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 07 March 2021:

1. The Cost of Convenience – Max Kim

Coupang — a portmanteau of coupon and the sound of one going off: pang! — was launched in August 2010 by Kim Beom-seok, a Korean American in his early 30s, as a daily-deals “social commerce” venture modeled on Groupon. Launched with backing from Clayton Christensen’s Disruptive Innovation Fund, it was turning a modest profit by 2012, when Kim — who goes by “Bom Kim” in English — decided to take the company public on the Nasdaq.

The weekend before the listing was due, Bom Kim pulled the plug. His vision, he had said in numerous interviews, was to create something that left customers saying, “How did I ever live without Coupang?” — and his company wasn’t that. From then on, the company would model itself not on Groupon, but on Amazon.

By 2015, Coupang had built something that surpassed even Amazon: a long, unbroken supply chain, whereby products moved seamlessly from warehouse to driver to customer, with 99% of orders delivered within 24 hours, all year and 7 days a week. (Amazon has since made a similar delivery network.) In 2016, Coupang was named one of the 50 Smartest Companies by MIT Technology Review. The same year, Bom Kim appeared on Forbes’ “Global Game Changers” list with the tagline “beating Jeff Bezos at his own game.”

Like Bezos, Bom Kim had rightly predicted that faster and “frictionless” delivery — not just competitive pricing and wide selections — would be the future of e-commerce. And with its dense, smartphone-friendly urban populations, South Korea was close to a perfect market. At the time, a slate of third-party marketplaces and Groupon imitators made up most of the country’s e-commerce sector.

“In modeling itself after Amazon by investing aggressively in its own logistical infrastructure, Coupang swooped in and set an entirely new standard for e-commerce [in South Korea],” says Im Il, a professor at the Yonsei University School of Business in Seoul. “It eventually sparked both a price war and a delivery war across the entire market.”…

…To cement Coupang’s control over the last mile, Bom Kim did something that few others in the industry wanted to: he hired his own drivers.

In March 2014, the company launched what has since become its crowning achievement, Rocket Delivery, starting with 50 “Coupang Men” — full-time drivers in branded trucks — who guaranteed next-day delivery of packages, which the company calls “gifts.”

Referred to internally as “spreaders of happiness,” Coupang Men were the spiritual ambassadors of the company. To win over female customers in their 20s and 30s — a key demographic — Coupang Men handed out flowers and handwritten cards, snapped photos of packages to confirm delivery, and would know not to ring the doorbell at homes with babies.

Bom Kim called them “the weapon that Amazon doesn’t have.” And unlike local shipping companies, which hired fleets of drivers on precarious temp contracts, Coupang Men were given a fair wage, full insurance coverage, annual health checkups, 15 vacation days a year, and company trucks and gas…

…The toll of this rapid growth is not only financial. The pace of expansion and the demand for maximum speed and efficiency have placed an enormous burden on the people who work fulfilling Coupang’s orders…

…Tae-il, who is stocky with shaggy hair, is wearing his Coupang polo and navy-blue wraps on his arms and knees. He has just picked up the 300 or so packages he will be delivering today from the nearby delivery camp. These apartments are his first stop.

“I have 180 homes today,” he says by way of greeting. His truck is one of the newer models, which supposedly eliminate dead space with sliding side doors that open into three horizontal shelves. The truck is packed to the brim, with boxes squeezed into even the passenger seat. When Tae-il yanks the sliding door open, an avalanche of stuff spills out. Asked how the AI system that orchestrates the loading process works, he answers with an exasperated laugh: “AI? It’s humans that do this work.”…

…Far from the idealized image of the Coupang Man as a “spreader of happiness,” Tae-il, who works 52 hours, five days a week, has a beleaguered air about him. When asked why he’s not writing any personalized letters or dropping off candy, Tae-il sneers. “Not a single person does that anymore. If you do, you get called an idiot. And you will probably get written up for not making deliveries,” he says.

2. How Does the Stock Market Perform When Interest Rates Rise? – Ben Carlson

But it’s also worth remembering the stock market generally holds up well when rates are rising…

…Surprisingly, growth has performed even better than value in large, mid and small cap stocks when rates have risen in the past.

It may also be instructive to look at some historical examples of rising rate environments.

From 1954-1960, the 10 year treasury yield went from 2.3% to 4.7%. In that time, the S&P 500 was up 207% in total (17.4% annualized).

Then from 1971-1981, rates went vertical, rising from 6.2% to 13.7%. This period included sky-high inflation and the brutal 1973-1974 crash, but nominal returns were still pretty decent, at 113% in total (7.1% annual).

From 1993-1994, rates shot up from 6.6% to 8.0%. The S&P 500 was still up nearly 12% in total despite some carnage in the bond market.

At the tail-end of the dot-com bubble, rates rose from 5.5% in 1998 to 6.5% in 1999. Didn’t matter. Stocks were up more than 55% (although that was followed by a 50% crash beginning in early-2000).

From 2003 through 2007, rates went from 3.3% to 5.1%. The S&P rose nearly 83% (12.8% annualized) before the onset of the 2008 crash.

And the latest rising rate environment saw the 10 year go from 1.5% in 2012 to 3% by 2018. Even with the mini-bear market at the end of 2018, stocks were still up 131% in total.

Could rising rates lead to a stock market crash? Yes, that is possible.

Do we know what level of rates will potentially cause a crash? Nope.

Should the stock market care if interest rates are rising for the right reason? Time will tell.

Are tech stocks being propped up by extremely low interest rates? We’ll see.

The problem with the current rate environment is we’ve never experienced interest rates this low before. Maybe investors will become spooked at lower rates than they have in the past. Maybe markets will be given the benefit of the doubt if the economy is chugging along.

3. Google’s Latest Chess Move is Great News for the Open Internet – Jeff Green

Yesterday Google made yet another announcement regarding its approach to the future of identity. And in the 24 hours since then, I’ve fielded dozens of calls about what this means for the open internet and for The Trade Desk.

The short answer? Not much has changed. But what has changed, will ultimately prove positive.

To be clear, Google’s announcement went a step further than they had previously. Specifically, Google stated that “today, we’re making explicit that once third-party cookies are phased out, we will not build alternate identifiers to track individuals as they browse across the web, nor will we use them in our products.”

On the surface, that may not seem like news. Cookies are going away after all. Nothing new there. You already knew that. And, of course, cookies only impact the browsing internet. That’s about 20% of data-driven ads today. 20% is meaningful, but the open Internet has already created an alternative to third-party cookies — Unified ID 2.0. Additionally, cookies don’t matter much to the fastest growing areas of the digital advertising ecosystem, such as CTV. With CTV, consumers log in with an email or phone number and that login helps create everything from customized viewing recommendations to a better ad experience that features fewer, more relevant ads. And this is critical for content owners, who rely on advertising to pay for that expensive content. In this new golden era of TV content quality, ad revenue is crucial to almost every content creator except for Netflix.

Rather, the new revelation is that Google will not rely on any identifiers that they don’t own.

Why is that important? In any chess match, eventually you have to let pieces go. You trade a less valuable piece for those that matter most. Google is making a trade. With this announcement, Google is doubling down on its own properties, such as search and YouTube and adding bricks to the walls around those properties. The trade-off is that Google no longer values serving ads on the rest of the internet as much — certainly not as much as they once did. DoubleClick, the ad server and the ad exchange, will be operating at a small disadvantage going forward. DV360 will likely be in a similar position. On the open internet, they will not use alternative identifiers to cookies, but everyone else will.

Those alternatives, especially Unified ID 2.0, eliminate the cookie syncing problem that once hurt the open internet’s ability to scale. But perhaps most important, Unified ID 2.0 has been designed with the consumer in the driver’s seat. The consumer’s information is not identifiable. The consumer controls how their data is shared. And the consumer gets a simple, clear explanation of the value exchange of relevant advertising in return for free content. With this approach, Unified ID 2.0 has the best opportunity to become a new common currency of the open internet. It’s already beginning. It is a common currency that pays off the value exchange of the internet in a way that benefits publishers, advertisers and consumers. It is also one that cannot be controlled by any one company, including Apple or Google.

4. Twitter thread on the future of the cable TV industry – Matthew Ball

1/ I want to talk about cord cutting and how current forecasts/models are fundamentally flawed (in the technical sense)

I’ve been tracking this for years, and faulty estimates have always stemmed from a focus on cutting rates rather than leading indicators: usage and investment

2/ I describe the disruption-era Pay-TV ecosystem in three waves. It is critical to differentiate in order to prognostic. We are going into a fundamental new state, one never seen before.

I wrote about this here a year ago. Jan-Feb solidified it.

3/ Wave #1 is 2007-2015.

During this time, Pay-TV actually became MUCH better.

It’s VALUE got much better, too. 

Enormous surges in original TV quality (Mad Men, Breaking Bad, Thrones) + volumes (150 to 400 original scripted series per year) + RSN rights…

…5/ Wave #2: 2015-2019.

The Pay-TV ecosystem was still getting better (quality x volume) and now, finally, prices were coming down via vMVPDs. 

So we see a lot more/better content, plus lower prices. 

Two-sided value growth..

…7/ Wave #3: 2019-Present. 

For the first time ever, the Pay-TV ecosystem is getting *objectively* worse, defunded, underfunded, harvested. Disney takes half of FX’s slate and makes it exclusive to Hulu. Remaining half goes next day to Hulu with no/low ads, as does Hulu library…

…14/ This will not have a standard effect on cord cutting. It will not get steeper. Eventually, the floor will start to drop out

Live news/sports are the primary value drivers in the bundle today, true, but Paramount/Peacock now diverting these en masse too

15/ And the very companies that own the live sports/news networks are, for the first time, those driving the decline of Pay-TV too. They cannot do this while unaware of the harm being done to their other pockets, or without planning for further change

5. China’s “Semiconductor Theranos”: HSMC – Kevin Xu

China’s semiconductor ambition just had its first ponzi scheme fully exposed: Wuhan Hongxin Semiconductor Manufacturing (HSMC).

The HSMC ponzi scheme was led by a trio of characters, who have zero expertise in semiconductor (or anything tech related), but are experts in manipulating local government subsidies, construction contractors, a renowned but gullible former TSMC executive, and China’s desperate need for homegrown chips to pull of a heist so large it makes Theranos look amateur…

…Let’s first summarize the major elements of the HSMC heist that unfolded between late 2017 and early 2021 (which may read like a movie script, not real life):

Part I — the Trap:

• Throughout 2017, a man by the name of Cao Shan traveled across China looking for a local government to invest in his semiconductor scheme. (“Cao Shan” is actually a fake name this person uses, because his real name is already tainted by the scams he used to do back in his hometown.)
• Cao eventually found an accomplice, Mr. Long Wei, who worked his connections to get the City of Wuhan’s East-West Lake District Government to provide land and investment.
• Long brought another close friend into the fold: Ms. Li Xueyan, a small business owner who has opened restaurants and sold Chinese rice liquor.
• The trio — Cao, Long, Li — formed the board of directors of what became HSMC.

Part II — the Money:

• Throughout 2018, the trio worked to secure two sources of “income”: direct subsidies from the East-West Lake District Government (aka taxpayer money) and deposits from construction contractors who want to build the HSMC factory.
• Sourcing both government subsidies and contractor deposits is a strategy for scam factory projects to increase the amount of money to be scammed.
• The East-West Lake District Government decided to invest in HSMC partly because of its jealousy of a local rival district, which attracted and incubated a successful flash storage manufacturer.
• To make themselves look important and powerful, the trio would spread false rumors about their personal background. Long was rumored to be the grandson of some high-level official, while Li would pretend to be the sister of some other political figure.
• By May 2019, HSMC has received 6.5 billion RMB (~$1 billion USD) of investment from the district government. Cao and Long have quit the board, giving Li and her cronies full control. Cao began going to other provinces to set up similar ponzi schemes.

Part III — Chiang Shang-Yi, TSMC, and ASML:

• By June 2019, the trio targeted and successfully persuaded Chiang Shang-Yi, the legendary founding CTO of TSMC, to join HSMC as its CEO.
• To convince Chiang, HSMC spread false rumors publicly that it has already attracted 100 billion RMB (~$15 billion USD) of investments. They also took advantage of Chiang’s gullibility and professional insecurities. (At the time, Chiang was a consultant at SMIC, China’s largest chip foundry, with relatively little influence.)
• Using Chiang’s aura, HSMC started aggressively poaching engineers from TSMC with salary packages worth 2 to 2.5x more than what they were earning.
• Chiang also used his industry reputation to convince ASML, the Dutch company and world’s leading manufacturer of lithography equipment, to sell one DUV equipment to HSMC. (DUV is not the most advanced equipment, but this is still a huge coup given heavy US pressure at the time on the Dutch government to not sell to China.)
• December 2019, the ASML equipment was delivered to HSMC amidst huge fanfare. The company also secured more investment due to this accomplishment from the district government, totaling 15.3 billion RMB (~$2.4 billion USD).
• One month later, the same equipment was offered as collateral to a local Wuhan commercial bank for a 580 million RMB loan (~$90 million USD) — another new source of “income” for the heist.

Part IV — HSMC Collapses, Heist Completed:

• During the first half of 2020, while Wuhan was ravaged by the coronavirus, the trio began siphoning HSMC money away.
• One of its primary methods was conducting employee training programs with a company run by Li’s younger brother.
• HSMC also refused to pay its construction contractors money, owing tens of millions of dollars.
• By July 2020, it became clear that HSMC was a scam. Chiang left the company. The Wuhan city government started leaking news that HSMC is running out of money.
• By November 2020, Li was pushed out of the company and the East-West Lake District Government took full ownership of HSMC.
• By January 2021, Chiang rejoined SMIC. HSMC furloughed all its employees for 40 days and reduced salaries across the board.

6. What Is Quantum Computing? – CB Insights

Quantum computing is the processing of information that’s represented by special quantum states. By tapping into quantum phenomena like “superposition” and “entanglement,” these machines handle information in a fundamentally different way to “classical” computers like smartphones, laptops, or even today’s most powerful supercomputers.

Researchers have long predicted that quantum computers could tackle certain types of problems — especially those involving a daunting number of variables and potential outcomes, like simulations or optimization questions — much faster than any classical computer.

But now we’re starting to see hints of this potential becoming reality.

In 2019, Google said that it ran a calculation on a quantum computer in just a few minutes that would take a classical computer 10,000 years to complete. A little over a year later, a team based in China took this a step further, claiming that it had performed a calculation in 200 seconds that would take an ordinary computer 2.5B years — 100 trillion times faster.

Though these demonstrations don’t have practical use cases, they point to how quantum computers could dramatically change how we approach real-world problems like financial portfolio management, drug discovery, logistics, and much more.

Propelled by the prospect of disrupting countless industries and quick-fire announcements of new advances, quantum computing is attracting more and more attention from players including big tech, startups, governments, and the media.

7. When Everyone’s a Genius (A Few Thoughts on Speculation) – Morgan Housel

The end of a speculative boom can be inevitable but not predictable. Unsustainable things can last a long time. Identifying something that can’t go on forever doesn’t mean that thing can’t keep going for years. Years and years and years.

Part of it is emotion. During the Vietnam War Ho Chi Minh said, “You will kill ten of us, and we will kill one of you, but it is you who will tire first.” Emotional trends aren’t beholden to logic, which can keep them going far past any point of reason.

Part is storytelling. Unsustainable trends have life support if enough people think they’re true, and once people believe something’s true it gets hard to convince them it’s not. Or put differently: If enough people believe it’s true it’s just as powerful as actually being true.

Every investor is making bets on the future. It’s only called speculation when you disagree with someone else’s bet.

In hindsight there was as much speculation in the 1990s that Kodak and Sears would keep their market share as there was that eToys and Pets.com would gain market share. Both were bets on the future. Both were wrong. It happens.

Of course there’s a speculation spectrum. But let’s not pretend that others speculate while you only deal with certainties…

…Jim Grant once put it: “To suppose that the value of a stock is determined purely by a corporation’s earnings discounted by the relevant interest rates and adjusted for the marginal tax rate is to forget that people have burned witches, gone to war on a whim, risen to the defense of Joseph Stalin and believed Orson Welles when he told them over the radio that the Martians had landed.”

Optimism is the best long-term mindset. And it requires a certain level of believing things that can’t be verified, either because you don’t have the technical skills to verify them – nobody knows everything – or because something hasn’t happened yet but you think it will happen in the future. Not enough speculation is just as dangerous as too much speculation.

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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 Alphabet (parent of Google), Amazon, Apple, Netflix, and The Trade Desk. 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 28 February 2021:

1. What Are mRNA Therapies, And How Are They Used For Vaccines? – CB Insights

The ongoing Covid-19 pandemic has highlighted the potential for mRNA therapies, with both of the current FDA-approved Covid-19 vaccines leveraging mRNA. But the potential for mRNA spans beyond that, to treating other infectious diseases, genetic diseases, and even cancer.

Cells use mRNA to translate DNA into proteins, which then can be used to replace abnormal or deficient proteins or to prepare a patient’s immune system to fight against infections or cancerous cells…

…Traditionally, vaccines use fragments of proteins to train the immune system to attack viruses that show similar proteins. However, manufacturing these protein fragments can take months — a particularly challenging timeline in the midst of a pandemic.

In contrast, mRNA vaccines encode protein fragments into a single strand of mRNA, then rely on cellular machinery to produce the proteins. This cuts manufacturing time to a number of weeks.

Moderna Therapeutics, with a Covid-19 vaccine approval under its belt, is already developing 3 new mRNA-based vaccines for HIV, seasonal flu, and the Nipah virus. Another major player in the space, CureVac, has partnered with the Bill and Melinda Gates Foundation to develop vaccines for Rotavirus and malaria…

…mRNA may be the key to unlocking personalized cancer therapies. By combining genetic screening, liquid biopsies, and artificial intelligence, healthcare providers can design and manufacture mRNA therapies specifically made for patients’ unique tumor genetics. Similar to vaccines, mRNA can be used to encode cancer-specific proteins that teach the immune system to recognize and target only a tumor (and not healthy tissue).

There are currently 150+ mRNA-focused clinical trials ongoing for blood cancers, melanoma, brain cancer, prostate cancer, and more.

2. Best Story Wins –  Morgan Housel

The Civil War is probably the most well-documented period in American history. There are thousands of books analyzing every conceivable angle, chronicling every possible detail. But in 1990 Ken Burns’ Civil War documentary became an instant phenomenon, with 39 million viewers and winning 40 major film awards. As many Americans watched Ken Burns’ Civil War in 1990 as watched the Super Bowl that year. And all he did – not to minimize it, because it’s such a feat – is take 130-year-old existing information and wove it into a (very) good story.

Bill Bryson is the same. His books fly off the shelves, which I understand drives the little-known academics who uncovered the things he writes about crazy. His latest work is basically an anatomy textbook. It has no new information, no discoveries. But it’s so well written – he tells such a good story – that it became an instant New York Times bestseller and the Washington Post’s Book of the Year.

Charles Darwin didn’t discover evolution, he just wrote the first and most compelling book about it.

John Burr Williams had more profound insight on the topic of valuing companies than Benjamin Graham. But Graham knew how to write a good paragraph, so he became the legend…

…When a topic is complex, stories are like leverage.

Leverage is just something that squeezes the full potential out of something with less effort. Stories can leverage ideas in the same way debt can leverage assets.

Trying to explain something like physics is so hard if you’re just deadlifting facts and formulas. But if you can explain things like how fire works with a story about balls rolling down hills and running into each other – watch Richard Feynman, an astounding storyteller, do that here – you can explain something complex in seconds, without much effort.

This is more than just persuading others. Stories help you just as much. Part of what made Albert Einstein so talented was his imagination and ability to distill complexity into a simple scene in his head. When he was 16 he started imagining what it would be like to ride on a beam of light, holding onto the sides like a flying carpet and thinking through how it would travel and bend. Soon after he began imagining what your body would feel like if you were in an enclosed elevator riding through space. He contemplated gravity by imagining bowling balls and billiard balls competing for space on a trampoline surface. He could process a textbook of information with the effort of a daydream.

Ken Burns once said: “The common stories are 1+1=2. We get it, they make sense. But the good stories are about 1+1=3.” That’s leverage.

3. The Stock Market Is Smarter Than All of Us – Ben Carlson

In Wealth, War and Wisdom, Barton Biggs writes about two of my most favorite historical topics: (1) World War II and (2) the stock market.

Biggs gives a blow-by-blow history of many of the turning points in the war through the lens of stock markets in various countries.

Many of those market moves seem completely counterintuitive:

On September 1, 1939, Hitler invaded Poland and Prime Minister Neville Chamberlain, his voice quavering, announced Britain was at war with Germany. The next day the New York Stock Exchange experienced a three-day mini-buying panic with a 20 point or 7% gain in the Dow. Volume was the busiest in two years as investors anticipated defense orders would create an economic boom.

We were on the brink of a second world war in 20 years yet investors remained optimistic.

The London stock market more or less predicted the United States would come along to help before it was too late:

The London stock market deduced in the early summer of 1940, even before the Battle of Britain at a time when the world and even many English despaired, that Britain would not be conquered. Stocks made a bottom for the ages in early June although it wasn’t evident until October that there would be no German invasion in 1940 and until Pearl Harbor 18 months later, that Britain would prevail.

It almost seems that throughout 1941 the London stock market intuitively sensed and responded to the growing and deepening alliance between Britain and the United States. It was more confident of America’s entry into the war than even Churchill. Certainly there was no good war news to celebrate because Britain was suffering defeat after defeat.

Even the German stock market got ahead of the fact that the tide was turning on Hitler before anyone else:

Similarly, the German stock market, even though imprisoned in the grip of a police state, somehow understood in October of 1941 that the crest of German conquest had been reached. It was an incredible insight. At the time, the German army appeared invincible. It had never lost a battle; it had never been forced to withdraw. There was no sign as yet that the triumphant offensive into the Soviet Union was failing. In fact, in early December a German patrol actually had a fleeting glimpse of the spires of Moscow, and at the time Germany had domain over more of Europe than the Holy Roman Empire. No one else understood this was the tipping point.

The war didn’t end until 1945 but the Dow bottomed in the spring of 1942 and never looked back:

4. Yuval Noah Harari: Lessons from a year of Covid – Yuval Noah Harari

Three basic rules can go a long way in protecting us from digital dictatorships, even in a time of plague. First, whenever you collect data on people — especially on what is happening inside their own bodies — this data should be used to help these people rather than to manipulate, control or harm them. My personal physician knows many extremely private things about me. I am OK with it, because I trust my physician to use this data for my benefit. My physician shouldn’t sell this data to any corporation or political party. It should be the same with any kind of “pandemic surveillance authority” we might establish.

Second, surveillance must always go both ways. If surveillance goes only from top to bottom, this is the high road to dictatorship. So whenever you increase surveillance of individuals, you should simultaneously increase surveillance of the government and big corporations too. For example, in the present crisis governments are distributing enormous amounts of money. The process of allocating funds should be made more transparent. As a citizen, I want to easily see who gets what, and who decided where the money goes. I want to make sure that the money goes to businesses that really need it rather than to a big corporation whose owners are friends with a minister. If the government says it is too complicated to establish such a monitoring system in the midst of a pandemic, don’t believe it. If it is not too complicated to start monitoring what you do — it is not too complicated to start monitoring what the government does.

Third, never allow too much data to be concentrated in any one place. Not during the epidemic, and not when it is over. A data monopoly is a recipe for dictatorship. So if we collect biometric data on people to stop the pandemic, this should be done by an independent health authority rather than by the police. And the resulting data should be kept separate from other data silos of government ministries and big corporations. Sure, it will create redundancies and inefficiencies. But inefficiency is a feature, not a bug. You want to prevent the rise of digital dictatorship? Keep things at least a bit inefficient.

The unprecedented scientific and technological successes of 2020 didn’t solve the Covid-19 crisis. They turned the epidemic from a natural calamity into a political dilemma. When the Black Death killed millions, nobody expected much from the kings and emperors. About a third of all English people died during the first wave of the Black Death, but this did not cause King Edward III of England to lose his throne. It was clearly beyond the power of rulers to stop the epidemic, so nobody blamed them for failure.

But today humankind has the scientific tools to stop Covid-19. Several countries, from Vietnam to Australia, proved that even without a vaccine, the available tools can halt the epidemic. These tools, however, have a high economic and social price. We can beat the virus — but we aren’t sure we are willing to pay the cost of victory. That’s why the scientific achievements have placed an enormous responsibility on the shoulders of politicians.

Unfortunately, too many politicians have failed to live up to this responsibility. For example, the populist presidents of the US and Brazil played down the danger, refused to heed experts and peddled conspiracy theories instead. They didn’t come up with a sound federal plan of action and sabotaged attempts by state and municipal authorities to halt the epidemic. The negligence and irresponsibility of the Trump and Bolsonaro administrations have resulted in hundreds of thousands of preventable deaths…

…One reason for the gap between scientific success and political failure is that scientists co-operated globally, whereas politicians tended to feud. Working under much stress and uncertainty, scientists throughout the world freely shared information and relied on the findings and insights of one another. Many important research projects were conducted by international teams. For example, one key study that demonstrated the efficacy of lockdown measures was conducted jointly by researchers from nine institutions — one in the UK, three in China, and five in the US.

5. Get Smart: How To Find The Next Growth Stock – Chin Hui Leong

We love business stories. A great tale can help you learn more about a business than you can ever hope to learn from a textbook.

The best part is…

…the story which you are about to hear actually happened.

What we are about to share is not some made-up story to make a point about investing. It’s a real-life story about innovation and failure. With that in mind, let’s get started.

Over a decade ago, a CEO stood at the stage, ready to reveal his company’s next exciting product. The anticipation was high for a huge reveal. The atmosphere was electric. The hype was in the air.

…and then, the moment finally arrived.

The CEO unveiled what he called a “revolutionary and magical” product. In fact, he was so confident that he declared the company’s new product as being five years ahead of other similar products, instantly pulling the shade over all its competitors. The statement was nothing short of bold, to say the least.

Now, to his credit, the company followed up by launching two models of the product within six months. The initial sales were promising. But with Christmas around the corner, the company blinked. Less than three months after the product launch, it decided to completely eliminate one of its product models.

If that wasn’t embarrassing enough, the company cut the price of the remaining model by 33%. Predictably, the customers that bought earlier were incensed. With his tail between his legs, the CEO offered to provide a rebate to soothe the feelings of the early buyers of its product. But the damage had already been done…

We are going to pause for a moment here to let you take in all that you have read so far.

The hype, the reveal, the promise, the fleeting initial success, and the bitter disappointment that followed…

Now, with all that in mind, here’s the question for you…

Given all that you know, would you, dear reader, be willing to back this company’s “revolutionary and magical” product for the next decade?

6. What Happened to Gold? – Michael Batnick

If you went into a laboratory to build a gold price optimizer, you would want a couple of things.

• A falling dollar
• Rising inflation expectations
• Money printing
• Central bank balance sheets expanding
• Fiscal deficits increasing Political turmoil

All of these things were in place over the last few months, and yet gold has done the opposite of what you expected it to do. It’s down 9% over the last 6 months, and it’s 15% below its highs in August.

Gold could rally on any one of the items I mentioned. All six were in place at the same time, and it couldn’t get out of its own way.

7. Dreams All the Way Up – Packy McCormick

In the late 1860’s, when the mile record stood at 4:36, runners around the world started seriously attempting to break the four minute barrier. Three different Walters in a row traded the record, bringing it down below 4:20 by the mid 1880’s.

Between 1942 – 1945, two Swedes, Gundar Hägg and Arne Andersson, traded the record four times, driving it down from 4:06.2 to 4:01.4, a nearly 5-second improvement in just three years. And then, nothing. The record stood, unimproved, for the next nine years, until Roger Bannister stepped up to the starting line at Iffley Road sports ground in Oxford.

Bannister took two seconds off the record, completing his mile in 3:59.4 and becoming the first person in history to break the four-minute mile.

His record stood for 46 days. John Landy smashed it with a 3:58.0. A year later, three runners broke the 4-minute mile in the same race, and today, over 1,500 people have run a competitive mile in under four minutes. Hicham El Guerrouj holds the world record with a 3:43.13 that he ran in 1999.

The moral of the story here is that there wasn’t necessarily anything physical keeping humans from breaking four minutes; it was mental. When people saw it could be done, they just kind of … did it. Bannister, through extraordinary performance, eliminated a mental barrier, and afterwards, other great but not all-time exceptional runners followed his lead.

In the public markets in the 2010s, the $1 trillion market cap was the four-minute mile. As someone who owned Apple stock and options earlier in the decade, I can tell you how frustrating it was that the stock seemed to trade at a discount (sub-10x P/E ratio) simply because it was so big, despite insane profitability and growth. $1 trillion felt like a restraining wall.

Then, on August 2, 2018, an extraordinary company broke another mental barrier, when Apple became the first US company to crack the $1 trillion market cap mark.

What happened next wasn’t quite the immediate flood that Bannister unleashed, but within 16 months, by January 2020, three more companies — Microsoft, then Amazon, then Google — had broken $1 trillion. FAAMG had been undervalued across the board. Since Apple couldn’t break $1 trillion for psychological reasons, and it was clear that the other four weren’t as valuable as Apple, they had to be worth some discount to Apple’s artificially low market cap.

Apple took the governor off, and today, after a wild, tech-friendly pandemic and zero interest rate policy (ZIRP) drove stocks higher, the FAAMG market caps are:

• Apple: $2.273 trillion
• Microsoft: $1.848 trillion
• Amazon: $1.651 trillion
• Google: $1.415 trillion
• Facebook: $770 billion

If certain parts of the market feel bubbly, these companies don’t. They’re category-defining companies that continue to grow and innovate at a faster clip than megacaps ever have before, and they trade at very reasonable NTM EV/EBITDA multiples: 

• Apple: 22.0x
• Microsoft: 24.8x
• Amazon: 22.4x
• Google: 15.4x
• Facebook: 13.1x

That’s not bubbly…

…Here’s my logic: FAAMG stocks seem to be reasonably priced and good anchors off of which everything else is pegged. FAAMG (particularly Amazon and FB) market caps have actually grown faster than startup and non-FAAMG public tech valuations. Startup and non-FAAMG valuation growth is just starting to catch up to FAAMG growth over the past year.

Startups and smaller cap tech companies are being valued based on a probability that they can become as big as the FAAMG companies (or the biggest companies in their verticals), and even at the same probability, they should be worth 5-15x as much as they were worth a decade ago, because the ceiling has risen that much.

In other words, if you think that FAAMG are reasonably valued, and you think that the probability of newer companies coming in and eventually growing as big as the biggest tech companies is about the same as it was a decade ago, startups and smaller cap tech companies are actually fairly valued or even undervalued today…

…Shopify’s relationship with Amazon is the textbook example of P/FAAMG valuation.

Since going public in May 2015, Shopify’s stock is up over 5,000%. It’s currently trading at a 60x NTM EV / Revenue multiple and a 395.7x NTM PE ratio. Those are both very high numbers if you’re valuing Shopify based on the fundamentals, and indeed, Shopify has felt expensive at almost every point on its meteoric rise since late 2018.

Breaking apart SHOP’s valuation that way, there are two factors: how much has Amazon grown, and how much has the probability that Shopify becomes as big as Amazon changed? 

• Amazon Market Cap. Over the past five years, Amazon has grown its market cap 6.7x, from $245 billion to $1.65 trillion.
• Probability SHOP Becomes AMZN. The implied probability that Shopify becomes Amazon, based on their relative market caps, has increased from 0.68% to 10.76%, not taking into account the fact that Amazon is likely to continue to get bigger as SHOP catches up. 

Let’s assume Amazon’s future growth and the discount rate come out in the wash, which is conservative, and we’re left with an ~11% chance that Shopify becomes as big as Amazon. If you believe that Amazon is fairly valued, and that an 11% chance of Shopify becoming Amazon is reasonable, then Shopify’s market cap isn’t as crazy as it seems from looking only at traditional valuation metrics.

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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 Alphabet, Amazon, Apple, Facebook, Microsoft, and Shopify. Holdings are subject to change at any time.

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

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

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

Here are the articles for the week ending 21 February 2021:

1. 12 Things I Remind Myself When Markets Go Crazy – Ben Carlson

1. There is no such thing as a normal market. Uncertainty is the only constant when investing. Get used to it.

2. The most effective hedge is not necessarily an investment strategy. The best hedge against wild short-term moves in the markets is a long time horizon.

3. Your gains will be incinerated at some point. Investing in risk assets means occasionally seeing your gains evaporate before your eyes. I don’t know why and I don’t know when but at some point a large portion of my portfolio will fall in value. That’s how this works.

4. You still have a lot of time left. I’m still young(ish) with (hopefully) a number of decades ahead of me to save and invest. That means I’m going to experience multiple crashes, recessions, bull markets, manias, panics and everything in-between in the years ahead.

The current cycle won’t last forever just like the last one or the next one.

5. Know yourself. One of the biggest mistakes you can make as an investor is confusing your risk profile and time horizon with someone else’s. Understanding how markets generally work is important but understanding yourself is the key to successful investing over the long haul.

6. There’s nothing wrong with using a “dumb” strategy. Buy and hold is one of the dumbest investment strategies ever…that also happens to have the highest probability of success for the vast majority of investors.

There’s no shame in keeping things simple.

7. The crowd is usually right. Being contrarian will always make you feel like you’re smarter than everyone else, but the crowd is right more often than it’s wrong when it comes to the markets. Yes, things can get overcrowded at times but being a contrarian 100% of the time will lead you to be wrong far more often than you’re right.

2. The Beginning of the End –  Dan Teran

Some view third party food delivery operators, such as DoorDash, UberEats, and Grubhub, as heroes of the pandemic, a lifeline to restaurants, creators of employment for masses of essential workers that are responsible for slowing the spread of the virus by keeping diners safely in their homes.

Others view these firms as unscrupulous predators, draining profits from independent restaurants while undercompensating and mistreating delivery workers, all to satisfy the appetites of venture capital investors who have gambled billions of dollars on a business model that may never generate more cash than it has consumed…

…While the pandemic has driven unprecedented demand and introduced new narratives, the facts remain largely unchanged – the third party delivery industry is bad for independent restaurants, bad for delivery workers, and serves customers who are indifferent so long as their food arrives. The pandemic has brought these harsh truths irreversibly into the light, and it is for this reason that we will look back on this year not as one of good fortune for third party delivery, but as the beginning of the end…

…The case for the downfall of third party delivery begins and ends with the business model. Peter Drucker refers to a business model as “assumptions about what a company gets paid for.” Today’s third party delivery operators make the following assumption:

Restaurants will pay 30% of revenue for new customers, serviced by a third party delivery network.

This sounds reasonable. A few extra meals a night to new customers would better utilize existing resources and make the restaurant more profitable. A nice story, but not true.

While sales representatives from DoorDash and UberEats tell restaurateurs they are paying for new customers, in reality they know they will also be charged 30% to service existing and repeat customers, too. Industry data first shared with Expedite suggests that more than half of the orders placed on third party delivery platforms today are from repeat customers.

While third party delivery has always been a bad deal for restaurants, delivery did not represent a significant share of most restaurants business prior to 2020, and so the damage to a restaurant’s bottom line was obscured. The pandemic has brought an inconvenient truth into focus: third party delivery will kill your business if you let it, and third party delivery operators do not care.

How could third party delivery kill your business while bringing customers in the door? The model below shows a P&L for a restaurant that does ~$1M in sales annually at a 15% EBITDA margin, this would be considered very good by any standards. As you can see at the top, as third party delivery takes over more of the business, the business becomes incrementally worse. In this case, third party delivery begins to kill the business as soon as they reach 50% of revenue––sooner if you want to draw a salary, repair equipment, or pay back investors.

During the pandemic, many restaurants have gone from doing ~20% of their business through third party delivery platforms to ~80%, and watched their income statements turn from black to red, as fees ate their business alive. The message from third-party operators? Too bad.

3. SaaS Stocks Prove to Be Winners as Business World Moves to the Cloud – Chin Hui Leong

Before cloud computing arrived, traditional enterprise software was hard to deploy and costly to maintain.

Applications had to be installed by location. To do that, companies had to invest heavily in IT infrastructure, networks and software licenses. The implementation was also complex and could take as much as 18 months, according to an example cited by the Harvard Business Review.

And that’s not all.

There is also the high cost of maintaining the on-premise system. Enterprises had to hire teams of IT staff and consultants to integrate, support, and upgrade the on-premise applications.

Enter Marc Benioff, the founder and CEO of Salesforce (NYSE: CRM).

In 1999, Benioff founded Salesforce based on two big ideas: software should be delivered over the internet, and the service will be subscription-based.

Salesforce’s software is delivered over the internet, making its service easier to deploy and scale. The company’s subscription model removed most of the upfront cost associated with the traditional way of software deployment.

Armed with these advantages, Salesforce set its sights on the customer relationship management (CRM) market, where the problems associated with traditional enterprise software were the most acute.

The lower installation cost also allowed the company to target small and medium businesses. From there, Salesforce would gradually move upstream to take on larger enterprises.

And the rest, as they say, is history.

With an annual revenue base of over US$20 billion today, Salesforce is valued at close to US$220 billion.

Investors during the company’s IPO in 2004 would have made close to 90 times their original investment.

As Salesforce grew, the broader SaaS industry also came into its own.

4. What Your Data Team Is Using: The Analytics Stack – Justin Gage

The goal of any analytics stack is to be able to answer questions about the business with data. Those questions can be simple:

1. How many active users do we have?
2. What was our recurring revenue last month?
3. Did we hit our goal for sales leads this quarter?

But they can also be complex and bespoke:

1. What behavior in a user’s first day indicates they’re likely to sign up for a paid plan?
2. What’s our net dollar retention for customers with more than 50 employees?
3. Which paid marketing channel has been most effective over the past 7 days?

Answering these questions requires a whole stack of tools and instrumentation to make sure the right data is in place. You can think of the end product of a great analytics stack as a nicely formatted, useful data warehouse full of tables like “user_acquisition_facts” that make answering the above questions as simple as a basic SQL query. \

But the road to getting there is unpaved and treacherous. The actual data you need is all over the place, siloed in different tools with different interfaces. It’s dirty, and needs reformatting and cleaning. It’s constantly changing, and needs maintenance, care, and thoughtful monitoring. The analytics stack and its associated work is all about getting that data in the format and location you need it.

The basics:

1. Where data comes from: production data stores, instrumentation, SaaS tools, and public data
2. Where data goes: managed data warehouses and homegrown storage
3. How data moves around: ETL tools, SaaS connectors, and streaming
4. How data gets ready: modeling, testing, and documentation
5. How data gets used: charting, SQL clients, sharing

5. Stop Stressing About Inflation – Barry Ritholtz

Inflation occurs when one or more factors combine to drive prices higher. Often, wage pressures raise prices for good and services, filtering into the general economy (1960s). Sometimes, the combination of a weakening dollar and rising commodity prices send input costs higher, which kicks off an inflationary spiral (1970s). Third, there are times when the cost of capital becomes so cheap it sends anything priced in dollars or debt off into an upwards spiral of (2000s).

But Inflation is not inevitable. There are numerous countervailing forces that have been at work for much of the past 50 years. The three big Deflation drivers: 1) Technology, which creates massive economies of scale, especially in digital products (e.g., Software); 2) Robotics/Automation, which efficiently create more physical goods at lower prices; and 3) Globalization and Labor Arbitrage, which sends work to lower cost regions, making goods and services less expensive.

Put into this context, Inflation is periodic, driven by specific events; Deflation is consistent, the background state of the modern economy. To fully understand this requires grasping how scarcity and abundance act as the drivers of the price of labor and goods. My suspicion is many economists who came of age during earlier eras of inflation fail to discern how the world has changed since.

Consider what this combination implies: the dominant modern world “flation” tends to be biased more towards falling than rising prices. We live in an era of Deflation, punctuated by occasional spasms of Inflation. This suggests that fears of inflation are likely to be more overstated, even with low monetary rates and high fiscal stimulus.

The net result: Forecasters have been over-estimating inflation by more than a little and hyper-inflation by more than a lot. Indeed, the Fed and most economists got this wrong in the 2000s, radically under-estimating how the novelty of ultra-low rates, high employment, and weak dollar caused prices to go higher.

Inflation was robust until the Great Financial Crisis came along; in its aftermath, inflation was (despite all too many forecasts) a no show. Persistent under-employment led to a lot of slack in the labor force, even as the US economy saw unemployment fall to below the 4% levels.

Perhaps this explains why so many economists forecast a post GFC inflation that never arrived. Post Covid, we should see hiring and lots of pent up demand and a transitory bout of modest inflation. But even that is likely to be much less of a threat than it has been in prior decades.

But not to the old school economists. Perhaps they need to reconfigure their models of what causes inflation and deflation. Being wrong for the past two decades should provide the motivation to update those models. Unfortunately, we see little evidence they are interested in changing their fundamental concept of what drives prices higher.

6. Twitter thread on what it’s like working for Jeff Bezos and Mark Zuckerberg – Dan Rose

People often ask me to compare working for Bezos vs Zuck. I worked with Mark much more closely for much longer, but I did work directly with Jeff in my last 2 years at Amazon incubating the Kindle. Here are some thoughts on similarities that make them both generational leaders:..

…They both lived in the future and saw around corners, always thinking years/decades ahead. And at the same time, they were both obsessive over the tiniest product and design details. They could go from 30,000 feet to 3 feet in a split second.

In the best tech companies, product defines strategy and culture. Jeff and Mark were both product CEOs first and foremost (though Jeff is arguably more commercial). Amazon and Facebook’s products are also an embodiment of Jeff and Mark’s individual personalities and values.

Neither of them would ever dwell on success. Every time I took a hill and looked up to celebrate, Jeff or Mark had already moved on to the next hill. They set unrealistic goals and were insanely intense, disciplined, hard working and hard driving…

…The skill set required to start a company is insanely different than being CEO of a mega corporation. Scaling of this magnitude requires tireless commitment, crazy focus, thick skin, unbridled ambition. You have to be a learning machine, constantly growing and pushing yourself….

…The cultures they built are also very different. Amzn is more siloed/secretive, while FB is radically open/transparent. There are pros and cons to each (which I will cover in a future post), but culture at both companies runs deep and is rooted in the values of the founder.

7. Congress Wants to Talk About GameStop – Matt Levine

Tenev also sheds some light on how Robinhood got a surprising margin call from its clearinghouse, and how it negotiated it down:

At approximately 5:11 a.m. EST on January 28, the NSCC sent Robinhood Securities an automated notice stating that Robinhood Securities had a deposit deficit of approximately $3 billion. That deficit included a substantial increase in Robinhood Securities’s VaR based deposit requirement to nearly $1.3 billion (up from $696 million), along with an “excess capital premium charge” of over $2.2 billion. SEC rules prescribe the amount of regulatory net capital that Robinhood Securities must have, and on January 28 the amount of the NSCC VaR charge exceeded the amount of net capital at Robinhood Securities, including the excess net capital maintained by the firm. Under NSCC rules, this triggered a special assessment—the “excess capital premium charge.” In total, the NSCC automated notice indicated that Robinhood Securities owed NSCC a total clearing fund deposit of approximately $3.7 billion. Robinhood Securities had approximately $696 million already on deposit with NSCC, so the net amount due was approximately $3 billion.

Between 6:30 and 7:30 am EST, the Robinhood Securities operations team made the decision to impose trading restrictions on GameStop and other securities. In conversations with NSCC staff early that morning, Robinhood Securities notified the NSCC of its intention to implement these restrictions and also informed the NSCC of the margin restrictions that had already been imposed. NSCC initially notified Robinhood Securities that it had reduced the excess capital premium charge by more than half. Then, shortly after 9:00 am EST, NSCC informed Robinhood Securities that the excess capital premium charge had been waived entirely for that day and the net deposit requirement was approximately $1.4 billion, nearly ten times the amount required just days earlier on January 25. Robinhood Securities then deposited approximately $737 million with the NSCC that, when added to the $696 million already on deposit, met the revised deposit requirement for that day.

Basically Robinhood got a normal margin call—its “VaR based deposit requirement”—for about $1.3 billion, because its customers were trading a lot of stocks that were very volatile. This margin call exceeded Robinhood’s regulatory capital, which under the clearinghouse’s rules triggers another, even bigger margin call. You can see why that would be a problem! We have talked about Robinhood’s clearinghouse margin call before, and we have discussed the destabilizing potential of these margin calls: As things get scary and volatile, clearinghouses have a lot of unchecked discretion to demand huge piles of money from brokers at exactly the worst moment for those brokers. Here, precisely because Robinhood was so thinly capitalized, its clearinghouse had the right to demand even more money from Robinhood, exacerbating the risk of disaster. And then it just waived the whole extra $2.2 billion charge and said “ehh never mind you’re fine,” because Robinhood agreed to stop trading so much of the volatile stocks.

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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 Amazon, Facebook, and Salesforce. 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 07 February 2021:

1. 7 Life Lessons from a Guy Who Can’t Move Anything but His Face – Jon Morrow

The only parts of my body I can move are my eyes and lips. My hands, feet, arms, and legs, are almost totally paralyzed, managing the occasional twitch and nothing more.

And yet… I have an amazing life.

Using speech recognition technology, I’ve written articles read by more than 5 million people. I’ve also built several online magazines that have, shockingly, made me a millionaire.

“This can’t be real,” you say. “You did all this, and you can’t freaking move?”

Hard to believe, I know, but it’s true. I do it all from home, sitting in my wheelchair, speaking into a microphone.

I’ve traveled a good bit too. I’ve lived in San Diego, Miami, Austin, and even Mazatlan, Mexico…

…During my 34 years, I’ve had pneumonia 16 times, recovered from more than 50 broken bones, and spent literally years of my life in hospitals and doctor’s offices.

But I’m still here. Not only have I survived my condition, but I’ve built a life most people only dream about.

And starting today, I want to talk about how…

…At some point or another, life punches everyone in the face.

The punch may be hard, or it may be soft, but it’s definitely coming, and your success or failure is largely determined by the answer to a single question: how well can you take the punch?

Do you roll around on the ground, weeping and moaning? Do you rock back on your heels but then keep going? Or have you been punched so many times already you don’t even notice?

Personally, I’m a living example of the last one. If you want to know what it’s like to live with a severe disability, just imagine that every morning six big guys sneak into your room and beat the hell out of you. Most days, the beating isn’t so bad, and you can limp through your day. Every now and again though, they keep punching and kicking you until you’re bleeding and broken, lose consciousness, and wake up in the hospital breathing through a tube.

That’s the best way I know to describe my life. Since the day I was born, muscular dystrophy has given me a daily beating.

The upside?

It’s made me incredibly strong. I can take any punch life throws at me without even breaking stride.

Lost $100,000 on a business deal? No biggie. Key employee quits? Yawn. Getting audited by the IRS? Wake me up when something important happens. Next to fusing my spinal vertebrae together, shattering my legs, or nearly drowning in my own mucus, none of it is honestly that big of a deal.

This, my friends, is the advantage of pain. The more you experience, the more you can handle in the future, and the less it knocks you off your game.

The way you respond to that pain is another matter, which we’ll talk about in a moment. For now, the point I want to make is this: if you feel depressed and weak, unable to cope with the difficulties of life, it’s not because you are a flawed human being. It’s because you were unprepared for the pain you are experiencing. The problem, ironically, is that you haven’t suffered enough.

2. Unfortunate Investing Traits –  Morgan Housel

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.”

What he meant, I think, is that most wars are lost rather than won. The final outcome is driven more by one side’s blunder than the other’s brilliance. One screw up can overwhelm a dozen smart decisions that preceded it, so even if strategy is crucial the expert is rarely preoccupied asking, “How can I be great?” The obsession is, “How can I ensure I’m at least average and never a disaster during the most important moments?”

And isn’t investing the same?…

…A few unfortunate traits that commonly prevent investors from doing the average thing:…

…An ignorance of what I’d call “normal disasters.”

If markets never crashed they wouldn’t be risky. If they weren’t risky they’d get very expensive as all potential returns were wrung out. When markets are expensive they’re fragile. And when they’re fragile they crash.

If you accept that logic – and I think it’s the punchline of all market history – you realize that huge market declines characterized as surprising and shocking and unexpected are in fact foreseeable. The timing isn’t predictable but the occurrence is inevitable. If you get caught in a period when you lose a third of your money and it stays that way for a year or two, you have not been hit by a 100-year storm; you’ve just experienced the base rate of investing, par for the course. That’s why they’re normal disasters.

Same in business. Take a group of 100 companies from nearly any industry. The odds that no more than half will still be around a generation from now are very high, not because they merged but because they went out of business. Competition is relentless and most competitive advantages die. It’s a disaster, but it’s normal and everyone should plan accordingly.

If you’re flying on an airplane, normal means everything is smooth and calm. Investing is closer to whitewater rafting. You’re going to get wet and tossed around, with a decent chance of minor injury. It’s kind of the point. Many investing blunders occur when people expect “normal” to be a period when nothing goes wrong when in fact it’s normal for things to constantly be breaking and falling apart.

It’s hard to do the average thing if you can’t accept that not only is it normal for things to break, but even frequent breakages don’t prevent great long-term growth.

3. Amazon’s Cloud King: Inside the World of Andy Jassy – Kevin McLaughlin

Mr. Jassy was not an obvious candidate to start a business that has made Amazon, in effect, a landlord for a chunk of the internet. A graduate of Harvard University—where he was an advertising manager of the Crimson, the student newspaper—Mr. Jassy is not an engineer. His passions, according to a person close to AWS, include sports, pop culture and music. As of a few years ago, he had a collection of several thousand CDs, a former colleague said. Last year, he joined the ownership group for a new, as-yet-unnamed National Hockey League franchise for Seattle.

After joining Amazon in 1997, the year of its initial public offering, he caught Mr. Bezos’ eye by writing the business plan for a new Amazon business—selling music CDs online—arguing that it was the logical next step for Amazon after book selling, another former colleague said. He later became general manager of the group.

In 2003, Mr. Bezos picked Mr. Jassy to be his technical assistant, a role that entailed shadowing the Amazon CEO in all of his weekly meetings and acting as a kind of chief of staff. While previous technical assistants had languished under the demanding Amazon leader, Messrs. Jassy and Bezos became close friends during that time and Mr. Jassy remains one of Mr. Bezos’ trusted advisers (he is on the “S-team,” a group of about a dozen Amazon executives in Mr. Bezos’ inner circle).

Mr. Jassy’s biggest break came when Mr. Bezos and Rick Dalzell, Amazon’s chief information officer at the time, tapped him to lead what became AWS. The business was an outgrowth of earlier technical work Amazon had done to let independent retailers sell goods through Amazon’s e-commerce systems.

Gradually, Mr. Jassy and others came to realize Amazon could take over the management of even more basic computing chores for outside companies, such as storage and databases, by running them inside Amazon data centers. Customers no longer had to worry about purchasing and maintaining the hardware and software needed for their applications.

The launch of its first services in 2006 coincided with the rise of a new generation of internet startups, many of them propelled by the emergence of smartphones as a platform for applications. Mr. Jassy was well attuned to the needs of these startups, most of which were happy to let Amazon run their technical infrastructure while they focused on more meaningful innovations.

“He’s able to think about things that are very complex and boil them down into a few clear action items that really matter,” said Mr. Dalzell, who left Amazon in 2007 and was one of Mr. Jassy’s mentors. “He has a unique ability to get to the essence of what’s important to customers and put that at the forefront.”

In meetings, Mr. Jassy follows Mr. Bezos’ approach of letting others speak first and then weighing in later with his feedback, a former AWS employee said. He doesn’t hold back if he feels their work isn’t up to par, but he has a softer touch than Mr. Bezos—known for his scorching criticisms—favoring “humor and gentle cajoling” to get what he wants, the person said.

Even though Mr. Jassy was the top dog at AWS, he remained mostly invisible outside Amazon. He allowed the division’s chief technology officer, Werner Vogels, a Dutch computer scientist with a knack for public speaking, to become the face of the new business, while he focused on products.

For years, Mr. Jassy was opposed to Amazon disclosing the division’s financial results, because he didn’t want competitors knowing how fast AWS was growing, according to a former employee. The parent company finally began releasing the AWS numbers in April 2015; under accounting rules, the business got so large the company could no longer conceal it.

“Andy wanted to keep them guessing,” the former employee said. “If they knew what Andy knew, they likely would have invested more earlier.”

4. How David Beats Goliath in Real Life – Josh Brown

On Wall Street, David doesn’t beat Goliath in real life – especially in a battle of brute force and liquidity.

The hedge fund industry manages $3 trillion. Private equity and real estate and venture money is even bigger than that. Funds are backed by banks and brokerages which are backed by the Federal Reserve. Get a grip on reality. This complex doesn’t lose an arms race. The money is infinite. You can’t squeeze it. It will crush you. The louder and more bellicose you are on the internet, the tighter it will squeeze back, until your head has literally popped off…

…So how does David win? David wins by avoiding Goliath and becoming a stronger, smarter, healthier, happier version of himself or herself. How?

David invests capital, time and energy in the furtherance of his or her career, not on memes and internet chatroom bullshit with other Davids…

…David focuses on the main thing under his control – how much he saves versus spends – and then allocates as much as possible to an investment portfolio….

…David diversifies broadly, and has the humility to accept the inherent unknowability of the future…

…Easier said than done. Warren Buffett once talked about the Paradox of Dumb Money. He said that the moment it realizes that it is the dumb money (and acts accordingly), it ceases to be the dumb money. Accepting your limitations isn’t the same as admitting defeat. It’s how you succeed. Because you stop playing the wrong game and start playing the right one.

5. Twitter thread on the “plumbing” that goes on behind the scenes at financial market brokerages – Compound248

Dear Media, what’s happening with RobinHood? A quick primer. This is a “plumbing” issue. It is esoteric, even for those on Wall Street. A very long thread on how the toilet is clogged. Read on

First: RH was not the only brokerage to restrict buying in $GME et al. Much of the below applies to many brokerages. I’m going to use “RH” in my writing for simplicity and because it’s the most prominent, but it’s not fair to call this a RobinHood issue, per se.

The restrictions impacted retail AND institutional players – many institutional prime brokers (“PBs”) did the same thing to their hedge fund clients. Why? Surely PBs can’t be trying to punish their own clients just to benefit Citadel. There must be something else happening… Let’s talk plumbing.

Most RH clients (& all HFs) use “margin” accounts, not “cash” accounts. RH’s sign up process nudges new customers into margin accounts by default. Whether RH should do that is worthy of discussion another day. This is a story of lending and capital.

Margin accounts are Wall Street’s way of denoting lending accounts. Practically speaking, in margin accounts, the client does NOT own *any* securities. Rather, margin account holders “own” a promise from their broker. Yay.

When an RH’er buys $GME, a whole bunch of things happen behind the scenes, all of which are the ugly plumbing of Wall Street.

6. Netflix at 200 Million: Is the Streaming Race Over? – Tien Tzuo

Netflix recently announced that it has over 200 million global subscribers, an impressive milestone. But more importantly, the company is “very close” to being free cash flow positive, despite previously forecasting a loss of up to $1 billion on the year. As Barron’s put it, “the big news was the revelation that Netflix is no longer a money pit. It’s now well on the way to becoming a cash machine.”

This is the same publication, I might add, that wrote an article called “Netflix Shares Could Dive to $45” in 2016. “Investors continue to overlook increasing cash burn and relatively modest income,” warned Barron’s. The stock is now trading at around $563.

Lots of people felt the same way back then. Do some googling and you’ll find plenty of articles with headlines like: “It’s Official: Netflix, Inc. (NFLX) Stock’s Run is OVER,” (Investor Place, 2016). Here’s another quote from Movie City News: “Netflix will be purchased by 2020… because the content issues will overwhelm their business, not too much unlike the way Netflix overwhelmed Blockbuster and the remaining mom & pop DVD/video stores.”

The bear argument against Netflix has always been that it will never be able to repay the huge amount of debt it has accrued ($16 billion at last count) to finance all those thousands of hours of content….

…That argument has now been settled. Not only does Netflix now have a significant competitive moat with attendant pricing leverage (get ready for your monthly rate to go up this year), but it’s also planning on an initial $500 million debt payment, as well as stock buybacks.

Of course, this will come as no surprise to Subscribed readers. As I noted in the book, borrowing heavily to invest in new content was simply Netflix using its recurring revenue as a competitive weapon. Unlike traditional movie production shops, Netflix starts every year with known, predictable revenue. It just made sense to use leverage, similar to a mortgage on a house, to invest in attracting new subscribers, especially if it also extended the lifetime value of their existing subscribers. That’s the beauty of a smartly run subscription model.

So now that Netflix has proven the naysayers wrong, is it all over? Has the streaming race been won? I don’t think so, not by a long shot. To paraphrase a line from The Social Network, “Two hundred million is a pretty good number. Do you know what’s an even better number? Two billion.”

7. It Feels Like the Game is Rigged – Michael Batnick

There are about a million and one different angles to consider when talking about the big story in the stock market.

The most important thing that’s happening is the deterioration of faith that people have in financial institutions. Once trust is lost, it’s almost impossible to gain it back. Memes aside, this is no laughing matter…

…You’re right, Jimmy. Insiders have advantages. I understand that it feels like parts of the system are broken. I understand that it feels unfair. I understand that it feels like the odds are stacked against you.

But I’m asking you to please reconsider.

I’m thrilled for the people that got in early and made boatloads of money. But the people who are getting in late will be left holding the bag. And when they do, they will go looking for people to blame. The “system is rigged” will be shouted out when what will really happen is the market’s inherent rejection of rewarding get rich quick strategies. If you play their game, and this is their game, you will not win. But Jimmy, if you take a long-term view, then you almost can’t lose.

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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 Amazon and Netflix. 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 31 January 2021:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

5. Type I and Type II Charlatans – Ben Carlson

Pockets of the market are flirting with silly territory.

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

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

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

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

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

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

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

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

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

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

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

Bernie Madoff is a type II.

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

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

LUTKE LEARNING 1 – OPERATE ON CROCKERS LAW

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

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

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

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

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

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

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

LUTKE LEARNING 2 – ALWAYS BE A STUDENT TO FIRST PRINCIPLES

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

Global Maximum > Local Maximum

Local Maximum = Optimising a cog in the machine

Global Maximum = Optimising the machine itself

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

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

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

This Truck driver was called Malcolm McLean

His first principles approach created the SHIPPING CONTAINER

The results?

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

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

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

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

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

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

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

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

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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 Alphabet (parent of Google) and Shopify. Holdings are subject to change at any time.

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

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

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

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

1. The Best Investors of All Time – Chris Mayer

Who are the best investors of all time?

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

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

Why not?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“Wait, what?”…

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

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

The paradigm of retention = product engagement.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here’s the punchline. They were both bullish.

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

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

Bezos’ Razors:

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

…Luck Razor: 

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

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

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

…Naval’s Razors:

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

…Taleb’s Surgeon:

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

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

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

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

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

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

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

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

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

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

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

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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 the shares of Amazon. Holdings are subject to change at any time.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

3. Fraud Is No Fun Without Friends – Matt Levine

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

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

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

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

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

[An edited transcript of the interview follows.]

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

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

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

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

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

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

5. Inflation Truthers – Ben Carlson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Will value come back?

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

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

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

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

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

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

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

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

Where does the Dollar Go?

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

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

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

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

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

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

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

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

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

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

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

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

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

“I wish it was not,” he responded.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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 the shares of Alphabet and Facebook. Holdings are subject to change at any time.

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

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

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

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

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

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

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

Yikes

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

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

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

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

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

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

Ensemble Capital recently tweeted:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

…Your spending is someone else’s income.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Nine years later World War II had begun…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here’s a different example.

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

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

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

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

(1) You can do it.

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

…(3) Your Vision.

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

…(6) Staying in the game.

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

…(10) Creating Value. For Others.

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

…(12) Network.

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

(13) Concentration vs Diversification.

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

…(25) Gratitude.

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

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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 the shares of Amazon, Apple, and Chipotle Mexican Grill. 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 27 December 2020:

1. The Airbnbs – Paul Graham

What was special about the Airbnbs was how earnest they were. They did nothing half-way, and we could sense this even in the interview. Sometimes after we interviewed a startup we’d be uncertain what to do, and have to talk it over. Other times we’d just look at one another and smile. The Airbnbs’ interview was that kind. We didn’t even like the idea that much. Nor did users, at that stage; they had no growth. But the founders seemed so full of energy that it was impossible not to like them.

That first impression was not misleading. During the batch our nickname for Brian Chesky was The Tasmanian Devil, because like the cartoon character he seemed a tornado of energy. All three of them were like that. No one ever worked harder during YC than the Airbnbs did. When you talked to the Airbnbs, they took notes. If you suggested an idea to them in office hours, the next time you talked to them they’d not only have implemented it, but also implemented two new ideas they had in the process. “They probably have the best attitude of any startup we’ve funded” I wrote to Mike Arrington during the batch…

…What we didn’t realize when we first met Brian and Joe and Nate was that Airbnb was on its last legs. After working on the company for a year and getting no growth, they’d agreed to give it one last shot. They’d try this Y Combinator thing, and if the company still didn’t take off, they’d give up.

Any normal person would have given up already. They’d been funding the company with credit cards. They had a binder full of credit cards they’d maxed out. Investors didn’t think much of the idea. One investor they met in a cafe walked out in the middle of meeting with them. They thought he was going to the bathroom, but he never came back. “He didn’t even finish his smoothie,” Brian said. And now, in late 2008, it was the worst recession in decades. The stock market was in free fall and wouldn’t hit bottom for another four months.

Why hadn’t they given up? This is a useful question to ask. People, like matter, reveal their nature under extreme conditions. One thing that’s clear is that they weren’t doing this just for the money. As a money-making scheme, this was pretty lousy: a year’s work and all they had to show for it was a binder full of maxed-out credit cards. So why were they still working on this startup? Because of the experience they’d had as the first hosts.

When they first tried renting out airbeds on their floor during a design convention, all they were hoping for was to make enough money to pay their rent that month. But something surprising happened: they enjoyed having those first three guests staying with them. And the guests enjoyed it too. Both they and the guests had done it because they were in a sense forced to, and yet they’d all had a great experience. Clearly there was something new here: for hosts, a new way to make money that had literally been right under their noses, and for guests, a new way to travel that was in many ways better than hotels.

That experience was why the Airbnbs didn’t give up. They knew they’d discovered something. They’d seen a glimpse of the future, and they couldn’t let it go.

2. How Pfizer Delivered a Covid Vaccine in Record Time: Crazy Deadlines, a Pushy CEO – Jared S. Hopkins

Even for jaded pharmaceutical scientists, what happened next was little short of miraculous. U.S. health regulators Friday night authorized the Covid-19 vaccine developed by Pfizer and its German partner BioNTech SE. The shot is already in U.K. use and will be the first given in the U.S., capping the fastest vaccine development ever in the West.

How the drugmakers pulled off the feat, cutting the typical time from more than 10 years to under one, partly stems from their bet on the gene-based technology.

As the inside story shows, it was also the product of demanding leadership, which bordered on the unreasonable. From urging vaccine researchers to move fast to pressing the manufacturing staff to ramp up, Mr. Bourla pushed employees to go beyond even their own ambitious goals to meet Covid-19’s challenge…

…BioNTech wanted to make vaccines out of messenger RNA, or mRNA, the molecules that carry genetic instructions telling cells what proteins to make.

The German company’s researchers thought they could use the genetic sequence of the coronavirus, which had recently been published, to synthesize mRNA that would instruct cells to make a harmless version of the spike protein that protrudes from the surface of the virus.

The defanged spike proteins would prompt a person’s immune system to produce antibodies that could fight off the real virus.

Unlike the months it takes to cultivate a vaccine in test tubes, designing an mRNA vaccine would be quick. BioNTech simply plugged the genetic code for the spike protein into its software. On Jan. 25, BioNTech Chief Executive Ugur Sahin designed 10 candidates himself.

The company’s researchers would create 10 more different potential coronavirus vaccines for a total of 20, each slightly different in the event one design worked better and more safely than the others.

But BioNTech, founded in 2008 and with just 1,000 employees when the pandemic hit, needed a big partner to manufacture the vaccines for human trials and potentially for people around the world.

During a March 1 phone call, Dr. Sahin proposed a coronavirus vaccine collaboration with Kathrin Jansen, Pfizer’s vaccine-research chief.

Many in pharma were skeptical of mRNA, which had been long in the making but never the basis for an approved product. Dr. Jansen, known in the industry for helping develop Merck & Co’s cervical-cancer shot Gardasil, saw promise, in large part because mRNA vaccines appeared to produce stronger immune responses than older shots.

“This is a disaster, and it’s getting worse,” Dr. Jansen told Dr. Sahin. “Happy to work with you.”

Mr. Bourla gave his go-ahead a week later, at one of Pfizer’s first leadership meetings on the program. When vaccine researchers at a follow-up meeting in mid-March forecast a coronavirus vaccine in the middle of 2021, Mr. Bourla spoke up.

“Sorry, this will not work,” he said. “People are dying.”

3. What If You Only Invested at Market Peaks? – Ben Carlson

In 2014 I wrote a piece called What If You Only Invested at Market Peaks?

It’s hard to believe it now, but many investors assumed after a massive 30%+ run-up in the S&P 500 in 2013 that a peak was imminent.

So I decided to simply run the numbers as a thought exercise on the results of an investor who only invested their money at market peaks, just before a market crash.

I was more curious than anything and unsure about what the results would show. They were surprisingly better than expected.

I didn’t put much thought into this piece but it has become by far the most widely read piece of content I’ve ever written. It’s been read nearly a million times.

It still gets tens of thousands of page views a year.

I used this example in my book A Wealth of Common Sense but have always thought this story would be even better with visuals.

So with the help of our producer, Duncan Hill, I found an illustrator1 who could turn my story about the world’s worst market timer into a cartoon.

I updated some of the numbers, did some voiceover work, got the illustration just how we wanted it and had Duncan put it all together…

…There were some lean times in there, especially in the aftermath of the Great Depression. But by and large, the long-term returns even from the height of market peaks look pretty decent.

I’m not suggesting investors are owed anything over the long-run. The stock market is and always has been a risky proposition, especially in the short-to-intermediate-term.

But if you have a long enough time horizon and are willing to be patient, the long-run remains a good place to be when investing in the stock market.

4. Barry Ritholtz and Josh Brown Won’t Predict The Market, But They’ll Talk About Anything Else. – Leslie P. Norton

Barron’s: You’re bloggers and money managers. How does that work?

Barry Ritholtz: The blogging was an attempt to correct broader errors from Wall Street and the press—that people understood what was actually going on in the world, and that their process wasn’t completely damaged by their own cognitive errors and behavioral biases. That led to optimist bias, where people think, “Hey, I could pick stocks, I can market-time.” I also recognized the academic research that [showed] it’s much, much harder to be a successful stockpicker, a market timer, or trader than it appears, and you’re better off owning the globe and trying not to get in your own way.

As the world gets more complicated, you have to be really selective with how you use technology. Sometimes, it’s a boon to investors, and other times, the gamification of trading, apps like Robinhood, are encouraging not the greatest behavior.

Josh Brown: Barry doesn’t get enough credit. We all wanted to start blogs like Barry’s. He was first to write about behavioral investing in a popular format. I worked as a retail broker at a succession of firms; I had a front-row seat for 10 years of everything not to do. I saw every horrendous mistake and swindle, and as a 20-something, I’d say, “I’m not going to do that—or that, either.”

It didn’t feel fortunate at the time, because my career was going nowhere. I was 30 years old, with a negative bank account, a mortgage, a 2-year-old daughter, and a pregnant wife. When I met Barry, I said, “Whatever you’re doing, I want to be part of it.” He said, “I don’t deal with clients. That will be your role.” In my blog, I share what I’m learning in real time. There’s always a new topic—cryptocurrency, tariffs, interest rates, the intersection of elections with markets. I try to share my own process…

…Has the pandemic altered the way you think about investing?

Brown: The thing is how outrageous the response in asset prices has been. There’s an argument to be made that the stock market is higher because of the pandemic than if 2020 had been a more routine year. It’s an affirmation of why we’re rules-based investors.

Ritholtz: Not only did you have to predict that a pandemic would occur, but you would have had to take it to the second level, which is that the Federal Reserve’s going to take rates to zero, and that Congress, which cannot agree on renaming a library, would panic and pass a $3 trillion stimulus. That’s how you get to a positive year, despite all the terrible news. We never try to guess what’s going to happen. If we’re not making forecasts, we’re not marrying forecasts.

Josh, you published a book that included 25 people’s portfolios. What was the most useful advice?

Brown: We gave people a blank sheet of paper and were very surprised that none of the chapters read like anyone else’s. Bob Seawright wrote something very poignant about an investment in a summer cottage for the family. It was a terrible investment financially, but it was one of the best investments of all time because of the memories it created. It was important for me to hear, because I work 18 to 20 hour days, and I work on Saturdays and Sundays, and I’m reading, and I’m blogging, and I’m doing podcasts. I don’t really smell the roses that much.

5. It’s the index, stupid! Our New Not-So-Neutral Financial Market Arbiters – Johannes Petry, Jan Fichtner and Eelke Heemskerk

Historically, index providers were primarily providers of information. Indices were ‘news items’, helpful for investment decisions — but arguably not essential. Actively managed funds merely used them as baselines to compare their performance, they were not expected to direct financial markets. As previously noted, the hallmark of active investors was to be different from the index — rather than being reliable, the index was there to be beaten. Hence, index providers’ decisions over the composition of their indices had relatively limited impact on financial flows — deviation from the index was a worthy risk metric. But their exact composition was not yet crucial to investors, listed companies or countries.

This changed fundamentally with the global financial crisis, which triggered two reinforcing trends: concentration, and the rise of passive investment. Together, these transformed index providers from merely supplying information to exerting power over asset allocation in capital markets.

First, the index industry concentrated — not least because banks sold non-core businesses to raise cash, as they tried to stay afloat during the financial meltdown that engulfed their industry. By 2017, the three indices S&P DJI, MSCI and FTSE Russell accounted for 27%, 26% and 25% of global revenues in the index industry, respectively.

This market concentration led to a growing power position of the few index providers that had historically positioned themselves and their brands in financial markets. With profit margins averaging between 60-70%, they operate in a quasi-oligopolistic market structure. This is because their indices are not easily substitutable, due to unique brand recognition and network externalities, e.g. through liquid futures markets based on their indices. The S&P 500, for instance, represents US blue chips like no other index. It is also the most widely tracked index globally, and S&P 500 index futures are the most traded futures contract in the world.

Second, and more importantly, the money mass-migration towards passive investments significantly increased the authority of index providers. They came to influence asset allocation in unprecedented ways, as more and more funds directly tracked the indices they own, construct and maintain. ETFs indexed to FTSE Russell indices more than doubled from US$315 billion in 2013 to US$765 billion in 2019. Meanwhile passive funds tracking MSCI indices even increased more than sevenfold between 2008 and 2020, from $132 billion to more than $1 trillion. ETFs and index mutual funds that follow S&P DJI indices increased from $1.7 trillion in 2011 to staggering $6.3 trillion in 2019. Whereas in the past indices only loosely anchored fund holdings around a baseline, now they have an instant, ‘mechanic’ effect on the holdings of passive funds.

As passive funds simply replicate an index, index providers’ decisions to change index compositions lead to quasi-automatic asset reallocations. Index providers now effectively ‘steer’ financial flows.

6. Managers at Major Index Provider, Sushi Restaurant Charged With Insider Trading – Alicia McElhaney

A senior index manager at S&P Dow Jones Indices has been charged the U.S. Securities and Exchange Commission and the Justice Department for insider trading.

According to complaints filed Monday by both entities, Yinghang “James” Yang allegedly used information that he learned on the job to help his friend Yuanbiao Chen, a manager at a sushi restaurant, trade options on companies before they were added to or removed from S&P indices…

…The scheme allegedly began in April 2019, when Yang wrote a check for $3,000 to his co-conspirator, who then deposited it in his personal bank account. Roughly a month later, the co-conspirator opened a brokerage account, the Justice Department’s complaint shows. (Chen was not named in the Justice Department complaint.)

Between June and October, Yang and Chen allegedly used the account to buy call or put options on publicly-traded companies, according to the SEC complaint. On the days of the trades, S&P would announce after hours that the same companies would be added to or removed from its indices, according to the Justice Department. The positions would then be liquidated, the Justice Department said.

Yang and Chen started small: Each of the early transactions was worth roughly $2,000 or so. For instance, on July 9, they bought T-Mobile call options at 1:25 p.m, according to the SEC complaint. At 5:15 p.m., just after markets closed, S&P announced that T-Mobile would be added to one of its indices. The next morning, Chen and Yang reportedly sold the call options, making $1,096, the SEC said…

…But in the middle of September, the trades ramped up. Just before 2 p.m. on September 26, for example, Chen bought call options for Las Vegas Sands, the SEC said. At 5:15, S&P announced the addition of the company to its indices. The reported profit? $325,956.

During that period, Chen and Yang made these types of trades on 14 occasions, the SEC said.

Then came the payout. On October 4, Chen allegedly wrote Yang three checks totaling $100,000 from the brokerage account, the complaint said. The Justice Department said Yang used this money to make credit card payments, pay off student loans, and fund his own trading activity.

In total, the duo made $912,082 on the options trading, returning 136 percent on their investments, according to the complaints.

7. The Down Under Scammer You’ve Probably Never Heard of – David Wilson

As such, it’s worth revisiting Australia’s singularly tragic version of both men: the bipolar insider trader Rene Rivkin, who after being sentenced to just nine months of weekend detention stints, sparking national gloating, killed himself in 2005. 

“Cell, cell, cell,” the lead story in The Sydney Morning Herald crowed.

If he had lived, however, Rivkin might have served more time. For one thing, he was also a suspect in a seamy murder case and the recipient of a lavish insurance payout under suspicious circumstances. And he allegedly offloaded stocks that his newsletter, the Rivkin Report, tipped. Last, despite having untold wealth hidden in the Swiss banking system, Rivkin owed the taxman millions.

His memory still casts a tailored shadow across the Australian investment landscape, because the “guru of greed” was such an epic character: a high-octane, cigar-smoking, Prozac-popping Sydney-sider dubbed “Australia’s most aggressive broker.” Some even labeled him messianic based on his grandiose claims of persecution, going so far as to compare his criminal conviction to the crucifixion of Jesus…

…Later that year the Australian investments commission charged Rivkin with insider trading for buying 50,000 Qantas Airways shares after chatting to the head of the aptly named, now-defunct Impulse Airlines. In 2003 Impulse founder Gerry McGowan testified to having told Rivkin that Australia’s flying flag carrier planned to buy his company.

In one of many plot twists, Rivkin’s mischief yielded a piddling profit. Nonetheless, Justice Anthony Whealy denied clemency….

…What drove Rivkin, Wood’s troubled boss? Jan Marshall, a scam victim advocate and educator and the chief executive of Life After Scams, says: “People start off with small risks, and as they pay off, they begin to think they are invincible. They are driven by their greed to take bigger and bigger risks.”

Almost certainly, Marshall adds, Rivkin had a sociopathic streak. That means no conscience and no concern for how others might be affected by his acts, she explains.

Hong Kong–based Dr. Anthony Dickinson, an expert on workplace psychopaths, also believes Rivkin to have been a sociopath. Unlike full-blown psychopaths, sociopaths have some empathy, he notes.

“But their sense of right and wrong is based upon the norms and expectations of their subculture,” says the neuroscience-trained psychologist.

As to why Rivkin risked all on Impulse Airlines, Dickinson suggests: “Classic case of the gambler’s fallacy” — the myth that winning streaks are inevitable. Or, more likely, Rivkin was just “upscaling” business-as-usual practices, assuming he would never be caught or could buy his way out if he was.

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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 the shares of 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 20 December 2020:

1. Last Man Standing – Morgan Housel

Let me propose the equivalent for individual investors. It might push you away trying to earn the highest returns because returns, like margins, don’t matter; generating wealth does.

Everything worthwhile in investing comes from compounding. Compounding is the whole secret sauce, the rocket fuel, that creates fortunes.

And compounding is just returns leveraged with time.

Earning a 20% return in one year is neat. Doing it for three years is cool. Earning 20% per year for 30 years creates something so extraordinary it’s hard to fathom. Time is the investing factor that separates, “Hey, nice work,” from “Wait, what? Are you serious?”

The time component of compounding is why 99% of Warren Buffett’s net worth came after his 50th birthday, and 97% came after he turned 65.

Yes, he’s a good investor.

But a lot of people are good investors.

Buffett’s secret is that he’s been a good investor for 80 years. His secret is time. Most investing secrets are.

Once you accept that compounding is where the magic happens, and realize how critical time is to compounding, the most important question to answer as an investor is not, “How can I earn the highest returns?” It’s, “What are the best returns I can sustain for the longest period of time?”

That’s how you maximize wealth.

2. The Essex Boys: How Nine Traders Hit a Gusher With Negative Oil – Liam Vaughan, Kit Chellel, and Benjamin Bain

Among the many previously unthinkable moments of 2020, one of the strangest occurred on April 20, when the price of crude oil fell below zero. West Texas Intermediate futures, the most popular instrument used to trade the commodity, had started the day at $18 a barrel. That was already low, but prices kept tumbling until, at 2:08 p.m. New York time, they went negative.

Amazingly, that meant anyone selling oil had to pay someone else to take it off their hands. Then the crude market collapsed completely, falling almost $40 in 20 minutes, to close at –$38. It was the lowest price for oil in the 138-year history of the New York Mercantile Exchange—and in all likelihood the lowest price in the millennia since humans first began burning the stuff for heat and light…

…U.S. authorities and investigators from Nymex trawled through trading data for insights into who exactly was driving the action on April 20. According to people familiar with their thinking, they were shocked to discover that the firm that appeared to have had the biggest impact on prices that afternoon wasn’t a Wall Street bank or a big oil company, but a tiny outfit called Vega Capital London Ltd. A group of nine independent traders affiliated with Vega and operating out of their homes in Essex, the county just northeast of London, had made $660 million among them in just a few hours. Now the authorities must decide whether anyone at Vega breached market rules by joining forces to push down prices—or if they simply pulled off one of the greatest trades in history. A lawyer for a number of the Vega traders vehemently denies wrongdoing by his clients and says they each traded based on “blaring” market signals…

…The pits were collegial and freewheeling, a place of ethical and regulatory gray areas. If a local overheard news about a big trade that some oil major had in the works, he might try to jump ahead of it, a prohibited but pervasive practice known as front-running. The cavernous trading floor had cameras, but there were blind spots where people went to share information. A former executive struggles to remember a single meeting of the exchange’s compliance committee.

One trick involved an instrument called Trade at Settlement, or TAS, an agreement to buy or sell a future at wherever the price ends up at the closing bell. The contract was aimed at investment funds, whose mandate it was to track the price of oil over the long term. But some traders figured out that they could take the other side of these TAS trades, then work together at the end of the day to push the closing price as low as possible so they could pocket a profit. The practice, while officially against the rules, was so common and effective it had a nickname: “Grab a Grand.”

3. Terry Smith talks big tech, fraud and ESG – Dave Baxter

[Question to Terry Smith] On Facebook (US:FB), what are your thoughts on the risks of it being broken up or more heavily regulated? More generally, is the quality of Facebook’s service deteriorating for advertisers? We ask this in light of this year’s hate speech ad boycott and recent news that the company overestimated the reach of some ad campaigns.

[Terry Smith’s response] Regulation doesn’t concern me much. Increased regulation tends to cement incumbents in place as newcomers find it hard to comply. The tobacco industry flourished for decades with tighter regulation.

I am not saying a break-up couldn’t occur, but I believe the last break-up of a company in the US forced by antitrust action was AT&T in 1984. It produced the so called Baby Bells (the offspring of ‘Ma Bell’-AT&T), which by 2018 had merged to form…AT&T. Also as an investor it’s by no means clear that a break up into its constituent parts would destroy value.

Again let’s look at the facts. The hate speech ad boycott was a non-event. Most advertisers did not participate, those who did only ‘paused’ their advertising rather than cancelling it indefinitely, and some of those who said they would boycott Facebook were, shall we say, misleading. Moreover, it is quite likely that other advertisers took advantage of the absence of their virtue signalling competitors to up their advertising spend. In its last quarter, Facebook’s revenue was up 22 per cent and ad impressions were up 35 per cent. It’s important to understand that Facebook’s advertising is more about enabling small businesses to advertise effectively than it is about the large corporate advertisers who were the ones who publicly announced their boycott, which was temporary if it happened at all.  Facebook’s top 100 advertisers only account for 16 per cent of Facebook’s revenues. I regard the recent news about Facebook overestimating the time viewers spent watching videos in the same light. Try to bear in mind when you read news about Facebook that most of the conventional media loathes and fears it in equal proportions…

…[Question to Terry Smith] Nowadays how widespread (or not) is creative accounting, and outright fraud, compared with when you wrote Accounting for Growth?

[Terry Smith’s response] I think Wirecard answers that in a single word.

4. The Daughter of a Slave Who Did the Unthinkable: Build a Bank – Jason Zweig

If Ms. Fraser has finally cracked the glass ceiling, it was Maggie Lena Walker who first battered down the walls.

The daughter of a former slave, Walker became the first Black woman ever to head a U.S. bank when she founded the St. Luke Penny Savings Bank in Richmond, Va., in 1903. Her success came from doing what great entrepreneurs do: Walker zeroed in on an underserved market and focused her prodigious energy on meeting its needs. But her story is all the more remarkable because it played out on a stage of such intense bigotry.

Her mother, Elizabeth Draper, was an illiterate teenager when Walker was born. Her father was a white Confederate soldier who, historians believe, raped Elizabeth. When Walker finished high school, her father, who still lived nearby, sent her a dress as a graduation gift. Her mother burned it.

As a girl, Walker helped her mother work as a washerwoman and soon joined her as a member of the Independent Order of St. Luke. This was a mutual-benefit society originally set up by a free woman in Baltimore that provided insurance, educational funding and other financial services to Black people after the Civil War.

After graduating high school and working three years as a teacher, Walker quickly advanced at St. Luke. She became the organization’s head in 1899, when it was on the brink of failure. Under her leadership, it blossomed to 100,000 members across 24 states.

Having grown up in a network of mothers who had to manage family finances to the penny, Walker saw the economic independence of Black women as an ethical imperative.

“Who is so helpless as the Negro woman?” she asked in a speech in 1901. “Who is so circumscribed and hemmed in, in the race of life, in the struggle for bread, meat and clothing, as the Negro woman?”

She called for St. Luke to create a department store and a newspaper—but, above all, a bank. That, she believed, was the way to uplift Black women. “Let us put our moneys together; let us use our moneys; let us put our money out…and reap the benefit ourselves,” she proclaimed. “Let us have a bank that will take the nickels and turn them into dollars.”

5. Penis Thieves & Asset Bubbles – Ben Carlson

In 2005, a man was sitting on a bus in Nigeria minding his own business when all of the sudden he let out an ear-piercing scream.

Wasiu Karimu began shouting that his genitalia had magically disappeared into his own body.

He immediately grabbed the woman seated next to him and demanded that she restore his stolen manhood at once.

Karimu continued shouting at the woman as they got off the bus which caused a commotion. The police eventually brought them down to the station to settle their dispute.

When asked to prove his claim of penis theft, the man told the police commissioner his organ had gradually returned to its rightful place.

This may sound like a case of a mentally unstable person making an outlandish claim. But thousands of people in places like Nigeria, Singapore and parts of China have experienced the phenomenon known in medical literature as koro or magical penis theft.

It’s a situation where people, mostly men, have the feeling their genitals are being sucked into their bodies. When doctors examine these patients, the men often look down and claim it had magically reappeared.

Magic penis theft is what is referred to as a culture-bound syndrome which are diseases that are more prevalent in certain societies or cultures…

…I believe culture-bound syndrome exists in the markets as well.

One of the simplest explanations offered for the continued strength of the U.S. stock market in recent years is generationally low interest rates. If there are no safe yield alternatives, investors are forced to go out further on the risk curve.

And this makes sense in theory until you realize the fact that rates are even lower in places like Europe and Japan yet they haven’t seen the same level of euphoria in their markets.

Yields for 10 year government bonds in Japan have been under 3% since 1996 and less than 1% since 2010:

Yet there hasn’t been a whiff of speculation in Japanese markets in that time.

6. Twitter thread on quotes from Charlie Munger from a recent interview – Tren Griffin

2/ “All successful investment involves trying to get into something where it’s worth more than you’re paying. That’s what successful investment is. There are a lot of different ways to find something worth more than you’re paying. You can do what Sequoia does [e.g, in VC].”

3/ “Good investing requires a weird combination of patience and aggression and not many people have it. It also requires a big amount of self-awareness about how much you know and how much you don’t know. You have to know the edge of your own competency.”

4/ “A lot of brilliant people are no good knowing the edge of their own competency. They think they’re way smarter than they are. Of course, that’s dangerous and causes trouble.” Charlie Munger…

…6/ “I don’t think we want the whole world trying to get rich by outsmarting the rest of the world. But that’s what’s happened. There’s been frenzies of speculation and so on.  It’s been very interesting, but it’s not been all good.” ..

…20/ “Early innovation by Giannini’s Bank of America helped immigrants by giving them loans. He kind of knew which ones were good for it and which ones weren’t. I think that was all for the good. That brought banking to a lot of people who deserved it.”

21/ “Bank of America helped the economy and helped everybody. Once banking got so they wanted to have soft hands and make zillions as speculators, those developments haven’t been a plus. In other words, I like banking when they’re trying to avoid losses prudently.”

7. How to Revive the Economy, and When to Worry About All That Debt – Corinne Purtill

Maya MacGuineas is head of an organization called Campaign to Fix the Debt, which is dedicated to the thesis that “America’s growing national debt profoundly threatens our economic future.” But even she says that now is not the time to worry about borrowing.

“Responsible fiscal policy is borrowing like crazy right now,” Ms. MacGuineas said. There will come a time, she said, to re-evaluate the trade-offs. In the meantime, it’s time to spend, but be aware that a pivot will be necessary at some point:

“No matter which party is in power, it’s nice to be able to enact your agenda without having to pay for it. We saw that in the four years leading up to this downturn, and I’m concerned there will be lots of voices saying we shouldn’t pay for things down the road. But I think responsible fiscal policy is borrowing like crazy right now. Things that are targeted, things that are smart, to goose the economy. But once we stabilize the economy, be willing to bring that debt back down so it’s not growing faster than the economy.”

The urgency of economic aid can’t be an excuse for programs that worsen inequality.

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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 the shares of Facebook. Holdings are subject to change at any time.