power. The other thing when we try to translate this stuff over into the investing in the business side is to think about where are we on the continuum of those groups evolving. So today, they might sit in one bubble representing one set of spending power. But in 5 years, they’re going to get advanced on the spectrum in some ways, maybe in some behavioral ways and some financial ways. And we’re early-stage venture investors. We’re trying to thread that needle between — what we’re really looking for is something that’s going to be on everyone’s mind a couple of years from now, 5 years, 10 years from now. It’s going to have broad adoption and people are going to be like, “Oh, yes, I can’t remember when we didn’t have that.” That’s a 10-year continuum, but it has enough relevancy that it can be relevant to adopt it today by some critical mass to create scale. And so you’ve got to understand where the demand is flowing when we think about where the spending power is today, where it’s going to be tomorrow and where the push for change is, that’s less surprising to people probably on the continuum. You are looking at someone who’s just out of college today but being much more relevant in a lot of these ways when there are parties, let’s say, to the person that’s mid-life and going through a lot of changes. Like those are really transformative years. And so that has always been the case. That’s why everybody always focuses on 18 to 45, and you get to 45, when you’re suddenly like, “Am I relevant or not anymore?” I mean the reality is there’s a ton of money, a ton of money in the baby boomer on the upside. And it’s a shifting profile on what’s discretionary and nondiscretionary. And there’s a big need there, but there’s also less behavior change. So it’s a complicated picture but it’s an interesting lens to put over, obviously, all your investing…

…Patrick: [00:47:06] You’ve invested in product categories that are far apart from each other in the consumer space, but all have tended to have very strong brands, at least in hindsight. I thought it’d be interesting to spend a few minutes talking about your take on brand, given how many amazing brands you’ve been associated with and helped grow and probably those that you’ve seen not work as well. And I know you’re coming out with a big, really interesting report that we’re looking forward to at the end of this year on a huge study that you’ve done on all these consumers and different brands around the world. So we won’t steal the thunder from that report. But I’d love if you could introduce it maybe at the highest level, sort of the framework that you think might emerge from that. And then we’ll talk about some case studies rather than talk about the specific framework and then look forward to what you publish later on this year.

Kirsten: [00:47:50] We have, over time, like teased out a view on that, but we really felt like we needed to take a step back, think about all of the lessons that we’ve learned, all of the observations that we’ve made, all of the reading that we’ve done around brands and say, what really makes a good brand? What is a framework that we might be able to use to help the companies that we’re working with, understand whether they’re on a path to set the stage and foundation for building a great brand? And so through those efforts, we came up with 6 core tenets that we felt really underpinned brand. And again, this is like from a mosaic of inputs. And then we went about kicking tires and testing on that from every angle. So we started with our own hypotheses and our own research. We went and had interviews with people who are experts in the industry. So people that are leaders of some of the most well-known recognizable brands and brands that we revere, we went and had conversations with people who are behind the scenes, brand whispers, if you will, working at agencies and have been doing this for decades across dozens or hundreds of brands, and we interviewed them along the criteria. We then went to consumers, and we went to over 14,000 people over the course of the study to explore their impressions of these 6 criteria and their impressions of brands.

And we started with a list of 100 brands, and we tried to get a real cross spectrum of things that would be obviously on the list and things that might not obviously be on the list. But really, they were focused on businesses at scale that are more or less known because we wanted to also talk to customers and noncustomers to really get a feeling for like does it vary between customers and noncustomers, can you actually build a brand and make a statement without having had a customer-first relationship. So we compared all of that information and ultimately got conviction around a framework, awaiting for a framework and scored these brands and build what we think is a pretty comprehensive list of traits and rankings and explored the rankings from all different angles in addition to those on the matrix, like, for instance, how big their businesses are, how fast their businesses have grown, et cetera. And it was really interesting and really fun. And I think it started to poke more questions and more explorations, which ultimately is like a pretty big body of work and conversation on this topic.

Patrick: [00:50:13] If you could sum it up in like a simple idea that wouldn’t betray the whole formula, how would you sum it up?

Kirsten: [00:50:20] A good brand delivers on its promise. A good brand has a clear directive around what relationship it wants to have with the consumers and the community at large, and it delivers on that in a consistent way across multiple or all touch points.

6. Ramon Pacheco Pardo, Shrimp to Whale: South Korea from the Forgotten War to K-Pop – Kalani Scarrott and Ramon Pacheco Pardo

Kalani Scarrott (07:17): Yeah. And I’ll ask this at the beginning just in case it might lead us down some rabbit holes, but your favorite period or even moment in South Korean history?

Ramon Pacheco Pardo (07:24): Yeah, that’s a great question. I mean, I really like a study in the 1980s, ’90s, the transition to democracy period because it was a people’s led process. And I find that very interesting how you saw different groups coming together. you have the student and workers movement that have been pressing for democracy for decades, but that’s the start of a strong feminist movement in Korea that also joins this fight for democracy among other things. but also normal white collar workers, office workers that traditionally have been less politicized in Korea. And obviously this group was smaller when Korea was poor, that also you in the fight for democracy. So you had all these different groups coming together. So I think that’s the one I enjoyed the most studying and researching and writing about.

Kalani Scarrott (08:15): Yeah. And in the book, you made a great illustration on the growth after the war, cause I think off the top of my head, the IMF even called South Korea basket case. So the growth from after the war. And you gave this great illustration just from someone being born in 1920 through to them turning 50. So could you highlight the changes they saw and what that looked like?

Ramon Pacheco Pardo (08:34): Yeah, it is interesting you, you pick up on the, on that, because quite a few readers have mentioned that, right? Including many Koreans who went through that process and said, Oh, that was me, right back in the day. So yes, that section I mean, I go back to someone who, who may have been born when Korea was under Japanese colonial rule who may have been sent to a Japanese mine as a slave worker, basically. Or who was a woman who may have been a sex slave or comfort women, right? Sent to one of the stations that Japan had during the Second World War. So a real suffering. We’re talking here, being a slave, basically of another country, right? And then how this person, during the Korean War, or after the Korean War, of course, during the Korean War, they would have suffer family losses after the Korean War having really poor.

(09:24): And that’s exactly when the World Bank was saying, Look, Korea is not, South Korea is not going to grow. It has no future, basically. And that person would have had to work extremely hard, obviously for his or her own sake to begin with, but also for the good of the country, for the country to, we can develop. And by the 1970s this person would live in a flat, probably in some cases, for the first time ever, they would be able to live in a flat they would have a TV, a fridge, things that in other countries were taken for granted. Of course you know, Europe, Australia, Canada, the US, but certainly not in Korea at the time. they would be able to scrap some holidays from time to time, probably to Jeju island of course in the south of South Korea.

(10:10): And they would have a completely different life from the moment when they were born. I draw this picture so to speak, in the book because if we compare with other countries that were already developed, where the development process took hundreds of years, really, we’re not even talking about decades. this wasn’t necessarily the case in other countries when the case of Korea, this was this compressed development in a period of 30, 40 years going for being colonized and extreme poverty to having a fairly middle class life, fairly stable job. And as I said, being able to go on holiday, something that certainly hadn’t been taken for granted by Koreans in, in history. Really.

Kalani Scarrott (10:52): Yeah. And it’s the insane growth and how quickly it’s all happened. That’s maybe what’s fascinating to me, cause I’ll pull this from your book “in 1953, South Korea was poorer than Subha Sub-Saharan Africa than the poorest region in the world.” And again, little to no natural resources. So some thought there might be better futures on the African continent, but what has South Korea done differently or maybe done better than other countries that have allowed it to succeed then? Yeah,

Ramon Pacheco Pardo (11:15): It’s interesting cause the comparison with Sub-Saharan Africa wasn’t mine, actually. It came from official documents that I read from different institutions, right? In a sense they were trying to say that back then there were different parts of the world that were really poor, right? And, and, and one of them was Korea the Korean peninsula in South Korea. And I think South Korea was able to do is actually three things. One of them, he was able to focus on the basics. So something that even before the 1960s, even after the Korean War, there was this focus on, on having universal education both girls and boys, actually, not only boys. That’s happening in some other countries Vaccination, for example. So, kids basically wouldn’t pass away, right? From, from tuberculosis or other diseases.

(12:08): And also focusing on the development of infrastructure. So trying to build housing, trying to build roads, railroads as well. So trying to build the basic infrastructure that any country would need if they want you to export. And that would be the second key point in the case of Korea, that other countries, if you look for example, at Latin America, they were focusing on this import substitution policy whereby they just wanted to get rid of foreign goods right, and produce domestic goods. But the case of credits was supplemented by exporting, right? By making goods that would be exported to the rest of the world. Of course, South Korea was not the first country to think about this. Mexicans have done it in the past, but South Korea really emphasizes in 1950s. So from the 1960s onwards and especially related to these, the emphasis on moving up the value added chain, because other developing countries, I wouldn’t say they were happy to only focus on textiles, shoes, et cetera, et cetera, but maybe had the long term thinking just say, Okay, how do we move to the next stage?

(13:12): Right? things like iron, for example, chemicals sorry, steel, chemicals later on shipping, semiconductors, et cetera, et cetera. So there was this focus on export about the long term component. And I think the third aspect is the strong network that the government had with the Chaebols that dominated the current economy, the big conglomerates these had downsides, of course there was corruption and, and some felt that the government was telling them basically what to do, at least until the 1980s. but they had upsides as well, which was you had these very big companies that were able to receive the capital from the state, but then they were able to become internationally competitive. And if they had been a small medium size enterprises, it might be me, have been very difficult to scale up sufficiently to be able to, to export so that, that matter as well in the case of Korea and to whether with the two of them, of course, the, the, the first aspect that I mentioned, you had this long-term planning to have a healthy population, educated population, and then they were, they were the workforce for this Chaebol that we’re working together with the government.

Kalani Scarrott (14:22): Yeah, there’s a million different threads I could pull on there, but I’ll start with the Chaebols. So could you explain, just for someone who’s never heard of the term, what they are, and then maybe why were they able to flourish and what’s their function, I guess, in the greater economy of South Korea?

Ramon Pacheco Pardo (14:35): Yeah, absolutely. There are these big conglomerates that span many different sectors. So they can span 30, 40, 50, 60 different sectors. Now, this gives them a couple of advantages. one of them is a variable to attract more capital because of their size, right? most of them are too big to fail, even though the, in Asian financial crisis, maybe this wasn’t the case if we look at some of them, but for many, we thought they were too big to fail. So obviously they receive a state support as, as well. And, and second characteristic, because they were in so many different sectors. If you look at the Chaebols such as Samsung, we know them because of the semiconductors and mobile phones. So if you go to Korea, for example, they also doing insurance. They’re involved in the housing sector, so involved in all types of sectors.

(15:26): And, and of course the advantage of this is that if one of the sectors is not working quite well, but some others are working better, right? this means that the Chaebol can survive, right? It’s not focused on a single sector. They’re very diversified. and if one of them is not working well, they can cut their losses and focus on other ones, right? And, example of Samsung that they just mentioned, for example, for a while, Samsung tried to get into the car making sector. This actually didn’t work right? But, but it’s very strong in many other sectors. So the, the company didn’t disappear, it was able to continue, right? So this allows for a long term planning that it wouldn’t be able, if you only focus on one sector or, or you only had one company essentially in two or three sectors only…

…Kalani Scarrott (18:43): And yeah, for South Korea overall going forward, how bullish and excited or positive are you about their future? Because you mentioned they’ve moved up the value-added chain. So what is now what in the past might have been steel, shipbuilding now is semiconductors, internet of things, because Korea’s done very well, over 50 million population, economy’s fourth largest in Asia, and 10th in the world by GDP. So yeah, where do they go from here?

Ramon Pacheco Pardo (19:05): Yes. I mean, that’s really good question. Cause there is a big discussion in, in Korea. I mean, it’s not new, but you can trace it back at least to the 1980s about to what extent Korea can continue to thrive, especially in consideration like this next to China, right? And, China is also moving up the value added chain. This has been a very big fear in Korea. As I said, it’s not new, It has been there for 40 years, but Korea has been able to continue to innovate to an extent that hasn’t been absorbed, so to speak by China. there was also fear in the past that he wouldn’t be able to compete with Japan. So again, that it would be a squeeze between high tech, Japan, low wage China. But now if we look at Korea, it competes at the global level, not only with Japan, in, in some sector, in some sectors, of course Japan and other countries, US, Europe, other countries are more technological advanced.

(19:53): But in some others, if you look at semiconductors, well Korea’s have there, along with Taiwan, for example. if you look at the green shipping which is I think the next big growth engine for Korea it leads at the global level, not in shipping first of all, but in the more environmentally friendly ships that increasingly we have to use for transportation, right? At the global level. if you look at robotics Korea’s getting up there, together with Japan, which is probably the most advanced country in this, in this sector, right? And now you see for example, after the pandemic, the biotech sector, right? So, so Korea, for the first time ever really developing an indigenous vaccine, it wasn’t able to export it. But who knows in the future it might be something that is able to do, to do as well.

(20:37): So I think innovation really is, is where Korea can thrive. I think it’s well known there is a population decline. Of course, some people see this as a challenge. but then I think there is a debate there because it can be a challenge if there are less workers, but we focus on the economy. Something interesting that you see in Koreas that focus on these less labor intensive sectors, cause it doesn’t have enough workers, right? And more focused on these high tech, capital intensive sectors. Plus, for example something very interesting, whenever I visit the increasing presence of robots actually before it was in factories only, but now you go to the airport or you go to a restaurant and you see robots because they simply don’t have enough workers, right? So robots, for example, they will take your dishes, you know, once they’re dirty instead of a waiter doing this because they don’t have enough, right?

(21:25): So after each of the robot, then they have to take it somewhere so it can be picked up, right? So I think that’s where I see the future of Korea going. The innovation, right? And innovation also on how to drive economic growth within the workforce. Because I, I don’t think even if the birth rate goes up is, is not going to reach the replacement rate doesn’t happen any developed country actually. And that’s not going to happen in Korea. And I don’t see Korea opening up too much migration that’s not really on the cards in my view. We may be surprised, but I don’t think it’s on the cards. So, so we’re going to see this innovation in terms of how to drive growth in an environment, which you actually have less workers as well.

7. How Binance CEO and aides plotted to dodge regulators in U.S. and UK – Tom Wilson and Angus Berwick

As 2022 dawned, Changpeng Zhao was riding high. In less than five years, the founder and chief executive of Binance had turned his young company into the world’s largest crypto exchange, accounting for more than half the trading in the trillion-dollar market.

True, global authorities were scrutinising crypto exchanges ever-more closely. But the Chinese-born billionaire, known to staff and fans by his initials, CZ, had that covered. He told customers in a blog post in January that Binance “embraces regulations” and “has always worked collaboratively with regulators all over the world.”

Behind the scenes, however, trouble loomed.

For at least a year before that post, the U.S. Justice Department had been pursuing a money laundering investigation into Binance, seeking extensive records on Binance’s policies and the conduct of Zhao and other top executives, Reuters reported on Sept. 1. Binance called such requests a “standard process” and said it works with agencies worldwide to address their questions.

Now, new reporting by Reuters reveals fresh details about Binance’s strategy for keeping regulators at arm’s length and continuing disarray in its compliance programme. The reporting includes interviews with around 30 former employees, advisers and business partners and a review of thousands of company messages, emails and documents dated between 2017 and early 2022.

It shows that in 2018, Zhao approved a plan by lieutenants to “insulate” Binance from scrutiny by U.S. authorities by setting up a new American exchange. The new exchange would draw regulators’ attention away from the main platform by serving as a “regulatory inquiry clearing house,” according to the proposal. Executives went on to set the plan in motion, company messages show.

In public, Zhao said the new U.S. exchange – called Binance.US – was a “fully independent entity.” In reality, Zhao controlled Binance.US, directing its management from abroad, according to regulatory filings from 2020, company messages and interviews with former team members. An adviser, in a message to Binance executives, described the U.S. exchange as a “de facto subsidiary.

This year, Binance.US’s compliance operation has been in turmoil. Almost half the U.S. compliance team quit by mid-2022 after a new U.S. boss was appointed by Zhao, according to four people who worked at Binance.US. The staff left, these people said, because the new chief pushed them to register users so swiftly that they couldn’t conduct proper money laundering checks.

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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 06 November 2022:

1. Nuclear energy: past, present and future – Julia DeWahl

Nuclear energy’s reputation has been dealt several major blows by the nuclear disasters of Three Mile Island (1979), Chernobyl (1986), and Fukushima (2011). Overblown response and media coverage to each of these events led to a vast misunderstanding of what happened at these events, and how damaging they actually were.

The accident at Three Mile Island in 1979, for example, killed a total of zero (0) people. The incident released negligible amounts of radioactivity — the estimated dose of radioactivity experienced in the local area is equivalent to ⅙ of the amount you’d get with a chest x-ray, and far below the level of background radiation typically experienced in a year.

However, the dramatic evacuation response, permanent shutdown of the reactor, and lack of clarification or attempts to accurately report what actually happened means many Americans still believe Three Mile Island to be a true “disaster” and reason to ban nuclear power plants. It didn’t help that Jane Fonda’s film China Syndrome, depicting a horrific nuclear meltdown, had debuted 12 days earlier.

Two other accidents, Chernobyl in 1986 and Fukushima in 2011, are similarly misunderstood, and Fukushima in particular, blown quite out of proportion. Chernobyl was operating without today’s safety standards. The plant didn’t have a containment dome, which would have helped to prevent the escape of radioactivity. Even more shocking is what caused the accident: the operating team was running an “experiment” that involved switching off automatic safety mechanisms and simulating an emergency. They did this without training or planning. The initial steam explosion killed 3, while 28 firefighters died from acute radiation syndrome (ARS). 15 died from thyroid cancer in the first 25 years after the accident.

The nuclear plant Fukushima Daichi suffered a meltdown from the flooding induced by the tsunami, however only 0 or 1 people died from the accident, with far more damage and loss of life caused by the overblown evacuation response to the accident. The earthquake that caused the tsunami that led to the Fukushima meltdown was the largest in its recorded history, leading to over 15,000 deaths and a massive toll on the built environment of Japan, including many industrial areas.

Despite these accidents, when compared to other industries, nuclear energy is very safe…

…Nuclear waste’s biggest problem is the prevailing belief that it is dangerous. Unlike other energy industries, nuclear takes full responsibility for its waste, also known as spent fuel, keeping it contained and secure so it doesn’t impact the environment. Nuclear fuel, as well as its waste, is also tiny in volume. All of the nuclear waste in the US could fit on a football field, stacked less than 10 yards high.

In addition, spent fuel can be recycled and used again as fuel in reactors. Regulation that stemmed from anti-nuclear weapons activism currently prevents the recycling of nuclear fuel in the United States, however the Department of Energy is supporting new reactor demonstrations that use recycled fuel, a positive sign that we may see things change here.

Finally, spent fuel has a perfect safety record — it has never killed or injured anyone and is safely contained on site at power plants. Air pollution from burning fossil fuels, for example, kills a million people prematurely each year worldwide.⁴ Solar panels produce 300x more toxic waste per unit of energy than nuclear, without any requirement to safely store this waste. Solar panels are therefore starting to end up in landfills, risking leaching toxic chemicals into groundwater…

…Nuclear is far safer than fossil fuels, particularly coal, and on par with renewables in terms of deaths per GW of power produced. Coal emits particulate matter that shortens lives, and deaths from fossil fuel accidents, e.g. natural gas pipeline explosions, far outnumber those of nuclear (as well as wind and solar, both also very safe). There have been no deaths in the US from commercial nuclear power, and relatively few abroad, especially when compared to other energy sources.

Nuclear energy can be produced in a very small footprint; a typical plant requires only about a square mile. In contrast, to produce the same amount of energy, wind requires 260–360x the amount of land, and solar requires 45–75x the amount of land.⁶ With such a small footprint, nuclear energy leaves a lot more land open for other purposes, including conservation.

2. TIP488: Current Market Conditions w/ Richard Duncan– Trey Lockerbie and Richard Duncan

Trey Lockerbie (00:25:23):

Yeah. That yield curve control in Japan, it seems like inevitable, and a lot of other parts of the world. In your most recent book, we were talking about it in our last episode in March, it was episode 424 for those who want to go back and check that out, you wrote that if the Fed were a corporation, it would be the most profitable corporation in the world, even leading Apple by $30 billion, give or take. And we discussed how the Fed actually makes money. The Fed basically creates money, buys bonds or mortgage backed securities and earns the interest with relatively low overhead. It’s around $8 billion or so, mostly paying probably economists. And in September, the Fed’s net income has, for the first time ever, turned negative. So can you describe exactly what’s going on here and the change with the Fed?

Richard Duncan (00:26:14):

Okay. Well, this takes some explanation. Let me begin by saying that when we spoke in February, the data for last year was not yet available. So when I said the Fed, if it had been a corporation, it would be the most profitable in the world, that was for 2020 data. That year, in 2020, the Fed’s profits were $87 billion. And the Fed is required to hand over all of its profits to the government. So that year, the Fed’s profits reduced the US budget deficit by $87 billion. Last year, the data now is available for 2021, the profits were much higher than they were the year before. Last year, the Fed’s profits were $107 billion that it handed over to the US Treasury Department, reducing the budget deficit last year by $107 billion.

(00:27:01):

So how this works, as you mentioned, the Fed creates money essentially at no cost to itself, and it buys bonds in order to pump money into the financial markets. Since those bonds pay interest to the Fed, the Fed has a lot of interest income. And since it created the money that it used to buy those bonds for free, it has very little interest expense thus far. And so with a lot of interest income and little interest expense, that’s where all the profits come from. Now, what has changed is when the Fed creates money, it does this by, it buys a bond, for example, from a bank, and it pays for that bond by making a deposit into that bank’s account at the Federal Reserve. All the banks have a bank account at the Fed. And so when the Fed buys a bond from J.P. Morgan, for example, it’s simply deposits money into J.P. Morgan’s bank account, money that it has created. It is not money that existed before. And that expands the amount of money in J.P. Morgan’s bank account at the Fed. In other words, it expands J.P. Morgan’s bank reserves.

(00:28:10):

Now, what’s happening is bank reserves, because the Fed has created so much money through quantitative easing, starting in 2008, the Fed has created something like… Well, at the end of 2007, the Fed’s total assets were, let’s say, $1 trillion, a little less than a trillion dollars. At the peak, a few months ago, they had increased to $9 trillion. So between 2008 and now, the Fed’s assets had increased by $8 trillion, meaning the Fed had created eight trillion new dollars, and money that it pumped into the financial system, into the banking system, causing bank reserves to expand. Now, there is massive excess supply of bank reserves. People become very confused about what bank reserves are, and it is really a bit difficult to get your mind around it. But on the other hand, it’s not as complicated as you think.

(00:29:03):

Bank reserves, they’re just money. The money gets transferred around the banking system now electronically. And it becomes very confusing when you think about these digits moving around the banking system and from the banks to loans, and the banks might buy bonds or might make investments in stocks. It all becomes very confusing. But if you think of these bank reserves as just dollar bills and follow where the dollar bills are going, or think of them even, to make it more dramatic, think of this as pennies. Just imagine these mountains of pennies that the Fed is creating and just watch where the pennies move. It’s the same. Bank reserves are the same as dollars, or pennies, or anything you want to look at it. When the Fed creates bank reserves, those bank reserves are not going to go away until the Fed destroys them with quantitative tightening.

(00:29:56):

So for example, the Fed may buy a billion dollars of bonds from J.P. Morgan and deposit a billion dollars into J.P. Morgan’s bank reserves. Now, J.P. Morgan can do anything with those bank reserves that it wants. Those reserves are money. So it could lend that billion dollars to Trey Lockerbie. But Trey Lockerbie is not going to keep the billion dollars worth of pennies in his backyard. That would be ridiculous. He’s going to deposit them in his bank, Goldman Sachs, for instance, perhaps. And then so the bank reserves move to Goldman Sachs. They don’t disappear. They’re not going to disappear no matter how much the banks lend or no matter what they do with those bank reserves. They could buy a building with it. They could buy pork bellies. The banks, just because the reserves move around, they don’t disappear, and they’re never going to disappear until the Fed destroys them through quantitative tightening, which the Fed is now doing.

(00:30:48):

Now, so in the past, making a long story even longer, in the past, the way the Fed controlled interest rates, the federal funds rate, there didn’t used to be massive excess reserves. Banks were required to hold a certain portion of their deposits at the Fed, in their bank accounts at the Fed, as reserves to make sure that if suddenly their customers came knocking on the door asking for their deposits back then the banks would have enough reserves to pay the customers their deposit back so there wouldn’t be bank runs. Back in the 19th century sometime the legally required reserve ratio was as high as 20%. The banks were required to keep reserves of 20% at one point. Over time, this required reserve ratio fell and dropped and dropped and dropped. But so you get the idea. These bank reserves were legally mandated, and the banks didn’t keep excess reserves if they didn’t have to. And so reserves were always scarce, and the Fed was able to manage the federal funds rate by making relatively small adjustments in reserve balances.

(00:31:55):

So for example, if it wanted interest rates to go down, then it would buy some bonds from the banking system. And when it buys bonds, it would inject new reserves into the banking system. So that would increase the amount of bank reserves, and that would make bank reserves more plentiful. And so the cost of borrowing reserves would drop. And conversely, if it wanted interest rates to move higher, the Fed would sell some of the bonds that it already owed to a bank, and the bank would have to pay the Fed by transferring its bank reserves to the Fed. And that would make the reserves in the system more scarce, and that would make the federal funds rate move up.

(00:32:33):

So by banking relatively small changes in its open market purchases and sales, in other words, by just selling a relatively small amount of bonds or buying a relatively small amount of bonds, it could change the supply and demand dynamic in the market for federal funds, affecting the federal funds rate. And that’s how the Fed moved up and down the federal funds rate, by small adjustments in making bank reserves more plentiful or more scarce. But after 2008, that doesn’t work anymore because the overall level of bank reserves in the system are not scarce anymore. They’re super abundant. The Fed has effectively created eight trillion extra dollars that are floating around in the financial system. So now the banks have massive excess reserves, any way you look at it. And the only way to get rid of the excess reserves would be for the Fed to entirely reverse all of the money creation that it’s done over the last 14 years, and that’s not going to happen.

(00:33:31):

So the Fed has had to create a new way to control the federal funds rate, and now the way they control the federal funds rate is entirely different than the way they controlled it in the past. Now they control it by paying interest on bank reserves. So before the Fed started hiking interest rates in March, the federal funds rate was about 25 basis points. And so the Fed paid the banks 25 basis points on their bank reserves so that the banks wouldn’t lend money at less than 25 basis points. Why would the banks lend money to anybody else at less than 25 basis points when they can earn 25 basis points interest from the Fed? Well, now every time the federal funds rate moves up, the Fed makes it move up by paying a higher interest rate on bank reserves. So now that the federal funds rate is at a range between three and three and a quarter percent, the Fed’s currently paying 3.1% on all the bank reserves held by the banks, and, therefore, that’s why the banks won’t lend any money at less than 3.1%.

(00:34:33):

That’s how the Fed is moving up the interest rates. If the Fed didn’t pay interest on these bank reserves, then there’s so many reserves, the banks, there’s excess supply of reserves, so that would put downward pressure on interest rates and the Fed would be unable to push interest rates higher. It would be unable to tighten monetary policy to fight inflation. But by this new policy that they introduced in 2008 of paying interest on bank reserves for the first time ever… Before 2008, it was not legal for them to do this. This is how they make the interest rates go up now. So if they increase the federal fund rate by a further 75 basis points in November, then they’ll start paying something like 3.8% on bank reserves and so on and so forth.

(00:35:18):

So suddenly, the whole dynamic has changed. Before, until very recently when the federal fund rate was very close to zero, the Fed didn’t have to pay any interest on bank reserves or on the money that it created, and so all of its interest income was pure profit. But now it still has the same amount of interest income, but the problem is it’s now paying a lot of interest on bank reserves. And so paying 3% interest on all of these bank reserves suddenly means that the Fed has a very high level of interest expense. And apparently, as you mentioned in September, if their net profit turned negative in September, it is because their interest expense, 3% on bank reserves, is greater than their interest income on all of the bonds that they own. And so it’s possible now that it seems likely that for this full year they’ll probably still have a profit, but for next year they will probably make a loss.

(00:36:12):

But of course, you’ve got to keep in mind that the Fed doesn’t have a lot of capital, and it doesn’t have a lot of capital because it gives all of its profits to the government every year. As I think I mentioned earlier, since the Fed was created, it has given the government $1.8 trillion. And just since 2008, most of that has come since 2008 when they started quantitative easing. The Fed has given the government $1 trillion since 2008. If it were a normal bank, all of that would have been in their capital account. But now they don’t have very much capital because they have to give all their profits to the government. So they’re going to make a loss. If they have a loss, they’ll have negative capital. But I don’t think that’s a particularly pertinent issue.

Trey Lockerbie (00:36:53):

It’s not, because I guess my question around that, to your point, was who is the lender to the Fed, right? As far as they run a deficit now, how are they covering that deficit?

Richard Duncan (00:37:05):

So the Fed, of course, can create as much money as it needs, and in the future it will revert to a position where it once again has more interest income than interest expense, assuming that one day interest rates go back down. I think for much of the money the Fed has extended through its quantitative easing programs is guaranteed by the government. So the government debt, instead of being lowered by government profits as it has been practically every year since 1913, the government debt going forward for the next couple of years will probably be higher as a result of the Fed’s losses.

Trey Lockerbie (00:37:45):

Is IOER, the interest on excess reserves, basically the technical term for what you were describing there?

Richard Duncan (00:37:52):

So things become even more complicated because, yes, it is, but in addition to bank reserves, bank reserves are on the Fed’s… They’re liabilities. But suddenly there’s a new big item on the Fed’s liability side that didn’t exist very long ago, and that is reverse repurchase agreements. And rather than that, so banks have bank accounts at the Fed, and that’s where they keep their bank reserves. Suddenly, over the last couple of decades, money market mutual funds have become a big new thing, relatively speaking, over the last couple of decades. And these money market mutual funds also need some place to make a profit. They’ve got, I think, last I looked, nearly $5 trillion of assets. And so this forced the Fed to allow them essentially to all have bank accounts at the Fed also in the form of reverse repurchase agreements. It’s essentially the same thing as bank reserves, except reverse repurchase agreements are where the money market mutual funds can park their money, and they will also be paid 3% interest right now since that’s where the federal funds rate is. And that will prevent them from lending to anyone at less than 3%.

(00:39:04):

So the Fed now has to pay interest on not only bank reserves but on what are effectively the reserves of the money market mutual funds. It has to pay interest on both of these. Bank reserves are around $3 trillion, and money market mutual funds have about $2.2 trillion at the Fed. So, that’s something like $5.2 trillion that the Fed is now paying interest on, and that is why their interest expenses shot up, and that’s why their profits have dropped from over 100 billion last year to probably a negative number next year. Now, this is a real issue that I think there is a solution to. There is no reason for the Fed to be paying interest on bank reserves because the banks didn’t do anything to earn those reserves. They didn’t make loans, they didn’t speculate in pork bellies, they didn’t nothing whatsoever to earn those reserves.

(00:39:56):

The Fed’s action created those reserves by creating money and depositing that money into the bank’s reserve accounts. That money is a pure function of the Fed policy, nothing whatsoever to do with what the banks have done. And so all of the profits the banks are earning on this 3% interest payment from the Fed, it’s pure windfall profits which they do not deserve. And therefore, there’s a way to resolve this, right? Over time, I mentioned in the 19th century, the legal required reserve ratio was 20% at some points in some banks, in some cities. But over time in the US, the Fed continued to reduce the required reserve ratio year after year after year after year. And the more it reduced the required reserve ratio that made the money multiplier expand. This may be a bit technical, but through the process of fractional reserve banking, the money multiplier is one divided by the required reserve ratio. And what that means is if the required reserve ratio is 10%, one divided by 10% is 10 times, and that’s the money multiplier.

(00:41:05):

What that means is for every new deposit that enters the banking system, they can effectively create 10 times that much money through lending and relending and relending that deposit. But over time, the Fed reduced the required reserve ratio again and again and again until it was really in the low single digits. And then in 2020, they reduced it to zero. So there’s no longer any required reserve ratio whatsoever for the United States, meaning that the money multiplier is infinity. The only constraint on how much the banks can create now in money is their reality that if they lend too much, the people they lend to won’t be able to afford to pay the interest on the money that they’ve borrowed.

(00:41:45):

So the solution to this problem of the Fed having to pay such high interest rates is the Fed should just simply reimpose a required reserve ratio on the banks that is high enough to absorb all of their reserves until there are no more excess reserves left. So right now, the required reserves are calculated by the amount of reserves the banks have as a percentage of the banks’ deposits. The required reserve ratio is how much reserves the banks have as a percent of their bank deposits. In the past, they were required to keep a reserve against their deposits. Right now, their amount of reserves relative to their amount of deposits is about 16%. Right now, the required reserve ratio is 0%, and the Fed is having to pay 3% interest on all of these reserves.

(00:42:33):

So what the government should do is increase the required reserve ratio from 0% to 16%, absorbing all of these excess reserves so that we would once again be back in the situation where we were before 2008, where reserves were scarce and the Fed was able to control the federal fund rate by making relatively small changes in its bond purchases and bond sales, so we could revert to the old system of having a required reserve ratio. Then, since the banks would be required to keep 16% of all of their deposits as reserves, then it wouldn’t be necessary for the Fed to pay interest on the reserves anymore because the banks would be required to keep these reserves. There would be no need to pay them for them. And in that case, the Fed would become immensely profitable again.

(00:43:21):

So this is what the government should do is reimpose very significantly higher required reserve ratio to absorb all of these excess reserves. That would immediately restore the Fed’s profitability, and it would ensure that all of the Fed’s profits go to the government, which is, in other words, go to the US taxpayers rather than ending up as windfall profits to the banks who’ve done nothing whatsoever to earn them.

3. What to Do When You Know What Stocks Will Do Next – Jason Zweig

Imagine you could know tomorrow’s news today. Would that make you a better investor?

On Oct. 13, the Labor Department announced the consumer-price index rose 8.2% in September from the same month a year earlier, dashing hopes that inflation would drop.

What if you had known, on Oct. 12, exactly what would be in the next morning’s inflation report? You’d have bet stocks would tank, with a skittish market certain to panic on the news. You’d never have guessed what happened next.

After nosediving 2% when the market opened that morning, stocks turned around almost instantly, shooting up to close nearly 3% higher, one of the biggest intraday swings on record. In fact, U.S. stocks have risen roughly 9% since their low on the morning of Oct. 13.

Maybe people decided the bad news wasn’t bad enough to make the Federal Reserve raise interest rates even more than the 0.75 percentage point already considered inevitable at its November meeting. Maybe they felt the bad news was less bad than their worst fears.

Who knows? What we can know is that even possessing tomorrow’s news today wouldn’t assure you of being able to make a profitable trade. That’s why it’s so important to stick to a long-term plan rather than chasing the latest illusion of certainty.

One of Wall Street’s favorite sayings is that investors hate uncertainty. What they should hate, instead, is certainty.

4. Modern Meditations: Ann Miura-Ko – Mario Gabriele and Ann Miura-Ko

2. Which current or historical figure has most impacted your thinking? 

That’s easy: David Swensen. He led Yale’s endowment for 36 years and was a mentor of mine. Not only did he influence my professional life, but he impacted how I think about things. 

First of all, he was such an original thinker. When he arrived at Yale, as this young guy from Wall Street, no one saw endowments as anything more than a pool of money. David invented portfolio management and invested in illiquid and risky asset classes like venture capital which are higher beta but led to transformational returns over many decades. Those insights and many others changed how institutions oversee their money. Many of today’s endowments and foundations operate according to the Swensen philosophy. 

Beyond his incredible professional accomplishments, I was even more influenced by the person he was. 

David was a remarkable mentor to people from different backgrounds. He cared about diversity long before it was popular to care. David was always mentoring women and minorities because he believed it was the right thing to do and because he derived great joy from it. This started in his office with the people who worked with him and extended to the managers of funds he entrusted the endowment to. 

Finally, David demonstrated it was possible to be professionally successful and a dedicated parent. A friend told one such story at his memorial. David coached his son’s Little League team for years and with incredible gusto. One day there was a Wall Street Journal article on David and the Yale endowment. A parent showed this article to a young seven-year-old teammate. The kid burst into tears and said, “Does this mean Coach Dave got another job?”…

…8. What contemporary practice will our descendants judge us for most? 

We’ve forgotten how to criticize our institutions from a place of love. So much of the discourse today is defined by disgust or hatred. We see something broken and want to annihilate it instead of trying to fix it. Not only do I think that’s a shame, but it also doesn’t feel effective. Would you ever listen to feedback from someone that hated you? 

I read a biography of Abraham Lincoln recently. Lincoln thought it was important for schools to teach a love for America’s institutions. I think that’s missing today. We must impart that love to our children – to re-learn admiration for imperfect things and even people. Then, we can engage with them from a place of discovery and optimism.

9. What risk are we radically underestimating as a species? 

Cyber warfare. It’s not well understood, and possible solutions are incredibly under-resourced. 

I saw this threat develop during my Ph.D. Between 2003 and 2010, bad actors went from vandalizing websites to nation-state-level warfare. I still don’t think America has adapted more than a decade later. From a budgetary and infrastructural standpoint, we don’t have what we need, which puts us in incredible danger. It’s an area of risk the general public doesn’t consider because it is so invisible. 

The primary challenge in this space is talent. We simply aren’t training enough people. 

5. No Grand Strategy: The Complete Financial History of Berkshire Hathaway – Frederik Gieschen

Consider its unlikely origins. Buffett, brilliant as he was, got himself into the driver’s seat out of spite. Cigar butt investments, as Berkshire was, are there to be picked up, smoked, and discarded. Buffett intended to exit the stock through a tender offer before Seabury Stanton, Berkshire’s CEO, tried to short-change him by 12 ½ cents. In that moment, the otherwise calculating and rational Buffett made an emotional decision.

Instead of moving on to the next stock, he stuck around. He committed. I find it utterly relatable that he took it personally, that he got triggered into taking control of a basket case of a company. He was going to show people how to build a great business. It’s a testament to his abilities and what Adam described as “patient opportunism” that Berkshire turned out the way it did.

“Building Berkshire was an exercise in patience combined with opportunism and a reminder that opportunity cost matters. There was no grand strategy.”

It also reflected the initial conditions in which Buffett and Munger operated, including having the “good fortune to observe what worked and what didn’t” at the previous generation of conglomerates. “These lessons were then applied to their canvas at Berkshire to create a masterpiece.”

“Warren Buffett and Charlie Munger were born at the right time to fill their sails, and that of their conglomerate, with incredible tailwinds. They were lucky to begin solidifying Berkshire’s economic position when market inefficiencies were much more prevalent.”

There was no grand plan and small mistakes turned out to be the stepping stones on the way to great success.

“Mistakes in capital allocation, such as the losses experienced in Florida and Texas in Berkshire’s Insurance Group, do happen. The key is making sure bad investments don’t put the larger enterprise at risk, learning lessons from those mistakes, and communicating candidly with shareholders about them.”

However, Berkshire under Buffett was never truly in peril. Buffett carefully created structures that ensured survival. There’s a lesson in that, too.

“[Buffett] wrote that Berkshire probably could have increased the 23.8% compounded annual return it had achieved by borrowing more money, but he was uncomfortable with even a 1% chance of failure. Even at 99:1 odds, he and Munger would not have been comfortable with the risks.”

“Charlie and I have never been in a big hurry: We enjoy the process far more than the proceeds—though we have learned to live with those also.”

6. Weekly Special – An Overview of RNA Technologies – BioCompounding

RNA technologies made headlines in 2021 when the first mRNA-based COVID-19 vaccine was approved in December 2020.

However, RNA therapy is not a new technology. RNA modalities have been under development for several decades and by Jan 2020, the U.S Food and Drug Administration (FDA) had approved a total of eleven RNA drugs, and that has increased to sixteen approved RNA therapeutics by March 2022. In addition, there are approximately another 29 RNA therapies in clinical trials as of March 2022.

The first use case of RNA as therapeutics was demonstrated in the late 1970s, Zamecnik & Stephenson demonstrated the potential of RNA antisense oligonucleotide (ASO) therapy.  The duo showed that the synthesized ASOs were able to inhibit Rous sarcoma virus replication, by inhibiting viral protein translation. This was followed by the use of mRNAs for protein expression, RNAi for translation inhibition, and further developments in other formats…

…Most RNA therapies can be sorted into one of three broad categories (See image below for visuals):

1) those that target nucleic acids (either DNA or RNA), which can be further divided into two distinct types of therapies: a. Single-stranded antisense oligonucleotides (ASOs) and; b. Double-stranded molecules that operate through a cellular pathway known as RNA interference (RNAi)

2) those that target proteins (aptamers), and

3) those that encode proteins (mRNA).

Also, hybrid approaches that combine several RNA-based mechanisms into a single package are emerging…

…Some of the key challenges that had to be addressed to make RNAs therapeutically viable as a treatment modality are as follows:

1) nucleic acids are negatively charged and do not passively cross the hydrophobic lipid barrier of the cell.

2) exogenous RNAs are degraded rapidly by RNases once they are injected into the host.

3) some exogenous RNAs cause an immune response that hampers the translation of the target protein or causes the development of a toxic cell environment

4) The short half-life of RNA.

Luckily, scientists over the past couple of decades have substantially overcome these barriers with the use of many unique delivery methods, such as nanoparticles that protect the RNA and enable cell-specific delivery of the therapeutic agent.

On the half life front, scientist initially improved the stability and half-life through a RNA modification called pseudouridine, whish replaces uridine. It is demonstrated that pseudouridine can enhance RNA stability also decrease anti-RNA immune response. As further improvements in half-life are required scientists are innovating to further improve the half-life of RNA therapeutics specifically mRNA therapeutics, read more here.

7. Hyperinflation in the Roman Empire and its Influence on the Collapse of Rome – Mark

Lasting for more than 100 years and classified as the world’s longest-lasting empire, the Roman Empire was a political, economic, and technological powerhouse. According to legend, the famous Empire was founded in 753 BC by the two twin sons, Romulus and Remus, of Mars (the god of war). The Roman Empire persisted for well over a thousand years, although it had its ups and downs.

The Pax Romana (which translates to “Roman Peace”) was a period spanning two centuries, starting from 27 B.C.E all the way to 180 C.E. The Pax Romana was essentially the Roman version of the American “Era of Good Feelings.” The two-hundred-year epoch in Roman history was a period of relative peace, minimal war, technological progression, and economic prosperity, under the governance of famous Roman emperors like Augustus (63 B.C.E. — 14 C.E.), and the stoic Marcus Aurelius (121 C.E. — 180 C.E.)

However, despite the Pax Romana era of prosperity and peace in the Roman empire, the following centuries leading up to the collapse of the Roman Empire would be plagued with disaster. One aspect we will be exploring and analyzing in this article is the role of hyperinflation in Rome and how it exacerbated the collapse of the Roman Empire.

Rome’s economic struggles began with problems of its regional currency, the Roman Denarius. The silver Denarius was implemented and produced as the national currency of Rome starting as early as 211 B.C.E., minted all the way until the middle of the third century C.E. until it was replaced by the Antoninianus, a temporary currency instated by Roman Emperor Caracalla (188 C.E. — 217 C.E.) to help curb the hyperinflation of the silver Denarius.

Around the size of a nickel, the Roman Denarius was approximately worth a day’s wages for a craftsman in Rome. The coins were initially minted with 4.5 grams of pure silver (this is considered high purity.) Initially, the value of the Denarius was not based on consumers’ confidence in the Roman government or some gold reserves located who knows where. The currency was backed by itself — meaning that the value of the Denarius was based on the value of the silver used to mint that coin.

Because of a finite supply of silver and precious metals entering the Empire, Roman economic activity was limited to the number of denarii in circulation. Because there was a small circulation of denarii in the beginning decades of its conception, the Denarius could not successfully be used as a medium of exchange or currency, because there just wasn’t enough of the currency to go around. This problem was an especially hard pill for the Roman Emperors to swallow, as they could not finance their “pet projects” (wars, newly constructed amphitheaters, circuses, etc.) with the small circulation of denarii in the Empire.

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

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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 30 October 2022:

1. The state of the energy transition – Bill Gates

The world still needs to reduce annual greenhouse gas emissions from 51 billion tons to zero, but global emissions continue to increase every year. If you follow the annual IPCC reports, you’ve watched as the scenarios for limiting the global temperature rise to 1.5 or even 2 degrees Celsius become increasingly remote. And some of the clean technologies we need are still very far from becoming practical, cost-effective solutions we can deploy at scale.

In the past decade, we finally got going. Over the next three, we need to go much further, much faster. I still believe we can avoid a climate disaster—if we devote the next generation to mobilizing the largest crisis response in human history.

To understand what it will take to get to zero, we need to start by asking where the 51 billion tons of emissions come from. Unfortunately, the answer is everything and everywhere.

Everything: Virtually every human activity produces greenhouse gas emissions. People automatically think of electricity, where there’s a path to zero because wind and solar are now cheaper than fossil fuels. But electricity accounts for only 26 percent of global emissions. Similarly, lithium-ion batteries have made it possible to see a net-zero future for car travel. But cars account for less than half of the transportation sector’s 16 percent of emissions. Lithium-ion batteries don’t do much about the emissions from long-distance travel in airplanes, cargo ships, and heavy-duty trucks.

Agriculture and buildings account for 21 and 7 percent of emissions, respectively. The sector with the most emissions, 30 percent of the total, is manufacturing—making the things that modern life depends on, like cement, plastic, and steel. There are currently no cement plants in the world, and exactly one steel plant, that don’t produce CO2.

So, if you are reading this over lunch on a plastic device in your climate-controlled concrete-and-steel office building that you took a bus to get to, you begin to see how more or less every aspect of our lives contributes to the problem.

Everywhere: More than 70 countries have committed to reaching net zero, including big polluters like the United States and the European Union. Even if the US and Europe get there, however, we won’t have solved the problem. Three-quarters of the global population lives in emerging economies like Brazil, China, India, and South Africa, and although historically they played a very small role in causing climate change, they are now responsible for two-thirds of total greenhouse-gas emissions. China by itself emits more than one quarter. So solutions can’t be dependent on unique conditions in a single country or region. They have to work in all countries, or the temperature will continue to rise.

Thinking globally instead of nationally reveals why we can’t solve climate change simply by using less energy. Low- and middle-income countries are building aggressively to achieve the standard of living their people aspire to—and they should be. Many countries in Europe and North America filled the atmosphere with carbon to achieve prosperity, and it is both unrealistic and unfair to expect everyone else to forgo a more comfortable life because that carbon turned out to change the climate…

…Humanity has never had all these raw materials in front of us before: the investment, the policy, the pipeline of innovations, the overall public awareness that climate change is a priority. In recent polling, more people around the world see climate as a major threat than any other issue. And more individuals than ever are taking productive steps to reduce their own carbon footprints, which when viewed collectively sends a powerful signal to business and government leaders that more must be done. But even with all these tools and momentum, we still have to fashion them into a comprehensive solution.

That means three things: more research, development, and demonstration; developing a fair, workable process for scaling up; and helping people adapt to the climate change that is going to happen no matter what we do now.

Research, development, and demonstration: There are still many critical clean technologies that aren’t anywhere near cheap enough to compete. We need sustainable liquid fuels for long-haul transportation; affordable ways to capture CO2 directly from the atmosphere; additional sources of renewable energy to keep up with global demand that will double or triple as we electrify more and more processes. And to fill these gaps, we need to keep doing what we’ve done well since 2015: we need to ratchet up investment in clean-energy innovation even more.

Develop a fair, workable process for scaling up: We cannot pretend an energy transition won’t be disruptive. Although new industries and jobs will appear, some old ones will disappear. New infrastructure will affect the communities where it’s built. In the past, low-income communities and communities of color have suffered disproportionately from decisions about where big infrastructure projects should go, and we cannot let that happen this time. Public policies need to ensure a just transition so that we never pit a livable planet in opposition to people’s livelihoods. Those who could experience disruption need a voice in the process.

At the same time, there must be a transition. Last year, voters in Maine blocked the construction of transmission lines needed to bring low-carbon electricity to the Northeast. Some of those transmission lines were slated to cut through farms and forests, but nevertheless we need to be able to make responsible tradeoffs in fair and transparent ways so we can go faster. The unimaginable disruptions caused by a 4-degree rise in temperature will outweigh the downsides of most clean energy solutions—and a strong community engagement process will result in better design and siting of projects.

Help people adapt: The climate has already changed dramatically, and it will continue to do so. To minimize the damage these changes cause, we also need to invest in helping people adapt to a warmer climate, rising sea levels, and less predictable weather. That means investing in crop science so that farmers can plant seeds that are more tolerant of heat, an area our foundation has been working in for years. It also means figuring out technologies like desalination to guarantee that communities will have access to clean water, and upgrading port facilities around the world to make them resilient to floods and storms. The world must use the same strategies that have incentivized innovation in mitigation technologies to start getting serious about adaptation, too. We’re expanding our approach at Breakthrough Energy to reflect this perspective.

2. Cumulative vs. Cyclical Knowledge – Morgan Housel

In some fields our knowledge is seamlessly passed down across generations. In others, it’s fleeting. To paraphrase investor Jim Grant: Knowledge in some fields is cumulative. In other fields it’s cyclical (at best).

There are occasional periods when society learns that debt can be dangerous, greed backfires, and more money won’t solve all your problems. But it quickly forgets and moves on. Again and again. Generation after generation.

I think there are a few reasons this happens, and what it means we have to accept.

Some fields have quantifiable truths, while others are guided by vague beliefs and individual circumstances. Physicist Richard Feynman said, “Imagine how much harder physics would be if electrons had feelings.” Well, people do. So any topic guided by behavior – money, philosophy, relationships, etc. – can’t be solved with a formula like physics and math.

Neil deGrasse Tyson says, “The good thing about science is that it’s true whether or not you believe in it.” You can disagree and say science is the practice of continuous exploration and changing your mind, but in general he’s right. Germ theory is true and we know it’s true. But what about the proper level of savings and spending to live a good life? Or how much risk to take? Or the right investing strategy given today’s economy? Those kinds of questions do not lend themselves to scientific answers. They’re subjective, nuanced, and impacted by how the economy changes over time. So often there simply isn’t relevant information to pass down to the next generations. Even when firm financial rules exist, some truths have to be experienced firsthand to be understood.

Cyclical knowledge, and the inability to fully learn from others’ past experiences, means you have to accept a level of volatility and fragility not found in other fields. I can imagine a world in 50 years where things like cancer and heart disease are either non-existent or effectively controlled. I cannot ever imagine a world where economic volatility is tamed and people stop making financial decisions they eventually regret – no matter how much history of past mistakes we have to study.  

3. Madhavan Ramanujam – How to Price Products – Patrick O’Shaughnessy and Madhavan Ramanujam

Patrick: [00:02:48] So Madhavan, I’ve loved reading your book years ago and then again in preparation for our conversation today for one major reason. And we’ll talk a lot about that reason in a few minutes here, and we’ll go over the place and all the things you’ve studied in business. But the one thing that you sort of blew my mind on with your book is the importance of pricing, which is something that so many entrepreneurs out their struggle with, and the order in which pricing should come in a product conversation. I think almost everyone puts that at the end. I have an idea, let’s talk to customers, let’s design something, let’s build something, and then let’s figure out what to charge for it. I’d love you to provide your alternative perspective on that order of operations and why you arrived at a radically different way of building products.

Madhavan: [00:03:32] I think probably framing the problem at hand for many years, I was working as a pricing consultant, especially in Silicon Valley. And I really witnessed how everyone was so obsessed on creating amazing new innovations but hardly paid attention to how to monetize successfully or to even have a willingness to pay in the market. We used to even get calls saying, “Hey, I built a new product. We’ve been working on it for the last 2 years, and we need a price. And by the way, we needed it last week.” And you couple all these reactions with the failure rate that you actually see in innovation, it’s remarkably high.

And when I took a step back and I kind of looked at it, I think the classic phrase that comes to mind is that these companies were, I would say, simply spraying and praying and hoping that they can monetize and they can build products that people will eventually buy. But the core issue here is they were hoping because they truly didn’t know. They built the products, slapped down a price and threw it in the market, and hoped for the best. I mean, this had to change. And this is why I wrote Monetizing Innovation. What we call a winning approach is to think pricing early and to really test for, whether there’s a product market pricing fit before you go too far in the journey.

And the reason for this is inverting that mindset is critical because when you’re building something as an entrepreneur, as a company, you actually don’t have a choice whether you’ll have a pricing conversation with a customer. The only thing in your control is when you will have it. And we are advocating having that much earlier so that you can design the product around what customers need, what they value, and what they’re willing to pay for, in a sense, know that you will monetize as opposed to hope that you would.

Patrick: [00:05:08] Maybe you can bring this to life and make it tangible for us with an example because it’s hard for me to imagine having a price conversation before I have a product to show somebody. It seems like the impulse is build something even if it’s like a vaporware, demo, or something, and be able to walk in the office and say, “This is what we do” and then maybe have a pricing conversation. But I think you think pricing conversation should be even before the design and building phase. So how does one of these conversations unfold if there’s nothing to show in the first place?

Madhavan: [00:05:35] Yes. Probably I’ll take an example of a story, and we talk about this in the first chapter of the book. It’s a story from Porsche. In their early ’90s, they were actually — they’re thinking of an innovative idea. They said, “Okay, should we build an SUV?” But an SUV for a Porsche, that just seemed off. What they did was interesting. They went to the market. There’s nothing drawn in terms of a blueprint, sketch, or even a product. But they just went in and tried to identify whether there is a need for a Porsche SUV. And more importantly, would someone pay for it, very high level. Pleasant surprise, they actually found that people said, “Yes, Porsche SUV could make sense, and I would pay for it.” I mean, people who had probably moved on from Porsche because they had a family, et cetera, but they wanted to come back to the Porsche umbrella. What happened next was super fascinating. What they did is they came up with blueprints, sketches and kept having this conversation with customers trying to identify what do they need, what do they value in an SUV, and are they willing to pay for it. They even did what we call as car clinics, where they would build a prototype, full-scale prototype, where they would actually bring in people and let them ride the car around. And not a single unit has been, let’s say, manufactured or productized yet, but it’s still a prototype.

And then after that experience, they would have this kind of willingness to pay conversations. Things like, for instance, a big cupholder, probably which goes against the grain of most engineers, doesn’t look very aesthetically appealing, is in the car because people said they need it, they value it, and they’re willing to pay for it. I mean, a 6-speed manual transmission, no one needed that in an SUV. That was out of the window. So everything that went into the car was actually battle-tested with customers to see if they need it, they value. And more importantly, are they willing to pay for it? This is a very different way of innovation as compared to like the age-old approach has been always build a product, perfect it, our customers don’t know what they want, let’s slap on a price and throw it in the market and hope for the best. Very different. But if you look at the output of this exercise, also couldn’t have been more different than traditional innovation processes. I mean, this SUV was launched with the name of Cayenne, which we all know today accounts for more than half of Porsche’s profit and is built in hundreds and thousands of units, one of the roaring successes in automotive history.

I think the key here is to have that conversation with your customers early. We are not saying you just have it once. It’s a bit of you have it over a period of time and sustaining. Like if you built a prototype and you pitch the value and you pitch the benefits, and if someone actually says they won’t pay for it, chances are they’re not going to pay for it when you build a nicer-looking version, and that’s the point. So having the testing and learning much earlier. And if someone says, no, they won’t pay for it, the most important question is to ask why. And you start hearing all of these things to design your products around what drives customers’ needs, what do they value and what are they ultimately willing to pay for. The folks at First Round wrote a blog article, in which they summarized the entire thesis of the book Monetizing Innovation in four succinct words. They said price before product, period.

Patrick: [00:08:36] What I like about that example is Porsche is not showing up saying, “We’ll build anything you want, what do you want?” They do have an SUV in mind. They’re willing to build single prototypes to test reaction. You’re not walking with a white sheet of paper, like there’s some opinion that they have. But they’re still testing that willingness to pay very, very early on. And I want to make sure we highlight what is distinct about willingness to pay versus just positive feedback because I think lots of things, features, and products or whatever, people might react positively to. But that’s not the same as their willingness to pay. So I want to make sure I understand the difference. And then I’ll ask what it looks like to have a great willingness to pay conversation, like how you actually structurally execute that strategy?

Madhavan: [00:09:18] Most of the companies, at least in the tech space, would tell you they try to achieve a product market fit. And while that is good, it is not sufficient. For instance, if someone comes and ask, do you like the headset that you’re wearing for this conversation? I like it. Do you like it at $200? The whole conversation is different. So if you didn’t put pricing as part of your product market fit validation, often you are hearing what you want to hear. The idea is to get to a product market pricing fit and try to truly understand if, at the end of the day, someone will pay for the innovation as in do they truly value it.

Because I think it also comes down to like how do we define price. When we talk price, most people think of a dollar figure. That’s just a price point. I think we need to educate people to think about price as a measure. For instance, liter is a measure of volume, price is a measure of value. And when you think of it this way, price really stands for do people want your product and how badly you want it. And in a way, the easiest way to remember this, in Latin, there’s only one word for price and value. It’s called pretium. And I think they figured this out long back. It’s reflections of the same coin.

4. Looking at Japan with FT Unhedged – Matthew C. Klein, Rob Armstrong, and Ethan Wu

Unhedged: As most of the world’s major economies have struggled with waves of pandemic-driven inflation and rapid policy tightening designed to address that inflation, Japan has stood apart. In August, Japanese consumer price inflation rose to 3% y/y. That’s a 30-year high, but officials in the U.S. or Europe can only dream of such a low figure. The Bank of Japan, correspondingly, swims against the global tide, keeping monetary policy loose. The result has been a dizzying fall in the yen:

It is the combination of an economic environment distinct from the rest of the world and a weak currency that drew Unhedged’s attention back to Japan. Surely relatively gentle policy, a currency supportive of exports, and some pent-up post-pandemic demand in Japan and Asia should create investment opportunities in a Japanese market that has been unpopular with global investors in recent years?

Matt Klein: The thing that really stands out to me is that the 1980s bubble and 1990s bust left a massive permanent mark on the Japanese economy. Corporations went from being massive borrowers that relied on external finance to cover their capital budgets (and some of their operating expenses) to being huge net lenders. Since 1995, debt repayments, cash accumulation, and purchases of other financial assets have added up to more than ¥600tn. The costs of this financial conservatism have been falling business investment and rising precarity for workers.

Shinzo Abe’s economic program was a response to this problem. The hope was that a mixture of carrots (a weaker yen, lower taxes on profitable companies, more pro-business regulations, infrastructure investment) and sticks (inflation, governance reforms, higher taxes on unprofitable companies) would get companies to start spending their cash piles. It didn’t really work, but the upshot is that Japanese companies have ended up with absurdly strong balance sheets…

…Unhedged: We have heard for a long time that strong Japanese balance sheets would be put to work creating shareholder value. Maybe now is the moment?

Matt: In theory, there is enormous potential for Japanese companies to boost shareholder returns by rejiggering their balance sheets. Dividend yields have ticked up since Abe began pushing for higher shareholder payouts a decade ago, but they are still low. Buybacks may be anathema to executives scarred by the 1990s, but there is no obvious reason why companies operating in a world of zero interest rates should be so conservative with their cash, which is worth about 13 times operating income.

Unhedged: Japanese companies’ balance sheet strength may make them look — in theory — like a haven in the rising-rate storm. So far, though, the Tokyo market remains unloved by international investors. That is understandable: a consequence of the weakening yen is that, measured in global currencies, the Tokyo stock index has performed terribly. From the start of the pandemic in February 2020, the Topix is up 20% in yen terms, but down 7% in dollars, badly trailing US and global indices…

…Matt Brett manages the Baillie Gifford Japan Trust, which has returned 300 per cent investing in Japanese equities (in pounds) over the past 10 years. He says that recently Japanese growth stocks, in which the Trust specialises, have followed US techs down, with the difference that “the Japanese growth stocks never went up”. Growth companies are trading at 1.3 times sales, he reckons, a “tiny premium” to the Topix at 1.1. Meanwhile, the yield on the stocks in the trust is 2.4 per cent. “As stock pickers, we are quite excited,” he says.

5. The end of Apple’s affair with China – The Economist

The mushrooming of factories in southern India marks a new chapter for the world’s biggest technology company. Apple’s extraordinarily successful past two decades—revenue up 70-fold, share price up 600-fold, a market value of $2.4trn—is partly the result of a big bet on China. Apple banked on China-based factories, which now churn out more than 90% of its products, and wooed Chinese consumers, who in some years contributed up to a quarter of its revenue. Yet economic and geopolitical shifts are forcing the company to begin a hurried decoupling. Its turn away from China marks a big shift for Apple, and is emblematic of an even bigger one for the world economy.

Apple’s packaging proclaims “Designed by Apple in California”, but its gadgets are assembled along a supply chain that stretches from Amazonas to Zhejiang. At the centre is China, where 150 of Apple’s biggest suppliers operate production facilities. Tim Cook, who was Apple’s head of operations before he became chief executive in 2011, pioneered the firm’s approach to contract manufacturing. A regular visitor to China, Mr Cook has maintained good relations with the Chinese government, obeying its requirements to remove apps and to hold Chinese users’ data locally, where it is available to the authorities.

Now a change is under way. Big tech is showing strains. On October 25th Alphabet and Microsoft presented disappointing quarterly results. Meta, which lost another fifth of its value after reporting the second straight quarter of declining sales, is a shadow of its former self. Apple’s latest earnings, due out after The Economist went to press on October 27th, may be dented by creaky Chinese supply chains and softening demand from Chinese consumers. So Mr Cook, who has not been seen in China since 2019, is wooing new partners. In May he entertained Vietnam’s prime minister, Pham Minh Chinh, at Apple’s futuristic headquarters. Next year Apple is expected to open its first physical store in India (whose prime minister, Narendra Modi, is a fan of gold iPhones).

The two countries are the main beneficiaries of Apple’s strategic shift. In 2017 Apple listed 18 large suppliers in India and Vietnam; last year it had 37. In September, to much local fanfare, Apple started making its new iPhone 14 in India, where it had previously made only older models. The previous month it was reported that Apple would soon start making its MacBook laptops in Vietnam. Some of Apple’s newer gadgets show the way things are going. Almost half its AirPod earphones are made in Vietnam and by 2025 two-thirds will be, forecasts JPMorgan Chase. The bank reckons that, whereas today less than 5% of Apple’s products are made outside China, by 2025 the figure will be 25% (see chart 1).

As Apple’s production system is shifting, its suppliers are diversifying away from China, too. One crude measure of this is the share of long-term assets that Taiwanese tech-hardware and electronics firms have located in China. In 2017 the average figure was 43%. Last year that had fallen to 31%, according to our estimates using company and Bloomberg data.

The most urgent reason for the scramble is the need to spread operational risk. Two decades ago the garment industry beefed up its operations outside China after the sars epidemic paralysed supply chains. “sars made it very clear to everyone operating in China that you needed a ‘China+1’ strategy,” observes Dominic Scriven of Dragon Capital, an investment firm in Vietnam. Covid taught tech firms the same lesson. Lockdowns in Shanghai in the spring temporarily shut a factory run by Quanta, a Taiwanese firm, believed to be making most of Apple’s MacBooks. Avoiding this kind of chaos is the “primary driving force” for Apple’s supply-chain moves, says Gokul Hariharan of JPMorgan Chase.

Another motive is containing costs. Average wages in China have doubled in the past decade. By 2020 a Chinese manufacturing worker typically earned $530 a month, about twice as much as one in India or Vietnam, according to a survey by jetro, a Japanese industry body. India’s ropey infrastructure, with bad roads and an unreliable electrical grid, held the country back. But it has improved, and the Indian government has sweetened the deal with subsidies. Vietnam offers tax rebates and holidays, too, as well as free-trade deals, including one recently signed with the eu. Bureaucracy around visas and customs remains a pain. But the work ethic is similar to that in China: “Confucius still gets them out of bed in the morning,” says one foreign executive in Vietnam.

6. Thinking About the Next Warren Buffett – Frederik Gieschen

Shareholder: “Do you ever get tired of being Warren Buffett? If you could come back again, would you want to be Warren Buffett?”

Buffett: “You see a lot of the publicity here for a couple of days around the time of the meeting. But life goes on in a very normal way. And I have fun every day of my life. Because, you know, I get to do what I want to do. And I get to do it with people I like and admire and trust. And it doesn’t get any better than that.”

The more I read about Buffett, the more overwhelmed I feel. The scale of his success and the sheer volume of material by and about him seems like too much to tackle. It creates a temptation to boil down the many layers and lessons into one convenient number: the track record.

Then I remind myself of this quote in which Buffett described the essence of his and Munger’s jobs:

“We have to identify and keep good managers interested after we’ve figured out who they are. The second thing we do is allocate capital. And aside from that, we play bridge.”

Notice the balance. Capital and people. Reading and relationships. Buffett is well aware that financial capital is not the only asset that compounds. His entire life he has been compounding social capital: relationships, trust, reputation.

You can’t tap dance to work if you don’t like who you’ll meet at the office. You can’t lead an enterprise with 372,000 employees based on “decentralization almost to the point of abdication” if you can’t completely trust your managers.

We have to resist the temptation to view him through just one lens. It creates a caricature. It’s not helpful. It’s worth asking: How many layers are there to Buffett’s success?

• Followed his passion.
• Great investor with an enviable long-term track record. 
• Built a company in his image.
• Keeps painting his own canvas every day. 
• Reached the top of the Forbes rich list and became an admired icon of the business world (rather than a reviled symbol of the system). 
• Shareholders got wealthy alongside him.
• Created a unique and possibly lasting culture.
• Used his platform to educate generations of investors and business leaders.
• And then there’s the Giving Pledge. Buffett turned into more than a philanthropist: he became a catalyst for others to take action.

In The Big Short, Michael Lewis described how Michael Burry studied Buffett and found that the more he learned, “the less he thought Buffett could be copied.” Rather, the lesson from Buffett’s life was that “to succeed in a spectacular fashion you had to be spectacularly unusual.”

“If you are going to be a great investor, you have to fit the style to who you are. At one point I recognized that Warren Buffett, though he had every advantage in learning from Ben Graham, did not copy Ben Graham, but rather set out on his own path, and ran money his way, by his own rules.” Michael Burry

Munger has said as much, explaining that Buffett, “the former protégé,” surpassing Ben Graham was “a natural outcome.”

“It’s what Newton said. He said, ‘If I’ve seen a little farther than other men, it’s by standing on the shoulder of giants.’”

Speaking of giants, during the 2019 annual meeting Munger was in a chattier mood. He shared one of my favorite little stories:

Munger: “Young lawyers frequently come to me and say, ‘How can I quit practicing law and become a billionaire instead?’ I say, well, it reminds me of a story they tell about Mozart.

A young man came to him, and he said, ‘I want to compose symphonies. I want to talk to you about that.’ Mozart said, ‘How old are you?’ ‘Twenty-two.’

And Mozart said, ‘You’re too young to do symphonies.’ And the guy says, ‘But you were writing symphonies when you were ten years old.’

He says, ‘Yes, but I wasn’t running around asking other people how to do it.’”

7. TIP485: Market Updates, Ray Dalio Retiring, Elon Buying Twitter and Elemental Power – Trey Lockerbie and Josh Wolfe

Trey Lockerbie (00:31:39):

I feel like people would have a hard time just wrapping their head around sitting across from Stan Druckenmiller who’s saying, “Hey, I want to give you money.” I would be like, “I want to give you money, Stan.” And I imagine that’s because you guys are doing such interesting cutting edge things and you’re fishing in all these areas that are maybe unexplored.

(00:31:55):

And one of them I’m really particularly interested in, which is chronobiology because I don’t know, you seem like the kind of guy who’s interested in longevity perhaps, or on the cutting edge and seeing all these things that might help in a lot of different ways. Maybe talk to us about what chronobiology is and maybe what is most exciting about it for you.

Josh Wolfe (00:32:14):

Maybe on the one hand I’m not old enough to be obsessed with the longevity thing. Maybe I still harness the illusion of the young that I’m going to live a very long time and I have some views about that, but I’m actually not focused on this in the context of longevity and trying to live forever. It’s more about understanding the biology of timing, the timing of mechanisms inside of ourselves and between ourselves and a truth that your Purkinje cells, which are in your brain are 25 years old and are not renewed. The cells inside of your cell or your gut are renewed in some cases every day or several days.

(00:32:45):

And so, if you were to say your gestational age versus your biological age, different parts of you are different ages. There isn’t a you, like this table that we’re sitting at is one age, but you and I, even though we might have been born at a certain year are made up of different parts and those different parts actually have different ages in the same way that you could look at a river or stream and say that, “Well, of course there’s a river or stream, but its individual components are constantly changing.” And it’s also why you might have cancer mutations in some parts of the body, because you have more rapid rejuvenation or reproduction of cells and in other cases you have very low rates of cancer, because you don’t have higher probability of mutations.

(00:33:18):

So I’m very interested in the cell signaling between organelles inside of a cell, between cells, within an organ, between organs themselves, between our bodies and circadian rhythms. If you take something like cholesterol medicine, they figured out that you want to take cholesterol medicine in a specific time of day, which tends to be night, because your liver shuts down the production of LDL and it’s a optimal time to take a cholesterol lowering medicine, so that’s something that’s not either obvious to many people or well known.

(00:33:46):

When you look at between humans, you see synchronicity between women who get their period that are clearly hormone signaling amongst each other at the same time they end up in the same cycle if they’re roommates in college and after. And so there’s just very interesting hidden biology in the timing mechanisms inside of cells, inside of our bodies, between our bodies and that means that there’s mysteries to unlock and ultimately drugs to produce.

(00:34:11):

And whether those drugs or mechanisms or technologies are for the specific time of day you should be taking specific drugs and your biology might actually be different than mine. There are people that we know are morning people and people that are more night owls. Some of that is genetic, some of that is biological and environmental or epigenetic, the way that the environment acts on the expression of your genes, but it’s an area that is just not well understood. And anytime there’s an area that’s not well understood, to me it’s a whistle to pay attention, because there’s an opportunity to discover something profound…

…Trey Lockerbie (00:37:38):

Elemental power. So, you’ve been outspoken about the need to rebrand nuclear energy to elemental power, but shifting towards a future heavily relying on it. Energy has been a major headline in 2022. Do you think the events that have unfolded this year have set the stage for a more elemental future?

Josh Wolfe (00:37:57):

On elemental energy, yes, I think that the events of the world have at least sparked people in a few ways, some of which are overt and observable and some of which are speculative. You’ve already seen in Germany, which unfortunately has made decisions, I would speculate, and this sounds conspiratorial and crazy, but the only thing that Putin had to do for the past decade was foment the Green party, foment them to rise up against Merkel and convince the populous that the important thing to do in the name of climate was to shut down nuclear power.

(00:38:26):

The effect of doing that was not to decrease our reliance on low carbon energy. I mean, nuclear produces zero carbon. It’s just the cleanest, largest, most reliable source of base load power for a population. Most of the people that are against nuclear, as I’ve rebranded it elemental, I’ll get to in a moment, they’re really against growth, they’re really against progress, they’re really against capitalism. They’re really against systems of power and in some cases democracy.

(00:38:50):

There really is an ideological wrapper around people that are against that. And the elements of the mantra for clean and green, if it’s not a de-growth position, are mostly focused on solar and wind and biofuels and things that feel like they’re natural. Now, solar, of course, is inorganic semiconductors, and they’re not necessarily super clean. Wind requires huge amounts of cement and technology and infrastructure, but there’s this poetic and romantic illusion about using these elements.

(00:39:16):

And so, that’s actually what inspired me to say, “Wait a second, people love solar. They love the sun. Sun makes us happy. It’s in children’s books and it’s on stickers at Greenpeace protests. People love the wind. There’s lots of that and that seems good and clean, and we want to keep our air fresh. People love water and hydro, that’s also good. I mean, it’s not great that we make dams and affect aquaculture, but people like the sun, they like the wind and they like water, they should like rocks. Rocks are great. Who doesn’t like rocks?

(00:39:41):

Well, hey, there’s this rock called uranium and you don’t really have to do all that much to it, but if you tweak it a little bit, just like you tweak the other stuff, you can get it to produce heat and that’s pretty cool. Okay, well, if you get heat coming out of this thing just like a geothermal, which people also love on the environmental end, that’s just literally heat from the earth that is able to boil water and produce steam and turn a turbine with that steam and produce electricity by spinning the magnets. Well, that’s really what nuclear power is.”

(00:40:05):

So, I realize that people are against nuclear because they conflate it, unfortunately, going back to the mid late 70s with nuclear war. Nobody wants nuclear war and nuclear war is terrible. So, now you’ve got this thing that’s associated, you don’t have hydro war, you don’t have solar war, you don’t have wind war, but you have nuclear war. Nuclear war is bad, so nuclear is bad.

(00:40:22):

And yeah, 1979, the China Syndrome movie where you had this environmental disaster and radiation leak from nuclear, you had also 1979 with Three Mile Island where there actually was a burst valve that wasn’t actually a radiation leak, nobody died, there were no injuries. It was actually proof positive of engineering systems that work. But then you had Chornobyl, which was a certifiable disaster. I would posit that there isn’t much Russian technology that is competitive on global stages that anybody would buy except for possibly an AK47 or a MiG fighter jet, because those actually have to compete on the global stage.

(00:40:54):

And then you had Fukushima where a company that we founded ended up playing a pivotal role in the cleanup, a company called Kurion named after Madame Curie who discovered radiation spelled with a K, that was developing technology, both material science that could grab radioactive elements like cesium and strontium and technetium and uranium and plutonium, and then robots that could actually enter a disaster site and remove that and they ended up being the only US company picked for that cleanup back in the Fukushima disaster, which happened because of an earthquake and a tsunami and then a radioactive meltdown. So, I was very proud of founding that company and capitalizing it and the work that they did, which was just quite miraculous.

(00:41:29):

So, I’ve always been interested in nuclear for about a decade, and I got interested really because of a book. I wish that there was something more sophisticated, but I read a book called Bottomless Well by two brilliant people, Mark Mills and Peter Huber. Peter since passed, but he was a polymath and brilliant legal mind, and Mark is a technology pundit and advisor to many and they wrote this great book. Bill Gates gave a testimonial blurb for it, and it was called The Bottomless Well and it was really about the availability of energy that’s all around us at a time when people were talking about peak oil and gas and so forth.

(00:41:56):

But the key thing was a paragraph in one of the chapters that caught me and the paragraph talked about our directional progress. And I always had this concept that I called the directional hour of progress, applying to all kinds of different technology industries, from lighting to automotive to semiconductors, where you can see where we start and how we progress and we’re never going back the other way. And so in this case, I’m listening to or reading this book, and I’m following the logic as they talk about going from carbohydrates, growing fields or trees and burning them as we did centuries ago, to hydrocarbons cracking the molecules of oil and natural gas and dead dinosaurs to release heat exothermically. And then the trend towards nuclear, which was uranium and the undeniable era of progress was more and more energy density per unit of raw material.

(00:42:38):

And so, that to me was a feeling of inevitability and so I got very interested in nuclear. I got very interested in every part of the fuel cycle from uranium miners who were mostly hucksters and fraudsters in New Mexico, Nevada. We said no to that. Modular reactors, small scale reactors that were too expensive and had too much regulatory risk. And I like to ask this two word question, which is what sucks in any industry and the thing that sucked was what do you do with the waste? And we went around and tried to find a company to invest in and we couldn’t and we ended up starting one from scratch.

(00:43:03):

So that was 10 years ago, we ended up selling that years later after success. We had about 160 million of revenue, 40 million of EBITDA. We sold for 10 times EBITDA with a mere, from us, million and a half invested in that company and returned about 105 million to our LPs and it was a great story. And as Bill Conway who put us in business from Carlyle said, “It’s got the benefit of being true.” So, nuclear did us well.

(00:43:24):

And it was interesting also, because we talked about being interested in defense and some of these sort of sectors that may benefit from a reality of the world, which is that there are these negative black swans that occur. And so, this was a company that benefited a positive black swan, a low probability, high magnitude event consequence from the Fukushima event, which for Japan was a negative black swan. And so, it’s just always interesting to think about how you can do something that not only makes investors a lot of money, but is morally good, because we helped to remove 99% of the radioactive material from that disaster site and feel really good about that. It’s made history.

(00:43:52):

I’ve been a proponent since then of nuclear, particularly as it has been noticeably, audibly, visibly absent from any of the proposals put forth by Al Gore, Greta, anybody that is saying we need to help the climate, we need to cut carbon. How can you not look at the abundance of the 440 plus global plants and their safety record and their low carbon footprint and say this is part of the answer. The amount of land that you need for wind or solar in contrast to one nuclear power plant, the density of the ability for a gigawatt power plant to provide for millions of people, it’s just incomparable.

(00:44:25):

And unfortunately, there was this zeitgeist that had captured people and it wasn’t part of the religious doctrine. It wasn’t at the podium when people were speaking. And so, I realized that the thing that this really needed was a rebrand and as I thought about wind and solar and hydro, I said, “Well, this is just a rock, so why don’t we call it elemental power?” And elemental power can’t include all these other things that the environmentalists love, but any true environmentalists should be pro-nuclear, but they just can’t bring themselves to say that word. It’s sacrilegious. And so, let’s give them a new word and the word is elemental power.

Trey Lockerbie (00:44:55):

There’s this new modular nuclear technology that’s coming up. Is that something that you are positioned in at all or you have interest in, or is it more about just raising awareness?

Josh Wolfe (00:45:05):

My rant here on elemental power has no economic interest. We made our money on cleaning up stuff and nuclear waste. It’s a hard industry. It’s not easy and I’d like to encourage a lot of people go into it. Eventually we’ll raise the talent base, we’ll lower the cost of capital, we’ll raise awareness and attention, and maybe we enter at some other point.

(00:45:21):

But as investors, I put it in the too hard category. Modular reactors are great, but it’s going to take a lot of money, a long time, and a lot of regulatory headache, so we’re not invested in modular reactors, we’re not invested in any of the large nuclear power players, we’re not invested in uranium players. There’s really no exposure today other than advocacy that I think it’s the morally right thing to do as a society…

…Trey Lockerbie (00:57:02):

All right, so before I let you go, there’s one more thing I want to talk about, because last time you and I got together, we discussed your aspiration to see human scent digitized. How have we been progressing on that front and what could a machine that could smell, maybe it’s the Tesla Optimus robot, let’s say, be of benefit.

Josh Wolfe (00:57:23):

Well, very skeptical of this Tesla Optimus robot. Obviously if you look at Boston Dynamics robots from five or 10 years ago, they were doing feats that just blow the mind. But yeah, so I don’t see that being really relevant technology and it felt like it was a gimmicky monorail man-like showcase from the Simpsons.

(00:57:39):

Yeah, digital smell. It’s something that one of the Nobel Prize winners that we backed Richard Axel in a company called Kallyope, which is focused on the gut brain access, a biotech company, maybe eight or 10 years ago said, “Forget about it. Don’t try. Like lots of people have tried, this is never going to work.”

(00:57:52):

And I’ve been looking for over a decade for both the hardware and the software and kissed a lot of frogs and we finally found someone. Beginning about six months ago, negotiated with a very large tech company where this technology’s being spun out of, it’ll be announced in about a month and we catalyzed the transaction and capitalized it with $60 million, some incredible co-investors, two giant tech companies, one giant global foundation, a few billionaire famous hedge fund folks that are coming as co-investors.

(00:58:19):

And notably, when I was negotiating this, I lost my sense of smell. I evaded Covid for two and a half years and I ended up getting it and my two symptoms were one, loss of smell and two was the anxiety about when my smell would come back, but that was about just under three weeks, so that was really poetic justice, I guess.

(00:58:34):

There’s three things that this company will do. One is, to me, the holy grail, and it’ll be the longest, but Shazam for smell, the ability to hold up your phone or some other small device to effectively capture in the same way you do today image, which is really two dimensional or three dimensional with RGB. And you can do time lapse and you can do slow mo and you can do 4K and you can put all kinds of filters and whatnot in that capture. The Sound, which is really two dimensional frequency, amplitude, wavelength and you can capture spatial or stereo or mono.

(00:59:02):

Smell is at least 40 dimensions and could be several hundred depending on what the molecules are. It’s complex. It’s not a single sound or a linear set of notes, it could be mixed in potpourri, so you have to be able to sort signal, but a smell is volatile organic compounds, they are quite literal chemicals that are floating in the air that bind to your old factory bulb. Ours is more sensitive than some, but less sensitive than others. We know that dogs can detect covid and cancer and Parkinson’s and early signals of epilepsy before someone has a seizure and machines will have the sense of smell.

Trey Lockerbie (00:59:34):

Now, is that the use case, what you just mentioned of for the medical device?

Josh Wolfe (00:59:39):

Yes, so one is Shazam for smell, for humans to be able to record smell, so your childhood bedroom, the nostalgia of a grandparent’s home, the smell of your loved one’s hair, the smell of a wine, a meal, a vacation, beach, forest, wooded path, your home, whatever it is. The second is detecting human health from breath, so that will be in fact why one of the large global foundations cares to be able to help diagnose people early.

(01:00:00):

And then the third is industrial and defense applications, so the ability to detect chemicals, and that could be industrial chemicals, it could be fire, it could be electrical fires inside of large server rooms. It could be taggants that are used on people of interest for defense applications. So yeah, it’s an exciting future and we relish the idea that we get to invest in people who are inventing the future.

Trey Lockerbie (01:00:22):

Now, can you foresee a world where the computer is recognizing the smell in those compounds, those volatile compounds, and then could recreate them in some physical space?

Josh Wolfe (01:00:33):

I can definitely foresee the world that it’ll take longer, but the first thing that Kodak did was figure out recording and then screen companies later on figured out playback, but recording will be first and we’ll be digitizing that with a signal and then playback will come after.

(01:00:45):

And I see no reason why it doesn’t obey the laws of physics to be able to do that. It just needs to reduce our human ignorance and come up with the knowledge and ultimately the technologies that embody that knowledge to be able to produce it, so we will have it. I couldn’t tell you when, but recording will come first.

---

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, Apple, Meta Platforms, and Microsoft. 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.

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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 23 October 2022:

1. A Rare Interview with Phil Fisher Following the 1987 Crash – Conor Macneil 

If that’s what’s coming, how does one protect oneself against this hyperinflation?

I made as deep a study as I could of what happened after World War I in France, where there was lots of inflation, and in Germany, where there was inflation into infinity. And in both countries the same thing happened. If you bought the very best stocks, according to my definition–not just any stocks–you were still darned uncomfortable during that period of the spiraling inflation. But when the inflation was over, you came out of it with about 80% of the real purchasing power intact. If I can come out of it with 80% of my present assets in real money, and my people can do that, that is fine. Until then I’m keeping a fair amount in Treasury bills. Timing these things is so damnably difficult. I don’t want to be the smart guy with too much cash because I think a big break is coming. Nor do I want, once it comes, to spend too long getting myself ready. When you’re not sure, you hedge. Very roughly, I have between 65% and 68% in the four stocks I really like, between 20% and 25% in cash and equivalents, and the balance in the five stocks that are in the grooming stage…

…What do you look for in a core stock?

They are all low-cost producers; they are all either world leaders in their fields or can fully measure up to another of my yardsticks, the Japanese competition. They all now have promising new products, and they all have managements of above-average capabilities by a wide margin.

You place a lot of emphasis on management, don’t you?

Getting to know the management of a company is like getting married. You never really know the girl until you live with her. Until you’ve lived with a management, you don’t really know them to that same degree…

…What’s the single most important lesson to be learned from your career as an investor?

It is just appalling the nerve strain people put themselves under trying to buy something today and sell it tomorrow. It’s a small-win proposition. If you are a truly long-range investor, of which I am practically a vanishing breed, the profits are so tremendously greater. One of my early clients made a remark that, while it is factually correct, is completely unrealistic when he said, “Nobody ever went broke taking a profit.’ Well, it is true that you don’t go broke taking a profit, but that assumes you will make a profit on everything you do. It doesn’t allow for the mistakes you’re bound to make in the investment business. Funny thing is, I know plenty of guys who consider themselves to be long-term investors but who are still perfectly happy to trade in and out and back into their favourite stocks.

Some years ago I was the adviser to a profit-sharing trust for a large commodities dealer. I bought for them–I think the stock has been split 15 times since then–a block of Texas Instruments at $14 a share. When the stock got up to $28, the pressure got so strong (“Well, why don’t we sell half of it, so as to get our bait back?’) I had all I could do to hold them until it got to $35. Then the same argument: “Phil, sell some of it; we can buy it back when it gets down again.’

That is a totally ridiculous argument. Either this is a better investment than another one or a worse one. Getting your bait back is just a question of psychological comfort. It doesn’t have anything to do with whether it is the right move or not. But, at any rate, we did that. The stock subsequently went above $250 within two or three years. Then it had a wide open break and fell to the mid-50s. But it didn’t go down to $35.

What turned you off in the short term?

Let me go back to the 1930s. The company I really started my business on was FMC Corp., then called Food Machinery. Two-thirds of its business was in selling to fruit and vegetable canners. So I started learning a fair amount about the canning business. Three different times in the Thirties I bought California Packing–that’s the Del Monte line–at a low price, when the outlook for canning looked poor, and sold it at a high price. I also bought, for any client who I could get to buy it, as much Food Machinery stock as they would let me.

Then in 1940 or 1941 I reviewed the bidding and found that the effort I had put into the timing of buying and selling California Packing shares considerably exceeded the time I had spent learning about and watching Food Machinery stock. Yet already by 1940 my profits in Food Machinery dwarfed the ins and outs of California Packing. That episode finally made me decide not to follow the almost accepted policy at the time that you should buy low and sell high and make a profit and bring it in. This just isn’t valid.

Warren Buffett once said his investment philosophy was 85% Ben Graham, 15% Phil Fisher. What’s the difference between Grahamism and Fisherism?

There are two fundamental approaches to investment. There’s the approach Ben Graham pioneered, which is to find something intrinsically so cheap that there is little chance of it having a big decline. He’s got financial safeguards to that. It isn’t going to go down much, and sooner or later value will come into it. Then there is my approach, which is to find something so good–if you don’t pay too much for it–that it will have very, very large growth. The advantage is that a bigger percentage of my stocks is apt to perform in a smaller period of time–although it has taken several years for some of these to even start, and you’re bound to make some mistakes at it. [But] when a stock is really unusual, it makes the bulk of its moves in a relatively short period of time.

The disadvantage of Ben Graham’s approach, as he preached it, is it is such a good method that practically everybody knows it and has picked up the things that meet his formula. I don’t want to say that mine is the only formula for success. But I think, and I may be conceited about this, that I started my business before the term growth stock was thought of.

2. Alien Truth – Paul Graham

If there were intelligent beings elsewhere in the universe, they’d share certain truths in common with us. The truths of mathematics would be the same, because they’re true by definition. Ditto for the truths of physics; the mass of a carbon atom would be the same on their planet. But I think we’d share other truths with aliens besides the truths of math and physics, and that it would be worthwhile to think about what these might be.

For example, I think we’d share the principle that a controlled experiment testing some hypothesis entitles us to have proportionally increased belief in it. It seems fairly likely, too, that it would be true for aliens that one can get better at something by practicing. We’d probably share Occam’s razor. There doesn’t seem anything specifically human about any of these ideas.

We can only guess, of course. We can’t say for sure what forms intelligent life might take. Nor is it my goal here to explore that question, interesting though it is. The point of the idea of alien truth is not that it gives us a way to speculate about what forms intelligent life might take, but that it gives us a threshold, or more precisely a target, for truth. If you’re trying to find the most general truths short of those of math or physics, then presumably they’ll be those we’d share in common with other forms of intelligent life.

Alien truth will work best as a heuristic if we err on the side of generosity. If an idea might plausibly be relevant to aliens, that’s enough. Justice, for example. I wouldn’t want to bet that all intelligent beings would understand the concept of justice, but I wouldn’t want to bet against it either.   

3. Nvidia CEO Jensen Huang: ‘The semiconductor industry is near the limit’ – Max A. Cherney and Jensen Huang

Artificial intelligence is one of the most transformative technologies that the world’s ever known. We can apply intelligence to problems at an extraordinary scale. Humans have great intelligence, but we can only read so much information and wrap that intelligence around so much data. And artificial intelligence, especially with today’s computing scale, could solve problems that no humans could possibly imagine wrapping their arms around. This instrument [AI] is available for the world’s largest technology companies that apply it for all kinds of interesting, very important problems like shopping and music recommendation and things like that.

But we need to put this technology in the hands of scientists, so they can apply it to the most important and pressing challenges. Most universities don’t have the budget. And it’s really quite a shame that most universities today still have [haven’t] come to grips with the idea that in order to advance the most important fields of science, you need a new type of instrument — just like we needed radio telescopes, just like we needed particle accelerators. We need instruments to advance science.

And in this new form, in this new world of scientific discovery, where principal methods, theoretical methods are still very important, but data-driven methods are vitally important. And this data-driven method is really about inferring from sensor information: How to predict physics, and in order to do this you need a large instrument, and that large instrument [today] is a computer, and most universities just don’t have the budgets for the scientists. They have the budget for the buildings, but they don’t have budgets for computers.

The semiconductor industry is near the limit. It’s near the limit in the sense that we can keep shrinking transistors but we can’t shrink atoms — until we discover the same particle that Ant Man discovered. Our transistors are going to find limits and we’re at atomic scales. And so [this problem] is a place where material science is really going to come in handy.

A great deal of the semiconductor industry is going to be governed by the advances of material sciences, and the material sciences today is such an enormously complicated problem because things are so small, and without a technology like artificial intelligence we’re simply not going to be able to simulate the complicated combination of physics and chemistry that is happening inside these devices. And so artificial intelligence has been proven to be very effective in advancing battery design. It’s going to be very effective in discovery and has already contributed to advancing more durable and lightweight materials. And there’s no question in my mind it is going to make a contribution in advancing semiconductor physics.

4. Black Monday – October 19, 1987 – Gene Hoots

The worst day in market history was October 19, 1987 – 35 years ago tomorrow. Some analysts will mention this on market news, perhaps referring to “old timers” who remember Black Monday.  To me, it seems like only yesterday. It was the most fearful day I have experienced in my 53 years of investing…

…People always think that the current bad market is the worst ever. Historical perspective is important. And unfortunately, we get more perspective from experience than from reading history. You just had to be there!

The 1987 crash ended a five-year ‘bull’ market. The Dow Jones Industrial Average rose from 776 in August 1982 to 2,722 in August 1987.” Then, in 8 weeks, the Dow declined 17%. On October 19, forever known as “Black Monday,” the Dow plummeted another 23%, the greatest loss Wall Street had ever suffered in a single day. (An equivalent one day drop now would be about 7,000. That would get your attention!)

I was working in New York at the investment firm, Reich & Tang, very aware of the disaster that was occurring 3 miles south at Broad & Wall Streets. Our office was eerily quiet. About 4:30, a lady who worked in the next office came to my door, and in hushed tones, said, “The Dow is down 508 points.”  The worst day ever!

We had no idea whether the market and the economy would now freefall as they had in 1929.  Everyone was scared. After work, I walked up 5th Avenue toward our apartment. My world had just collapsed. Reich & Tang might go out of business…

…Tom Quinn, the chief investment officer at RJR Investment Management in Winston-Salem was buying stocks like crazy that afternoon.  And when the rest of the world, or 99% of it, was either selling or frozen with fear. The consequences of his decision, a courageous and correct one, show how hard it is to be a contrarian who does the right thing. He later recalled:

I could have been characterized as dangerously unemotional. We were buying stocks for a new $100 million portfolio. By October 18, we had purchased $60 million of stocks, and we held $40 million in cash, planning to be fully invested by month-end. On October 19, we watched the market crash that morning.  We were experiencing pure panic in the market. This was most likely an excellent buying opportunity.  That afternoon, with the market down over 20%, we completed the buying.

This decision was logical and economically correct.  But I was threatened with termination because of this economic wisdom.  Black Swan [unexpected] events create unique opportunities to make money.  However, emotions that create the event will also constrain people from capitalizing on that event.

Some called my not getting caught up in the emotions of the day a “Herculean effort”.  It did not seem Herculean to me, just simple investment common sense.  But what I did may have been more stupid than stupendous. It almost cost me my job.

On the day following the crash, the CEO, expressed shocked that we were buying stocks when the market was crashing.  He wanted us to move the pension fund to 100% cash.  We argued that such action was inappropriate.  We held a series of meetings and discussions to resolve our major differences and reached a compromise. Our investment group agreed to hedge (short) 20% of the plan assets, $370 million. [If the market continued to decline, the trade would profit. If the market advanced, the trade would lose.]

We took the short position 30 days after the crash. Ironically, that was the day the market bottomed. My theory has always been that it took 30 days for the last ERISA fiduciaries to argue, resolve their differences, and complete their liquidation of plan assets. 

Now, being a little wiser, I realize that making the most money at the lowest risk is not the primary objective of fiduciaries or their agents (advisors).  The primary objective is to cover your backside and keep your job or investment account.  It is a matter of short-term thinking rather than long term investing.

The 20% shorting of the S&P 500 Index resulted in a significant loss for the pension fund. A year later, CEO Ross Johnson put RJR ‘in play’ as a buyout.  Floyd Rodgers, a Winston-Salem Journal reporter, interviewed Johnson.  Floyd asked about the shorting incident. Ross dismissed the question, saying, “We made money on that move.” In this business, lots of people make terrible decisions and later claim they are not!  His comment still infuriates me.

5. Meta’s new AI-powered speech translation system for Hokkien pioneers a new approach for an unwritten language – Meta AI Blog

Until now, AI translation has mainly focused on written languages. Yet nearly half of the world’s 7,000+ living languages are primarily oral and do not have a standard or widely used writing system. This makes it impossible to build machine translation tools using standard techniques, which require large amounts of written text in order to train an AI model. To address this challenge, we’ve built the first AI-powered translation system for a primarily oral language, Hokkien. Hokkien is widely spoken within the Chinese diaspora but lacks a standard written form. Our technology allows Hokkien speakers to hold conversations with English speakers.

The open sourced translation system is part of Meta’s Universal Speech Translator (UST) project, which is developing new AI methods that we hope will eventually allow real-time speech-to-speech translation across all extant languages, even primarily spoken ones. We believe spoken communication can help break down barriers and bring people together wherever they are located — even in the metaverse.

To develop this new speech-only translation system, Meta’s AI researchers had to overcome many challenges from traditional machine translation systems, including data gathering, model design, and evaluation. We have much work ahead to extend UST to more languages. But the ability to speak effortlessly to people in any language is a long-sought dream, and we’re pleased to be one step closer to achieving it. We’re open-sourcing not just our Hokkien translation models but also the evaluation datasets and research papers, so that others can reproduce and build on our work…

…Speech translation systems are usually evaluated using a metric called ASR-BLEU, which involves first transcribing the translated speech into text using automatic speech recognition (ASR), and then computing BLEU scores (a standard machine translation metric) by comparing the transcribed text with a human-translated text. However, one of the challenges of evaluating speech translations for an oral language such as Hokkien is that there is no standard writing system. In order to enable automatic evaluation, we developed a system that transcribes Hokkien speech into a standardized phonetic notation called Tâi-lô. This technique enabled us to compute a BLEU score at the syllable level and easily compare the translation quality of different approaches.

In addition to developing a method for evaluating Hokkien-English speech translations, we also created the first Hokkien-English bidirectional speech-to-speech translation benchmark dataset based on a Hokkien speech corpus called Taiwanese Across Taiwan. This benchmark dataset will be open-sourced to encourage other researchers to work on Hokkien speech translation and together make further progress in the field…

…The techniques we pioneered with Hokkien can be extended to many other written and unwritten languages. To that end, we are releasing SpeechMatrix, a large corpus of speech-to-speech translations mined with Meta’s innovative data mining technique, called LASER, which will enable researchers to create their own speech-to-speech translation (S2ST) systems and build on our work.

6. An Interview With Replit Founder Amjad Masad – Ben Thompson and Amjad Masad

I really want to understand more about who your users are. One thing you read a lot about is Replit has a massively positive reputation, I would say, amongst teachers for example, where it’s just so much easier for students in a class. I think this really came to the fore during COVID when people were working from home, and you couldn’t help students get their computers set up correctly and the ability to just go to a browser and to your point, everything is there ready to use. There’s another core which is people like young Amjad back in Amman who doesn’t have access to a ton of resources but does have a computer with a browser, and Replit is accessible and it’s free to use. But then if you go to the other end of the spectrum, there are professional developers who would perhaps argue that making it hard to get set up is an excellent filter for people who are good at problem solving, Replit maybe makes it too easy.

I would assume your biggest market is by far on that first side of the spectrum, the people that where the ease of use is a really killer feature. The problem is maybe all the money to be made or the big market at least today is on the opposite end of the spectrum. Do you see Replit in the long run bridging that gap? Or is this a situation where you’re going to be so easy to use and so easy to get started and then you’ll just keep building features over time that you’ll capture the next generation and you don’t need to worry about the gray beards over there saying like, “Oh, that’s trivial. I could have built that if I wanted to.”

AM: I think the answer is both, and historically it’s been both. So if you look at the PC revolution, the microcomputer, it started with kids and with hobbyists and computer clubs. What did the professionals do? They were using IBM mainframes at their companies and they looked down at everyone that used a PC. PCs didn’t have a killer app, it was VisiCalc or some of the spreadsheet apps that were the first killer apps. Apple was mostly a home computer and education computer, Microsoft was also an education company, Microsoft’s first product is BASIC, it’s a beginner programming environment. So a lot of computer revolutions, a lot of these big companies start kind of simple, start like a toy, and a lot of the initial beachhead market is hobbyists, teachers, schools and things like that, and that’s a great place to be in.

The reason Adobe has been around for a long time is because everyone’s pirating Adobe and using it at school, and it’s so embedded. These companies are so embedded in our childhood, and so we just grew up using it and I think the same thing’s going to happen with Replit. We have people start their first line of code on Replit and go all the way now to starting a job. I just tweeted about a kid who he said every line of code he’s ever written, CS student at Waterloo, has been on Replit. He just interned at Apple, and presumably he used Replit as well there. So you’re going to see a whole generation of people growing up on Replit and taking it to their jobs and I think at some point there’s going to be enough of them that also the companies are going to be paying attention and be like, “Okay, I have all these people that are very effective, that are very collaborative, that are very fast.” And by the way, maybe we’ll talk about some of our AI tools later on…

…You did an excellent job of setting up a whole host of topics that I wanted to touch on. Let’s start with the collaboration bit. This is something that the web makes possible first and foremost, but how important has that been to Replit? Was that in the vision to start out with? Because you start out with this idea, “Oh, it should be super easy to get started.” Well, for a single player in part you need it to be super easy to get started because you don’t know anyone to talk to, you have no one to help you get set up. It’s almost counter to your founding story where actually now collaboration and people being able to work together is a big part of what I hear in the Replit value proposition. So tell me how you got to collaboration and why that is important for you and your value proposition now.

AM: I think the web is deeply collaborative. The idea that a resource is accessible via URL, which has the word resource in it, is a deeply collaborative concept. The idea that I can pass you a link and we’re both looking at the same thing, that is the fundamental of collaboration. So it was immediately obvious for us the moment we added saving of projects and the ability to pass around these links — the way people used to collaborate before we added multiplayer coding is that I’ll get a link, I’ll fork that, and I’ll change something, I’ll send you a link, and people will fork things thousands of times and just go back and forth between each other. Collaboration was an emergent property of the architecture of the system just by being in on the web and then collaborative coding — Google Docs sort of popularized this idea of being in real time together, and it was an obvious extension of being able to pass a URL and being able to have access to the same object and the same thing that you’re viewing the same document.

So we started working on that in 2017/2018 and turned out it’s a lot harder than we expected. Recently it became really, really good and really reliable because with Google Doc you have a server-client relationship, and it’s very easy to reason about that. With Replit you have the server that’s running your code that could actually crash at any given moment because you might write bad code. It’s also managing the state and so it is more of a distributed systems problem because any time the server can come up and down and anyone can connect at any given point, and so Replit collaboration is designed in a more distributed systems fashion. So we worked on that and we launched it in 2018. It was a bit of a slow start, and it really exploded in COVID when people realized that I can just share this thing and I can be in this document with this other person and we’re coding and it’s really a magical experience.

That being said, I think that it’s very early in code collaboration. Again, there’s a lot of different things other than writing prose. One example being is I could introduce syntax error in one file, and you’re trying to run the program in another file and I just broke the program, how do you deal with that? We think there’s this potential hybrid system somewhere between real time and between Git that exists where you could checkout single files, or you could imagine this thing that I like to call the multiverse of a code project where you have a single code project instance but every edition is sort of a mini-fork of the project and then you can transparently go between forks or go back to master and having all that kind of resolved in real time. There’s a lot of innovation to be made on collaboration, and I think we’ll be the first to figure it out…

…I did want to touch on that. One of the reasons I reached out to you, and why I’ve been interested in Replit just from afar, you mentioned Paul Graham earlier, he is one of your biggest cheerleaders for sure. He’s got a, needless to say, pretty good track record on the companies he’s pretty enthusiastic about. But then also there was this just being this web-centric, collaborative-centric, there’s a Figma, you mentioned Figma earlier, comparison there and how powerful that can be. But what really triggered reaching out now was your announcement of Ghostwriter, and this is GitHub Copilot adjacent, this idea where you can basically — you already have this multiplayer idea, you can code with someone else. I like the way you framed it where now, the other multiplayer can basically be AI and it can help you do this. Was Copilot, is that what opened your eyes to this and this possibility?

AM: In 2013, I read this paper called On The Naturalness Of Software. I actually have it on my website because I love that paper so much. So this paper — I read it fairly early on and it basically says code is like natural language. They actually have this statistical reason for why they think code can be thought of as natural language. And then, they’re like, “Okay, if it is natural language, can you apply NLP (Natural Language Processing) on it?” So in this paper, they built this n-gram model and they build this auto complete engine based on this n-gram model and it was actually — so an n-gram model is just a frequency model, right? It’s like how frequent is this word following this word? So a probability distribution for words.

It turns out, you can build a fairly sophisticated auto-complete engine just based on the n-gram. When they actually married n-gram with a more semantic engine like say, IntelliJ’s IDE engine, they were able to build a superior auto-complete engine that users found better and they had some data around that. So I was like, “Okay. Wow, this is insane.” I’ve spent all my career working with code and coding, I write code to manage code. At Code Academy, we wrote code to execute code. At Facebook, I wrote compilers. I was lead developer on Babel which is the world’s most popular JavaScript compiler. I started a JavaScript infrastructure engineering team at Facebook, so I always wrote compiler-like things and it’s very laborious.

Yep. A lot of busy work.

AM: A lot of busy work and also very algorithmic and semantically challenging. So when I saw this paper and saw this, “Okay, we can actually apply these statistical approaches to code,” that opened my mind. One of our first pitches, we actually talk about we want to do AI-supported code. As I was thinking about the modes that we’re going to have, data kept coming back as a mode. We’re going to have everyone’s coding experiences from their first line of code to their first job. And so, what does that give us?

So I’ve been following the space and tried a few times to do something with it. When GPT-2 came out, that was the first time we were like, “Okay, now the technology is almost there.” Actually, we also tried to acquire Tabnine, the founder of Tabnine was an OpenAI intern that sold it to some company before it grew. So when we were seeding we were trying to cap money together to acquire this company but anyways, the technology wasn’t really there. So GPT-2 came out, we started saying, “Okay, this is probably going to enable this technology.” GPT-3 came out, I immediately started writing software for it and then we started building on GPT-3. We released explain code before Copilot and before anyone else. We released a bunch of experiments on OpenAI.

Unfortunately, the pricing model of OpenAI just didn’t make sense for us. The other thing is we are a company that knows how to optimize compute and we have, at any given point, 1 million containers running continuously. It makes us one of the bigger clouds in the world actually and so it just didn’t make sense for us to build on OpenAI because we couldn’t control latency, we couldn’t get uptime. It’s a great company, we love them, we’re partnered with them but at the end of the day, it just made sense for us to build our own. So with the Ghostwriter, we started from an open source model and we applied a ton of optimization on it and a ton of additional training and work and we built this really nice front-end UX on top of it and we’re now in closed beta. We’re going to open beta pretty soon and then you’ll be able to buy it as a Power Up on Replit next month.

7.  “Zaitech” (財テク) – O-Tone

But a handful of pundits in Japan had been well aware about a peculiar phenomenon taking place within Japan’s corporate sector: “Zaitech” (Japanese 財テク), or “Zaiteku”, which means money management. The Japanese term is a blend of 財務 (zaimu, “financial dealings”) and テクノロジー (tekunorojii, “technology”).

It describes a corporate strategy where earnings are generated through non- operating financial activities and speculation. Today “Zaitech” is known under the label of “financial engineering”, and mainly conducted in the western hemisphere.

In its extremes, “Zaitech” was as simple and safe as investing retained earnings in short-term bank certificates. At the other end of the spectrum, it meant borrowing money from Japanese banks or in the Eurobond market to enter highly speculative positions in a variety of financial instruments.

The heyday of “Zaitech” was in the late 1980’s, right after the Plaza Accord to devalue the dollar against its major peers. Within one year after the agreement in 1985 by the G5 countries (Japan, United States, West Germany, Britain, and France) the Yen doubled in value vs. the US Dollar.

Japanese exporters were hit hard. They had to lower unit prices in Yen to maintain market shares. Profit margins plummeted. To shore up profits, an increasing number of companies engaged in “Zaitech”. The Bank of Japan (BOJ) facilitated the trend by deciding to soften the blow of rapid Yen appreciation through unprecedented monetary easing.

The actual extent of “Zaitech” was unknown. According to Nomura, financial assets of Japan Inc. totalled $909.7 billion in March 1983. Three years later they had grown to $1.4 trillion. In 1986 it was rumoured that one third of Toyota Motor’s pre-tax profits was based on “Zaitech”. And, at least within Japan, it was an open secret that other prominent Japanese companies, like Sony Corp. and Sanyo Electric Co engaged in it.

With the amount also complexity of “Zaitech” operations increased. Corporate Japan had long gone beyond merely speculating out of retained earnings or bank loans. Instead, it raised money via sales of dollar-denominated Eurobonds with stock warrants attached to it. Those warrants became extremely popular over time. Roughly half of them were sold within Japan. The rest easily placed, and eagerly purchased, internationally with very low interest rates attached to them. Basically, when converting the dollar proceeds into Yen, Japanese borrowers often had an effective interest cost of nil, or less.

The funds would then be put into securities that had been in a sustained uptrend, such as Japanese real estates, stocks, bonds, or even warrants and/ or options. “Tokkin” funds were also popular vehicles used by corporate Japan. Trust accounts with special tax advantages, often handled by young and highly aggressive “portfolio managers”, and eagerly marketed by leading Japanese investment banks like Nomura or Daiwa.

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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 16 October 2022:

1. The World According to Xi Jinping – Kevin Rudd

Xi has brought that era of pragmatic, nonideological governance to a crashing halt. In its place, he has developed a new form of Marxist nationalism that now shapes the presentation and substance of China’s politics, economy, and foreign policy. In doing so, Xi is not constructing theoretical castles in the air to rationalize decisions that the CCP has made for other, more practical reasons. Under Xi, ideology drives policy more often than the other way around. Xi has pushed politics to the Leninist left, economics to the Marxist left, and foreign policy to the nationalist right. He has reasserted the influence and control the CCP exerts over all domains of public policy and private life, reinvigorated state-owned enterprises, and placed new restrictions on the private sector. Meanwhile, he has stoked nationalism by pursuing an increasingly assertive foreign policy, turbocharged by a Marxist-inspired belief that history is irreversibly on China’s side and that a world anchored in Chinese power would produce a more just international order. In short, Xi’s rise has meant nothing less than the return of Ideological Man.

These ideological trends are not simply a throwback to the Mao era. Xi’s worldview is more complex than Mao’s, blending ideological purity with technocratic pragmatism. Xi’s pronouncements about history, power, and justice might strike Western audiences as impenetrable or irrelevant. But the West ignores Xi’s ideological messaging at its own peril. No matter how abstract and unfamiliar his ideas might be, they are having profound effects on the real-world content of Chinese politics and foreign policy—and thus, as China’s rise continues, on the rest of the world…

…In 2013, barely five months after his appointment as party general secretary, Xi gave an address to the Central Conference on Ideology and Propaganda, a gathering of top party leaders in Beijing. The contents of the speech were not reported at the time but were leaked three months later and published by China Digital Times. The speech offers an unfiltered portrait of Xi’s deepest political convictions. In it, he dwells on the risks of the ideological decay that led to the collapse of Soviet communism, the West’s role in fomenting ideological division within China, and the need to crack down on all forms of dissent. “The disintegration of a regime often starts from the ideological area,” Xi said. “Political unrest and regime change may occur overnight, but ideological evolution is a long-term process,” he continued, warning that once “ideological defenses are breached, other defenses become very difficult to hold.” But the CCP “has justice on our side,” he assured his audience, encouraging them not to be “evasive, bashful, or mince our words” in dealing with Western countries, whose goal is “to vie with us for the battlefields of people’s hearts and for the masses, and in the end to overthrow the leadership of the CCP and China’s socialist system.”

This meant cracking down on anyone “harboring dissent and discord” and demanding that CCP members demonstrate loyalty not only to the party but also to Xi personally. What followed was an internal “cleansing” of the CCP, accomplished by purging any perceived political or institutional opposition, in large part through a decadelong anticorruption campaign that had begun even before the speech. A “rectification campaign” brought another round of purges to the party’s political and legal affairs apparatus. Xi also reasserted party control over the People’s Liberation Army and the People’s Armed Police and centralized China’s cybersecurity and surveillance systems. Finally, in 2019, Xi introduced a party-wide education campaign titled “Don’t Forget the Party’s Original Purpose, Keep the Mission in Mind.” According to an official document announcing the initiative, its goal was for party members “to gain theoretical learning and to be baptized in ideology and politics.” By around the end of his first term, it had become clear that Xi sought nothing less than to transform the CCP into the high church of a revitalized, secular faith…

…But as the party apparatus increasingly asserted control of the economic departments of the state, China’s policy debates on the relative roles of the state and the market became increasingly ideological. Xi also progressively lost confidence in market economics following the global financial crisis of 2008 and China’s homegrown financial crisis of 2015, which was sparked by the bursting of a stock market bubble and led to a nearly 50 percent collapse in the value of Chinese stocks before the markets finally settled in 2016.

China’s economic policy trajectory under Xi—from a consensus in support of market reforms to an embrace of increased party and state intervention—has therefore been uneven, contested, and at times contradictory. Indeed, in late 2013, less than six months after Xi’s revivalist sermon on ideology and propaganda, the Central Committee of the CCP (the top several hundred leaders of the party) adopted a remarkably reformist document on the economy, starkly titled “The Decision.” It outlined a series of policy measures that would allow the market to play “the decisive role” in the allocation of resources in the economy. But the rollout of these policies slowed to a standstill in 2015, while state-owned enterprises received trillions of dollars in investment from “industry guidance funds” between 2015 and 2021—a massive infusion of government support that brought the Chinese state roaring back to the center of economic policy…

…Xi’s ideological beliefs have committed China to the goal of building what Xi describes as a “fairer and more just” international system—one anchored in Chinese power rather than American power and one that reflects norms more consistent with Marxist-Leninist values. For that reason, China has pushed to strip UN resolutions of all references to universal human rights and has built a new set of China-centric international institutions, such as the Belt and Road Initiative, the Asian Infrastructure Investment Bank, and the Shanghai Cooperation Organization, to rival and eventually replace Western-dominated ones. A Marxist-Leninist quest for a “more just” world also shapes China’s promotion of its own national development model across the global South as an alternative to the “Washington consensus” of free markets and democratic governance. And Beijing has offered a ready supply of surveillance technologies, police training, and intelligence collaboration to countries around the world, such as Ecuador, Uzbekistan, and Zimbabwe, that have eschewed the classical Western liberal-democratic model.

These changes in Chinese foreign and security policy were signaled well in advance by earlier shifts in Xi’s ideological line. Using what Western audiences might see as obscure, theoretical mumbo jumbo, Xi has communicated to the party a crystal-clear message: China is much more powerful than it ever was, and he intends to use this power to change the course of history…

…But Xi is not completely secure. His Achilles’ heel is the economy. Xi’s Marxist vision of greater party control over the private sector, an expanding role for state-owned enterprises and industrial policy, and the quest for “common prosperity” through redistribution is likely to shrink economic growth over time. That is because declining business confidence will reduce private fixed capital investment in response to growing perceptions of political and regulatory risk; after all, what the state gives, the state can also take away. This applies in particular to the technology, finance, and property sectors, which have been China’s principal domestic growth engines for the last two decades. China’s attractiveness to foreign investors has also declined because of supply chain uncertainty and the impact of the new doctrines of national economic self-sufficiency. At home, China’s business elites have been spooked by the anticorruption campaign, the arbitrary nature of the party-controlled judicial system, and a growing number of high-profile tech titans falling out of political favor. And China has yet to figure out how to leave behind its “zero covid” strategy, which has compounded the country’s economic slowdown.

Adding to these weaknesses are a number of long-term structural trends: a rapidly aging population, a shrinking workforce, low productivity growth, and high levels of debt shared between state and private financial institutions. Whereas the CCP had once expected average annual growth to remain around six percent for the rest of the 2020s before slowing to around four percent for the 2030s, some analysts now worry that in the absence of a radical course correction, the economy will soon begin to stagnate, topping out at around three percent in the 2020s before falling to around two percent in the 2030s. As a result, China might enter the 2030s still locked in the so-called middle-income trap, with an economy smaller or only marginally larger than that of the United States. For China’s leadership, that outcome would have profound consequences. If employment and income growth falter, China’s budget would come under pressure, forcing the CCP to choose between providing health care, elder care, and pension entitlements on the one hand and pursuing national security goals, industrial policy, and the Belt and Road Initiative on the other. Meanwhile, China’s gravitational pull on the rest of the global economy would be called into question. The debate over whether the world has already witnessed “peak China” is only just beginning, and when it comes to China’s long-term growth, the jury is still out.

2. Discovering novel algorithms with AlphaTensor – Alhussein Fawzi, Matej Balog, Bernardino Romera-Paredes, Demis Hassabis, and Pushmeet Kohli

Algorithms have helped mathematicians perform fundamental operations for thousands of years. The ancient Egyptians created an algorithm to multiply two numbers without requiring a multiplication table, and Greek mathematician Euclid described an algorithm to compute the greatest common divisor, which is still in use today. 

During the Islamic Golden Age, Persian mathematician Muhammad ibn Musa al-Khwarizmi designed new algorithms to solve linear and quadratic equations. In fact, al-Khwarizmi’s name, translated into Latin as Algoritmi, led to the term algorithm. But, despite the familiarity with algorithms today – used throughout society from classroom algebra to cutting edge scientific research – the process of discovering new algorithms is incredibly difficult, and an example of the amazing reasoning abilities of the human mind…

…For centuries, mathematicians believed that the standard matrix multiplication algorithm was the best one could achieve in terms of efficiency. But in 1969, German mathematician Volker Strassen shocked the mathematical community by showing that better algorithms do exist.

Through studying very small matrices (size 2×2), he discovered an ingenious way of combining the entries of the matrices to yield a faster algorithm. Despite decades of research following Strassen’s breakthrough, larger versions of this problem have remained unsolved – to the extent that it’s not known how efficiently it’s possible to multiply two matrices that are as small as 3×3. 

In our paper, we explored how modern AI techniques could advance the automatic discovery of new matrix multiplication algorithms. Building on the progress of human intuition, AlphaTensor discovered algorithms that are more efficient than the state of the art for many matrix sizes. Our AI-designed algorithms outperform human-designed ones, which is a major step forward in the field of algorithmic discovery. 

First, we converted the problem of finding efficient algorithms for matrix multiplication into a single-player game. In this game, the board is a three-dimensional tensor (array of numbers), capturing how far from correct the current algorithm is. Through a set of allowed moves, corresponding to algorithm instructions, the player attempts to modify the tensor and zero out its entries. When the player manages to do so, this results in a provably correct matrix multiplication algorithm for any pair of matrices, and its efficiency is captured by the number of steps taken to zero out the tensor.

This game is incredibly challenging – the number of possible algorithms to consider is much greater than the number of atoms in the universe, even for small cases of matrix multiplication. Compared to the game of Go, which remained a challenge for AI for decades, the number of possible moves at each step of our game is 30 orders of magnitude larger (above 1033 for one of the settings we consider).

Essentially, to play this game well, one needs to identify the tiniest of needles in a gigantic haystack of possibilities. To tackle the challenges of this domain, which significantly departs from traditional games, we developed multiple crucial components including a novel neural network architecture that incorporates problem-specific inductive biases, a procedure to generate useful synthetic data, and a recipe to leverage symmetries of the problem.

We then trained an AlphaTensor agent using reinforcement learning to play the game, starting without any knowledge about existing matrix multiplication algorithms. Through learning, AlphaTensor gradually improves over time, re-discovering historical fast matrix multiplication algorithms such as Strassen’s, eventually surpassing the realm of human intuition and discovering algorithms faster than previously known.

For example, if the traditional algorithm taught in school multiplies a 4×5 by 5×5 matrix using 100 multiplications, and this number was reduced to 80 with human ingenuity, AlphaTensor has found algorithms that do the same operation using just 76 multiplications…

…Because matrix multiplication is a core component in many computational tasks, spanning computer graphics, digital communications, neural network training, and scientific computing, AlphaTensor-discovered algorithms could make computations in these fields significantly more efficient. AlphaTensor’s flexibility to consider any kind of objective could also spur new applications for designing algorithms that optimise metrics such as energy usage and numerical stability, helping prevent small rounding errors from snowballing as an algorithm works.   

3. This Is Life in the Metaverse – Kashmir Hill

Horizon is “Meta’s universe in the metaverse,” said Vishal Shah, the executive in charge of “the spatial co-present version of the internet” that the company formerly known as Facebook has staked its future on. Meta has an impressive track record, fundamentally changing the way its nearly three billion users socialize, share information and waste time…

…There is no shortage of skeptics mocking Meta’s plans, but how many of them have actually experienced the metaverse? I decided to try it out, defining, for my purposes, the metaverse as Horizon, Meta’s virtual platform for events, business meetings and user-constructed spaces.

My goal was to visit at every hour of the day and night, all 24 of them at least once, to learn the ebbs and flows of Horizon and to meet the metaverse’s earliest adopters. I gave up television, books and a lot of sleep over the past few months to spend dozens of hours as an animated, floating, legless version of myself.

I wanted to understand who was currently there and why, and whether the rest of us would ever want to join them…

…Sam Ferrer, 25, an illustrator based in the New York metropolitan area, wears golden, owl-like spectacles just like her avatar, Lil Nihilist. She told me that the metaverse had helped her through a difficult time in her life.

“If I never picked up a V.R. headset when I did, I might be dead now,” she said one night in the Plaza.

Ms. Ferrer graduated from college at the beginning of the pandemic and moved across the country to where she had no friends. In December 2020, isolated and lonely, she walked into an Amazon 4-Star store and spontaneously bought a Quest 2. She started social networking in virtual reality almost every night, first on the apps AltSpace and vTime before moving to Horizon.

“I like from 1 a.m. to 3 a.m.,” she said, of when the metaverse is at its peak. She lies under a weighted blanket in her bed, with a snack and a drink, spending hours chatting with friends in Horizon. She plugs her headset into a wall outlet so that the battery doesn’t run out, ending the session when she is too tired to continue.

This pattern is extremely common among the metaverse’s early adopters, who don’t want to be limited to the two hours allowed by the headset’s built-in battery. The World Health Organization says electromagnetic fields emitted by electronic devices such as smartphones do not pose a health risk. A Meta representative said the headset was safe to use while plugged in.

Though I am not a night owl, and had to significantly alter my sleep schedule to go to the metaverse in the wee hours, that is when I had the most interesting conversations, with artists and technologists from across a wide sweep of time zones. Many of them were there for long hours at a time. A beret-wearing avatar named I Love My Cat expressed concern about how long people wore their headsets. She was a “community guide,” one of the many moderators hired by Meta to hang out in the Plaza, answer questions and enforce the company’s code of conduct. She took a break every hour or so during her eight-hour shift.

“I was talking to someone once who had been on for more than 12 hours,” she told me. “I don’t know how they do it.”

It’s easy to lose track of time in Horizon. Like a casino, there are no clocks on the walls. Ms. Ferrer said it was what she did now instead of watching TV or scrolling TikTok.

Horizon’s cartoonish graphics have been widely mocked, but Ms. Ferrer likes the visual simplicity. Allowing users to shed the distractions of the physical world, Horizon offers a meeting of the minds, Ms. Ferrer said, and conversations get deep quickly.

“It’s extremely refreshing to be talked to and to be seen for who I am versus how I look,” she said. “I’m mentally cautious about not making my whole life about it. I still go out to bars or whatever and meet people, but I always have this to come back to.”

Horizon Worlds reminded me of the AOL chat rooms from my earliest days on the internet, in the 1990s — except here I was making eye contact with the people I’d met, seeing their movements and hearing their voices…

…Despite Meta’s warnings, every time I went into the metaverse, I inevitably ran into children. During one of my first visits to the Plaza, on a Monday afternoon in July, a guy in a gray blazer named Dustin excitedly told me that he had joined Horizon the day before and had spent eight straight hours there. He invited me to play a zombie-shooting game in a shopping mall. When tiny versions of the blocky, green zombies appeared, I exclaimed, “They’re little kids!”

“So am I,” he said, before adding, “Well, not that little.”

Dustin told me that he was 11, squarely in the camp of people whose brains were more threatened by the device than by the undead. As other journalists have discovered, there are tons of young people running around Horizon. On the upside for Meta, this means the company finally has a product that appeals to the generation that has largely rejected Instagram and Facebook. Though Horizon is an 18-and-over app, community guides told me that they kicked out only users younger than 13, and only if users explicitly revealed their age…

…Meta’s chief technology officer, Andrew Bosworth, has said the company wants “almost Disney levels of safety.” Horizon has user tools designed to deter virtual assaults and threatening behavior, including a personal boundary that keeps other avatars from getting too close; a “safe mode” that allows a user to escape into a solitary confinement cell; a mute function that can silence another avatar; and a polling function that can gauge whether a group feels a disruptive user should be kicked out.

Meta also asks Horizon users to consent to having their audio recorded. (If they refuse, they can’t talk in Horizon.) Audio is stored on a user’s headset, according to the company, and sent to Meta only if someone files a report, about harassment, for example. Users can be barred for a few hours or even for a month, based on those captured conversations…

…The Soapstone Comedy Club was created by Aaron Sorrels, who goes by the handle Unemployed Alcoholic. After quitting a marketing job to deal with his alcoholism, Mr. Sorrels became a comedian. When the pandemic hit, and he could no longer perform stand-up in his home state of Michigan, he was adrift until hearing that Mr. Zuckerberg was spending billions on the metaverse.

“This is going to be something, and now is the time to get involved,” Mr. Sorrels recalled thinking. He bought three Quest headsets with plans to beam in comedians, but he found more success building a world for amateurs to take the stage.

His club now gets up to 13,000 visitors weekly. He accepts donations from supporters, who get access to a private lounge, and he is among a small group of creators who Meta allows to monetize their worlds. Mr. Zuckerberg recently name-checked the Soapstone during an appearance on Joe Rogan’s podcast, which has millions more listeners than Horizon’s last confirmed tally of hundreds of thousands of users. Mr. Sorrels said running “a cartoon comedy club in a pretend land” was now his full-time job.

I started chatting with a man sitting next to me in the club named Malefic, who had a goatee and earrings, though his real-world self, Joe Cronin, had neither. Six hours earlier, Mr. Cronin, 30, a married programmer based in Pennsylvania with two small children, had been playing video games online with friends. When they went to sleep, he came to Horizon, his headset plugged into the wall, to decompress and socialize after an adrenaline-filled session. Horizon is where gamers go to chill out, like skiers at an après-ski bar.

“When you hear the birds chirping, you know you’re in trouble,” said Mr. Cronin, who liked the ability to “go out” via his Quest 2. “You don’t even have to get up and get dressed and get yourself all primped up. You just put on your headset. I’m legit in pajamas right now.”…

…Finding the time to go into the metaverse outside work hours was challenging. At one point, I wore my headset while exercising on a stationary bike. I managed it for 40 minutes, though my eye display fogged up, and I was breathing more heavily than I generally preferred to do when meeting new people. What I was not willing to do was to clock hours sleeping in the headset.

“Oh, that’s me. I sleep in my headset,” said Sam, a redhead in a blazer, one night in the Soapstone. “Imagine waking up in the most amazing place in the universe.”

I thought she was kidding, but she insisted that she was serious. “What does your bedroom look like? Is it where you want to live the rest of your life?” she asked.

I told her I liked my bedroom. She persisted: “That’s where you want to die?”

I said that I didn’t want to die anytime soon but that I did like my bedroom…

…One of my favorite experiences in Horizon was Surrounded, a comedy show produced by Just For Laughs and filmed at its Montreal festival in July. Seven professional comedians, including Pete Holmes and Nicole Byer, had performed in the center of a small, live audience — Horizon allowed me to join it. Attending real-world events in the metaverse could have wide appeal.

“I’ve never heard you laugh so hard,” my husband said, when I took off my headset.

But the companies pushing the metaverse have work to do to make it as “seamless” as their evangelists describe, including making the headset lighter. I tried to get colleagues, including my editor, to meet me in Horizon as I worked on this story, but I rarely succeeded. Zoom was just easier.

4. Your Life is Driven by Network Effects – James Currier

Adam Smith published The Wealth of Nations in 1776. In it, he envisioned markets with thousands of individuals pursuing their own independent self-interest as creating an “invisible hand” that unintentionally promoted the good of society. This “free-market model” allowed him to point out the math and mechanisms behind the emergence of large-scale social order.

Here we want to do the reverse — to use a “network model” to characterize the large scale human social orders and explain how they impact each of us with an often unseen hand.

In short, the networks of human connections in your life create a force that guides you down a path not always fully of your intention, through the mechanism of 100s of small interactions.

Further, this “network force” compounds over time. The longer your relationships, cliques, and communities persist, the more they shape your destiny.

Sociologists regard the evolution of our lives as resulting from a combination of our own choices and preference and the force of our surrounding social network structure.

Observing our own lives, and watching as 100s of founders move through their own journeys, we would go even further in the belief that it’s network forces that influence the majority of how our lives turn out. And 90% of those network forces are established in just 7 crossroads or pivotal life events.

Given the power of network forces on your life, they should be the primary consideration when making decisions at these crossroads. Although it may feel like a complex decision in the moment, they become simplified when seen primarily through the lens of joining and forming new networks and changing the network topology of your life.

The world seems chaotic. But it’s not. Underlying all this apparent complexity is some wonderfully simple math. Follow the math to your destination.

Understanding the primacy of networks will give you a superpower to see what others do not and navigate life’s big decisions more effectively…

…Did you know the frequency of the words you use are determined by an underlying mathematical pattern?

What’s stranger is that same mathematical pattern seems to determine the sizes of cities within a country, income distributions of people within an economy, income distribution among companies, how much traffic goes to different websites on the Internet, how often last names are used in a society, the number of phone calls people receive, the number of people who die in wars.

This mathematical pattern is a power law known as Zipf’s Law. It was first noticed as a principle of language. About 100 years ago, physicists and linguists discovered that the second most commonly used word in English is used one half as much as the most used word. The third most used word is used one third as much as the most used word, so forth down through all the words in a given language.

This law turns out to hold not just in languages, but in many other cases. The world looks complex or chaotic on the surface, particularly in social matters and perhaps your own life, but underlying what we see are simple rules of math.

The underlying mechanism for Zipf’s law is not yet agreed on but the main hypothesis is that it’s an outgrowth of the Principle of Least Effort. In short, systems that survive and operate at steady state optimize for efficiency. When they do, things tend to look like Zipf distributions.

Related to your life, an even stranger implication of Zipf’s Law is that unconscious network forces will act on anyone or any company that gets to be an outlier in one or more of these distributions. Bringing you back in line — or bringing another person or company back in line to make room for your new numbers — will happen without any conscious or intentional force at play.

This is a bit spooky. It means that the number of inhabitants of NYC constrains and influences the number of inhabitants of LA, Seattle, Chatanooga and all American cities in some unseen way because they are all part of the network of US cities. Even though we are each making what feel like independent decisions about where to live, it seems that we are part of this network unconsciously influencing people to keep American cities on the Zipf distribution line. I am one of those people being pushed around. And so are you.

That also implies that my income is somehow influenced by other incomes that surround me as my income fits into the Zipf Law curve. And my country’s GDP is influenced by other countries’ GDPs.

If math is underlying all this, what else in my life is being affected by the larger social order?

5. Little Rules About Big Things – Morgan Housel

There is rarely more or less economic uncertainty; just changes in how ignorant people are to potential risks.

You should obsess over risks that do permanent damage and care little about risks that do temporary harm, but the opposite is more common.

The only way to build wealth is to have a gap between your ego and your income…

…The inability to forecast the past has no impact on our desire to forecast the future. Certainty is so valuable that we’ll never give up the quest for it, and most people couldn’t get out of bed in the morning if they were honest about how uncertain the future is.

Having no FOMO might be the most important investing skill…

…People have vastly different desires, except for three things: Respect, feeling useful, and control over their time. Those are nearly universal.

The market is rational but investors play different games and those games look irrational to people playing a different game…

…A big takeaway from economic history is that the past wasn’t as good as you remember, the present isn’t as bad as you think, and the future will be better than you anticipate.

Most assholes are going through something terrible in their life. People hide their skeletons, which requires blind forgiveness of their quirks and moods because you’re unaware of what they’re dealing with.

History is driven by surprising events but forecasting is driven by obvious ones…

…Nothing too good or too bad stays that way forever, because great times plant the seeds of their own destruction through complacency and leverage, and bad times plant the seeds of their own turnaround through opportunity and panic-driven problem-solving…

…Napoleon’s definition of a military genius was “The man who can do the average thing when everyone else around him is losing his mind.” It’s the same in business and investing…

…Everyone is making a bet on an unknown future. It’s only called speculation when you disagree with someone else’s bet.

There are two types of information: stuff you’ll still care about in the future, and stuff that matters less and less over time. Long-term vs. expiring knowledge. It’s critical to identify which is which when you come across something new…

…Risk is what you can’t see, think only happens to other people, aren’t paying attention to, are willfully ignoring, and isn’t in the news. A little surprise usually does more damage than something big that’s been in the news for months…

…Once-in-a-century events happen all the time because lots of unrelated things can go wrong. If there’s a 1% chance of a new disastrous pandemic, a 1% chance of a crippling depression, a 1% chance of a catastrophic flood, a 1% chance of political collapse, and on and on, then the odds that something bad will happen next year – or any year – are … pretty good. It’s why Arnold Toynbee says history is “just one damn thing after another.”…

…More people wake up every morning wanting to solve problems than wake up looking to cause harm. But people who cause harm get the most attention. So slow progress amid a drumbeat of bad news is the normal state of affairs.

6. Vannevar Bush: Engineer of the American Century – David Senra 

[00:10:06] So I just want to go through a couple of these things just on one page to just give you an idea. Because, guess, the important part here is like studying Edwin Land and studying Bush, one of the main themes is they both had a profound belief in the individual capacity for greatness. So the note I left myself on this page was, “This is more on Bush’s philosophy. A lot of this sounds like Edwin Land.” And so it says, “He was a contrarian, skeptical of easy solutions yet willing to tackle tough problems without a compass. He was a pragmatist who thought that knowledge arose from a physical encounter with a stubborn reality. He was suspicious of big institutions.” Every single thing I’m saying is what Bush believed, but also Edwin Land believed the exact same thing.

They objected to the pernicious effects of an increasingly bureaucratic society and the potential for mass mediocrity. And that’s not hyperbolic. Edwin Land is a two-time Harvard dropout. He winds up going and MIT asks him to give a speech. This, I think, happened in the 1950s. And Land was worried that our educational institutions at that time got so bureaucratic, he said that a student would get a message — he’s talking about MIT, for God’s sake. He said, “A student will get a message that a secret dream of greatness is a pipe dream.” And then he made the point that there’s little connection between the way they’re being taught and how the world actually works.

And he says, “He asked with passion.” This is Edwin Land speaking. “If this is preparation for life, where in the world will a person ever encounter this curious sequence of prepared talks and prepared questions, questions to which the answers are known?” And so Land’s point is, if they are able to survive this educational indoctrination, they may be good but they’ll never be great. And so you see in Bush’s — the way Bush would think about that is like we have — we’re essentially mass-producing mediocrity. And finally, I believe that they both share that’s related to what you and I are talking about right now. He believes that the individual was still of paramount importance…

…Why I think it’s important, because a lot — the reason I started studying him, and I told you this before on other podcast, is like if you study, there’s this gigantic economic explosion in American history that happens during and after World War II, right?

[00:14:03] And when you’re reading books about these founders, and I probably read, I don’t know, 30, 40, 50 of them, Bush is in every single one. His writings and his ideas were influential to generations of technology company founders. And then this book goes into more of how he viewed the world. “Bush saw the engineer as a pragmatic polymath.” And he’s going to describe here what that means. “The engineer, he once wrote, was not a physicist, a businessman, or an inventor, but someone who would acquire some of the skills and knowledge of each of these and be capable of successfully developing and applying new devices on the grand scale.” And that’s important to you and I because he saw entrepreneurs as the people to organize these inputs and to convert the inputs into an actual practical product that could be used by other people.

“This realization that the engineer was the engine of the 20th-century capitalism qualified Bush as the godfather of high technology and a leading proponent of industrial vitality through innovation. He co-founded one company and inspired many others that form the nucleus of the Route 128 high-tech cluster near Boston at the time in American history. Bush’s keen appreciation on the value of entrepreneurs made him a lonely advocate for economic dynamism when most economists welcome the concurrent rise of big business and big government.”

That’s an important point to pause on. He’s having these views. These views are completely — he’s having these views in 1950, it’s completely opposite to the world that he’s living in. And it’s why the author at the very beginning called him a contrarian. “He was among the few who realized the curative power of new ventures. The best way to limit monopoly economic power, he insisted, was through the advent of small, new industrial units,” what we call start-ups today, “for if these latter have half a chance, they can cut rings around the great stodgy businesses.” And so not only did he have opinions, but he forcefully argued those opinions in writing, in speeches, in actions…

…This part actually reminded me, all the way back on Founders #103, I read the biography of Hetty Green, who was the richest woman in America at the time. And she came from a family of whalers. She actually grew up in New Bedford, Massachusetts. And in that book, the author makes the argument that New Bedford, Massachusetts, was the richest city per capita in the world at the time, and that was a direct result of the fact that the whaling industry was so large at that time. So here, we see — this is absolutely incredible. When Bush is growing up in New England as well, he’s in Cape Cod, and for entertainment, as a boy, he would read old whaling logs over and over. And this is why. He said the logs taught him about leadership and group dynamics. “The relations between the captain and the mate during voyages that lasted for years strained human nature to the utmost,” he wrote. He learned that successful captains were autocratic.

Let me actually pause in the middle of this paragraph. So he says he learned the successful captains were autocratic. It doesn’t say how old Bush is when he’s doing this, but let’s say he’s maybe 10 or 15 years old. That would mean since he was born in 1890, he’s doing all this reading, let’s say, 1900, 1905, somewhere in there. About 110, 120 years later, I’m doing all this reading, too. Instead of reading old whaling logs over and over and reading biographies of entrepreneurs over and over, I have come across — like that’s the same conclusion that I’ve come to.

He learned that successful captains were autocratic. And so let’s define that word, a ruler who has absolute power. You and I have talked about that before, the best founders, they run their companies; they’re dictatorships, they’re not democracies. Hopefully, they’ve benevolent dictatorships…

…”He had barely enough money for 1 year of study, and he wished to avoid dragging his new wife into a life of penury.” So he didn’t have enough money. So he said, hey, why not work in 2 jobs to get by. One job, he’s on the faculty at Tufts, and then he’s also working at this company called AMRAD, which is American Radio and Research Corporation. And I mentioned this last week, but the reason that’s important is because this is — out of AMRAD comes the invention of these radio tubes. That’s the foundation for this gigantic company that’s going to make Bush wealthy called Raytheon. And this is an example of being at the right place at the right time with the right set of skills.

“They timed their move well. In 1924, the number of homes with radios tripled. Within 2 years, the first nationwide radio networks were in place. Raytheon’s radio tubes were destined for success. They brought down the price of home radios and made them easier to use. They took away the sense that mastering a radio required a zeal for gadgetry. The ability to plug a radio into a wall socket rather than rely on unwielding batteries domesticated the radio. It was now no more threatening than an electric lamp.” It will never cease to amaze me how all of these ideas fit together.

[00:23:53] So this jumped out at me. I had just recently reread Becoming Steve Jobs, which to me is the best single biography on the life of Steve Jobs that I’ve read so far. I read it for the second time, made another podcast on it. That’s episode 265. In that book, there is this like 200-word mini-speech that Steve gives off the cuff. I think he’s like 22 years old. The reporter writing this article finds him at a computer show. And he uses that exact terminology. So they say, hey, this is what Raytheon did. It gave — it brought down price of home radios, made it easier to use, took away the sense that mastering a radio required a zeal for gadgetry. Very similar to what Steve Jobs thought, like, hey, why are we building computers for hobbyists? For every 1 hobbyists, there’s 1,000 people that just want to buy a computer from a store, plug it in and use it. The ability to plug a radio into a wall socket. It’s the same idea. Rather than rely on unwielding batteries, domesticated the radio. It was now no more threatening than an electric lamp. This is incredible.

So let’s go — I’m going to read the whole 220 forewords because it was included in the book. Because it says, “It gives you an idea of Steve’s fully formed verbal mastery and the fact that he always had this verbal mastery and magnetic charisma even when he was young.” And so the magazine reporter comes to a young Steve Jobs at the computer fair at the Apple computer booth, right? And this is what Steve says, “I wish we had these personal machines when I was growing up,” Jobs tells him. That’s hilarious considering he’s still in the process of growing up when he’s talking about this, right? It’s just hilarious.

Jobs tells him before continuing on for a total of 224 words. “People have been hearing all sorts of things about computers during the past 10 years through the media. Supposedly computers have been controlling various aspects of their lives. Yet in spite of that, most adults have no idea what a computer really is, what it can or can’t do. Now for the first time, people can actually buy a computer for the price of a good stereo, interact with it and find out all about it. It’s analogist to the camera. There are thousands of people across the country taking photography courses. Didn’t have to be professional photographers. They just want to understand what the photographic process is all about.

Same with computers. We started a little personal computer manufacturing company in a garage in Los Altos in 1976. Now we’re the largest personal computer company in the world. We make what we think of as the Rolls-Royce of personal computers.” Here is the punchline, the reason I’m reading this to you, his next sentence. “It is a domesticated computer.”

[00:26:17] That is so wow to me. I love how these ideas all connect. And the crazy thing is this is what speaks to the importance of rereading books. I read this book for the first time, I don’t know, maybe a year ago, a year and a half, I can’t actually remember. Just like I read the Becoming Steve Jobs probably 2 or 3 years ago, the fact that then I pick up the book, the Becoming Steve Jobs book, years later or 2 or 3 years later, whatever it is, reread it, reminded of this fantastic excerpt that’s in that book of a 22- or 21-year-old Steve Jobs. Then a few weeks later or a month later or 2 months later, I don’t actually remember when it was, I picked this book up again, reread it, and like, “Oh, wow, where have I heard the word domesticated? It’s domesticated radio. What the hell? Why is my brain going crazy when I read that?” And I’m like, “I’m pretty sure somebody said that about they domesticated the computer. So who the hell said it?

Then I go to Readwise where I have 20,000 highlights from all these books and all my notes and this crazy database on the history of entrepreneurship that I’m not sure anybody else in the f**** world has. I type in the word domesticated computer and boom. I immediately see the ideas, the philosophy and the communication skills of one of history’s greatest entrepreneurs. That is wild. That is how you know it is a good idea. If you could take something complex and a little bit scary and domesticate it, make it easier for the customer to immediately get a benefit out of. When you do that, you explode the f**** market. The size of the radio market before this invention was tiny compared to what it is now. What is the size of the computer market in 1976, the personal computer market in 1976 compared to now? That is an incredibly powerful idea, domestication. And I would have never ever, ever, ever come up with that on my own. And these two separate experiences are separated by 50 years. This is happening in 1924 and that Steve Jobs quote is from 1977. That gets me fired up…

…So this is happening in 1938. The looming international crisis ended Bush’s days as a world-class inventor. And then he does something unbelievably intelligent here. He moves to DC — to Washington, D.C,, in anticipation before he’s asked to do this.

[00:42:02] And this is why. Bush could not tell if the U.S. would be drawn into the war, but he considered moving to the nation’s capital in case it was. “Washington is a central point,” he thought, and “I might be useful there in time of war.” And this is crazy. He didn’t want to do this. He just thought it was the right thing to do. He did not relish the prospect of living so far from his cherished New England. “Washington struck him as alien ground, and even visiting the city was an irritation to him.”

And then we see this repetition. He’s repeating this idea that’s throughout the entire book. It applies to war, education, company building. This is happening — this chapter is on 1939 and 1940, so I think this is when he said it. “It is being realized with a thought that the world is probably going to be ruled by those who know how in the fullest sense to apply science.” And so in the early days of World War 2 before America jumps in, Charles Lindbergh, the famous aviator, gives this speech — you probably know his name because he actually was the first one to make that first nonstop flight over the Atlantic. I think he flew from like New York to Paris.

But anyway, he gives a speech saying, “Hey, the German Air Force are just so much further ahead. There’s no way we can compete with them.” I’ve read it in a bunch of different books that people thought he was like a Nazi sympathizer. I have no idea. I haven’t looked into it. But the reason I’m bringing this to your attention is because I just love Van Bush’s response. His response to an enemy with superior technology, “All right, cool. We’re just going to have to get smarter.” I absolutely love this guy. Lindbergh left a mark on Bush who did not easily accept influences. Lindbergh showed such respect for German air power that he usually convinced listeners that the Nazi should be granted a wide berth. But Bush reacted differently to Lindbergh’s scare tactics. He was impelled to action by the very threat which Lindbergh so forcefully presented.

This is — I know I’ve repeated this over and over again, but this is a main trait of Bush that we have to get in. He likes to fight. Not one to retreat from a fight, Bush felt the country could keep its peace only by showing its strength. He wisely asserted that every innovation in war could be stymied by a counter-innovation. He glimpsed around the curve of knowledge exuding a poise and confidence that tomorrow’s inventions would erase the advantage of today’s dominant weapons. This is way before the invention of atomic bomb; how crazy is this? He was not unnerved by Germany’s lead in military hardware, neither did he accept American weakness.

7. How great value is being created in the stock market today – Chin Hui Leong

In my book, there are two main components that can cause the share price to increase or decrease: the free cash flow per share (FCF per share) and the price-to-FCF (P/FCF) ratio.

Multiply these two factors, and you get the share price. This simple equation implies that the movement of both the FCF per share or the P/FCF ratio will have a direct impact on a company’s share price…

…The equation above provides us with a framework to decipher what is happening to shares that we own. In the short term, share price movements are usually influenced by the P/FCF ratio.

Take Apple (NASDAQ: AAPL), the manufacturer of the popular iPhone. For the first nine months of its current fiscal year (9MFY22), the Cupertino company saw its FCF rise to US$90.6 billion, up by over 19 per cent from around US$76 billion a year ago. In terms of FCF per share, it has risen from US$4.53 per share in 9MFY21 to US$5.57 per share in 9MFY22.

Yet, despite the growth in FCF per share, Apple shares have fallen by 23 per cent this year. Clearly, the disparity between the iPhone maker’s business performance (represented by its FCF per share) and its share price performance is down to a shrinking P/FCF ratio.

There is a reason for this pessimism. To say today’s stock market sentiment is sour would be an understatement. Optimism arising from the economic bounce post-Covid has been overshadowed by pessimism over rising inflation and higher interest rates.

Should the market sentiment brighten, this ratio could head higher. Yet, as we said earlier, hoping for a higher P/FCF ratio is akin to hoping that investors’ mood changes for the better, which is an unreliable way to invest. We need something more reliable to drive stock price returns. 

To be sure, we are not making light of the current economic situation. Apple is facing headwinds such as supply constraints; foreign currency translation losses due to a strong US dollar; and the impact on its business in Russia.

As investors, however, we have to separate between what’s temporary and what’s permanent. Should we take these current challenges as permanent? I don’t think so.

If history has taught us anything, it’s the business growth, represented by the FCF per share, that will be far more consequential compared to a change in market sentiment. Let me explain.

When I bought shares of Apple in June 2010 at a split adjusted US$8.75 per share, the business had generated US$0.47 per share in FCF over its trailing 12 months. The stock sported a P/FCF ratio of 18.7, as shown in the accompanying table…

…Fast forward to today, and shares have risen by 16 times to around US$140 per share. What’s interesting is the wide disparity between the key drivers behind the stock price increase.

Granted, my shares did benefit from an increase in the P/FCF ratio. However, the contribution of the ratio is a mere 13 per cent over the past 12 years. The clear driver is Apple’s FCF per share which has ballooned from US$0.47 when I bought the shares to over US$6.60 today.

Given the vast difference in contribution to Apple’s share price increase, what would you focus on? The answer is obvious: the business, represented by Apple FCF per share.

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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 Apple, Meta Platforms, and Zoom Video Communications. Holdings are subject to change at any time.