We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.
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But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general.
Here are the articles for the week ending 05 January 2025:
1. Mike Alkin – Talking Uranium (Transcript here) – Bill Brewster and Mike Alkin
Alkin: So coming to this market, I did that. I spent a good almost couple of years doing supply/demand on my own. There’s 430 reactors around the world. And understanding the country where they operate, the attitude towards nuclear, understanding the math involved. Often as investors, you look for heuristics. How many reactors are there? How many pounds per reactor would there be? You’re looking for rules of thumb. As you start peeling the onion back, I realize that rules of thumb don’t apply here because the amount of uranium needed for the reactor fleet around the world is not always the same. It depends upon enrichment capacity. We won’t go down that rabbit hole, but there’s a whole other segment you need to learn.
As I was doing that, I would go to these conferences and I would talk to nuclear fuel buyers, people who buy this stuff. It was hard for me at first to really understand what I was dealing with because as somebody at that time having well over 20 years of experience as a hedge fund investor, I talked to people in all industries that were on all sides of the equation. But the people buying it typically were curious as to what we were thinking when we were questioning them. If we were talking to a buyer at a company that was buying a product, they would say “What are you as an investor hearing? What are you hearing from the other side? What are my competitors saying? What are you hearing about inventories?” They were inquisitive. That was not this cohort. As I started speaking to nuclear fuel buyers, I was met with an enormous wall put in front of me telling me, “I’m an outsider, I’m not a nuclear engineer, I don’t know what I’m doing, I should basically stay away and they’ve got it.”
I thought it was that attitude that just said to me, “Something’s not right here because the numbers I’m coming up with, whether I’m looking at inventories or the amount of the cost of the supply, or the actual demand” – for context, at the time the price of uranium was $17, $18, $19 a pound. It would say what it was trading for in the market. As I did the analysis, I realized that the average cost was somewhere in the mid-$50s. I’m not that sharpest tool in the shed but I know that if something costs you mid-$50s to make, you can’t sell it for $17 for very long. So it was then that I had to peel back the onion saying, “Why are they producing it at that price?” Then you start to understand that the uranium market is one driven mostly by long term contracts. Well north of 80% on average will trade in a long-term window with contracts that cover 5, 7, 10, 12, 15 years depending on the contract. But that’s where most of the pounds trade. After the Fukushima event, a lot of these uranium producers, when the spot market had declined precipitously, were still selling into much higher prices. My understanding of that when I was talking to fuel buyers at these nuclear conferences, they were telling me that the price of uranium was $17 and $18, it was going to $10, it was going to $5. There was all this uranium out there.
That’s not what my math was showing me. What my math was showing me was that the model was that the long term contracts that had been signed before Fukushima melted down in 2011 were going to start to expire and rather rapidly. Uranium producers could not sell $17, $18, $20 uranium when it cost him 2.5 times that. At some point, production would have to start to shut down.
So you ask, “Do you think you’re crazy?” Yes, because as I’m talking to people who are obviously very sharp – they’re nuclear engineers – but it’s understanding, as you realize, as an investor, you have to understand incentives and you have to understand market structure. Charlie Munger would always say, “Show me the incentive, I’ll show you the outcome.” It was as I was starting to go and talk to these folks and realizing a couple of things. Number one is, they had no interest in what I was learning on my journey. Even though I’m not a nuclear engineer, I’m still somebody who’s a market participant. I’m still somebody that while I don’t speak their language, sitting at a dinner table or a lunch table or at a bar having a beer with them, I certainly could hold my own in supply/demand conversation. And as I would talk about what I was learning and uncovering, I was shot down at every step. I thought, “Wow, that’s interesting because I’m seeing a recency bias. What is now will always be.” So they were kind of latched onto that.
Then as I started peeling that, I’m thinking, “Why is this?” I’ve been doing this a very long time. Over the years, I’ve been wrong many times. I’ve been right more often than not. But you’re wrong and you try and understand where you’ve been wrong. I was thinking, “What is it? Why are they so uninterested in hearing what an outsider’s view is?” As I started to explore that more, you start to understand the makeup and the cost structure of a nuclear reactor, which I have known, but it really started to come into clear vision for me was the fuel. Uranium is just one part of the fuel cycle that goes in. You have uranium, they convert uranium from a powder into a gas. It then gets enriched, it then gets fabricated into pellets. That takes 18 to 24 months to do this stuff. There’s many different stages of the fuel cycle. As I was starting to think about what are the costs of that, all those stages are probably around 20% to 25%. What’s the cost of the uranium? That depends on the price. But it could be mid-single digits, high-single digits, somewhere around that. As you start talking to them about that, you realize it’s not a meaningful cost.
For comparative purposes, if I’m running a natural gas power plant or a coal power plant, my feedstock, the natural gas and the coal are 80% to 90% of the cost of operating it. Here, the uranium is single digits cost of operating it. The vision that started to come to me was uninterested market participants. They’re in the market very infrequently. Why are they uninterested? Because the cost is de minimis. Not to say it’s meaningless, but it’s de minimis. Then as I started to explore and ask questions, “Why are you not as concerned about this?” I was obviously met with a wall.
But what started to come to me was – and I asked flat out at a particular dinner at a World Nuclear Conference – I asked one, actually there were four fuel buyers at a dinner, I said, “If you all had a really enterprising fuel buyer that did the supply/demand work and said, “I think consensus is wrong. Here we are, $17, $18, $20 a pound. We should be buying uranium because the forecasts going out of the future are for deficits to be forming.” Let me ask you a question. Do you all, if the price were to go parabolic and you had all these great cost savings for your plant, do you participate that in any way, shape or form? Are you rewarded financially? Are you rewarded with a promotion?” The answer was I got laughed at. “What are you talking about? We’re paid to secure fuel.” These were buyers. As you come to a market as an investor, you think buyers are traders – they’re commercial creatures. These aren’t. These are really smart nuclear engineers that happen to buy a product that happens to not be a major cost component. There’s infrequent price discovery on their part and so it’s a lesson in understanding incentives and market structure…
…Alkin: One of the things you see now is you have expert networks who provide hedge funds and mutual funds experts to speak to in any industry. If you’re a hedge fund wanting to get up to speed right now on the nuclear power industry, you’re going to say, “Get me three nuclear fuel buyers. I’d like to speak to them about uranium.” They’re going to get on the phone and they’re going to speak to them. For years – though I’m sure they’ve been doing this – they can get on the phone and speak to three fuel buyers and they say, “Yeah, there’s plenty of uranium out there.” Those are the same folks, when the price was $17 was telling me that, versus here you’re seeing floors and ceilings at $125 and $135. They are the gift that keep on giving. Yet the way the structure of the research process is, they’re going to expert networks. They find these people, and if you don’t understand how the sausage is made, you’re going to be misled. They’re not purposely misleading you. It’s just what their own beliefs are. For me, that’s a beautiful thing. I’ve been doing this a long time now, almost 30 years as a professional investor, and I’ve never seen a cohort of people who are so uninterested in hearing the other side of the story. So far I’ve seen them prices move up 4x in there against them and they still have the same attitude.
Brewster: To your point, it doesn’t sound like they’re very incentivized to care.
Alkin: There’s very little to no incentive to care, other than maybe you would think pride? I don’t know. But it doesn’t matter. It’s just not a thing. We actually chuckle because when we go to these conferences, you talk to them in a hallway or in a bar, it’s as though you’re an adversary. It’s very bizarre. They don’t have an incentive. It doesn’t matter what they pay. So that’s the bizarre thing.
2. Chip Cities Rise in Japan’s Fields of Dreams – Gearoid Reidy
In Chitose, a city of 100,000 in the northernmost main island of Hokkaido, billboards seek recruits for the Self-Defense Forces, which saw a 50% shortfall last year. When I arrived on a fully booked plane from Tokyo packed with salarymen in cheap suits and expensive watches, it was easy to see where the competition was coming from: a half-dozen towering cranes jutting into the sky, a jarring contrast against the surrounding countryside…
…Those cranes are building the first fab for Rapidus Corp., a public-private venture that aims to skip Japan to the head of the chip production queue. Founded just two years ago, it hopes to produce cutting-edge, 2-nanometer chips by 2027, in cooperation with IBM Corp. It’s fraught with risks, and the government’s record in promoting industry is spotty. But this is just the latest and most ambitious example of a series of bets on chips, with Prime Minister Shigeru Ishiba recently pledging an extra ¥10 trillion ($66 billion) on top of ¥3.9 trillion invested since 2021. Near the other end of the Japanese archipelago, 1,500 kilometers (930 miles) to the southwest, is another. In Kumamoto, on the island of Kyushu, mass production is soon set to begin at a $7 billion semiconductor plant.
Here, Taiwan Semiconductor Manufacturing Co., drawn by government subsidies and the region’s supply chain, opened its first Japanese plant in February. A second is in the works, with authorities lobbying for a third. It’s triggered an influx of Taiwanese workers into a city where until recently almost everyone was Japanese…
…As many as 6,000 laborers are employed to build Rapidus. But talk is of the arrival of permanent workers once test production begins. That’ll bring at least 1,000 high-earning jobs, along with their supply chains. On my visit, ASML Holding NV, the Dutch maker of chip-testing tools, had just opened offices, with 50 staff expected. Every second building seems to be being torn down and rebuilt…
…The scale of the ambition creates the risk of spectacular failure, one many in Japan’s media fully expect. Skepticism is warranted, considering previous government-led efforts, from DRAM maker Elpida Memory Inc., sold to Micron Technology Inc. after its 2012 bankruptcy, to troubled Japan Display Inc.
The economy was already doing well even before talk of Rapidus, Mayor Ryuichi Yokota told me, describing the fab as a “Big Bang” that has the city scrambling. Yet at night, when the construction crews leave, the silence is deafening. I couldn’t feel the billions I expected to find flowing, just a cold wind that would soon begin to turn to snow…
…The risk from disaster is unpredictable; but what if these experiments simply don’t work out? Japan has spent billions on subsidies to bring a foreign company in Kumamoto. And when it comes to Rapidus, the risks are immense. Even if the company can find the talent it needs (the country is expected to have a shortfall of 40,000 engineers), the technology succeeds and yields are acceptable, it still has to outcompete rivals — including TSMC — to attract customers with an unproven product.
Chitose mayor Yokota shrugged off these concerns. “I’m convinced it will succeed,” he said, resolute that researchers currently studying with IBM in the US will return, like Meiji-era scholars, with secrets Japan can use to rebuild.
3. Before Berkshire: Warren Buffett’s Tab Card Triumph – Kingswell and Alice Schroeder
He decided that he would come in and invest in this company — Mid-Continent Tab Card Co. — but, interestingly, he did not take Wayne and John’s word for it. The numbers they gave him were really enticing, but again he went through and he acted like a horse handicapper.
Here’s another point of departure from what almost anybody else would do. Everybody that I know — or knew as an analyst — would have created a model for this company and would have projected out its earnings and would have looked at its return on investment in the future. Warren didn’t do that. In fact, in going through hundreds of his files, I’ve never seen anything that resembled a model.
What he did is he did what you would do with a horse. He figured out the one or two factors that could make the horse succeed or fail — and, in this case, it was sales growth and making the cost advantage continue to work. Then, he took all of the historical data, quarter by quarter for every single plant, he got the similar information as best he could from every competitor they had, and he filled pages with little hen scratches of all this information and he studied that information.
And, then, he made a yes/no decision. He looked at it: They were getting 36% margins [and] they were growing over 70% a year on a million of sales. Those were the historic numbers. He looked at them in great detail — just like a horse handicapper studying the tip sheet — and then he said to himself, “I want a 15% return on $2 million of sales.” And then he said, “Yeah, I can get that.” And he came in as an investor.
So what he did is he incorporated his whole earnings model and compounding discounted cash flow into that one sentence. “I want 15% on $2 million of sales.”
Why 15%? Because Warren is not greedy. He always wants a mere 15% day one return on an investment and then it compounds from there. That’s all he has ever wanted. He’s happy with that. It’s a very simple thing. There’s nothing fancy about it…
…The $2 million of sales was pretty simple, too. It had $1 million [and] it was growing 70%. There was a big margin of safety built into these numbers. It had a 36% profit margin and he said, “I’ll take half that.”
He ended up putting $60,000 of his personal non-partnership money into this company, which was about 20% of his net worth at the time. He got 16% of the company’s stock, plus some subordinated notes.
4. China’s Bond Yields Scream the ‘D’ Word – Lingling Wei
Over the past week, just as Chinese leaders tried to get the public—and markets—excited with another round of stimulus talk, China’s 10-year sovereign yield kept falling to fresh lows. Now, the yield is around 1.7%, a full percentage-point plunge from a little over a year ago. The return on the 30-year government bond has also dropped below 2%.
The sovereign-debt yield still has a ways to go before falling to zero, but the speed of the drop is astonishing. The lower the yield falls, the deeper the market is signaling economic stress.…
…In reality, Beijing is sticking to the formula of boosting demand through investment. The official thinking is, investment creates jobs, which would in turn create demand. That means more roads will be built, factories will be expanded and debts will continue to rise. Already, residents in some cities are complaining about the inconvenience from old roads being dredged up as authorities search for ways to invest.
One big irony is the source of bond buying—the force pushing down the yields.
State-owned banks, insurance firms and funds, the very institutions Beijing is counting on to support the economy, are the major purchasers of government bonds. These institutions would rather park their money in the safety of bonds than financing business projects or otherwise putting it to work.
“What’s good to invest in these days when demand is so low?” a Chinese banker told me, referring to weak business and consumer spending.
5. An Interview with Gregory Allen About the State of China Chip Export Controls – Ben Thompson and Gregory Allen
Here’s the question though. China doesn’t generally seem to be operating, and for good reason under the circumstances, under a real stringent return on invested capital calculation. I mean the 7nm chips that are being produced, we know with I think a pretty high degree of certainty, the yields are terrible.
GA: The yields are dreadful.
But they’re doing it anyway just because it needs to be done and this sort of ties into another thing. You referenced Dylan Patel and SemiAnalysis, who have been pretty strident critics of the enforcement of chip controls. But I think a good point he has made is that China, unlike the US, is not necessarily constrained in power or in the ability to build a ton of data centers, and so there’s a bit where they could just sort of — it’s not great, but they could just be way less efficient and accomplish similar things. Is there a bit where these expert controls are fashioned with Western/US constraints and concerns about how you go about building this stuff that might make them less impactful in the long run?
GA: Yeah, the export controls have not achieved their wildest dreams. There was a faction in the Biden administration that says, “Bwahaha, we found the secret weapon, and China’s AI dreams are gone” — that theory is just dead. Where we are now is at more of a cost imposition strategy. “We are going to make this as expensive and complicated as possible for you to do it, we’re going to try and slow you down, we’re going to try and increase your costs, and that is the race that we’re going to run”.
I mean, if you think about it, we’re switching from a mode in which the US AI ecosystem and the Chinese AI ecosystem were largely fused such that if we’re running a race, you can imagine there’s US people giving China Gatorade and those new Nike shoes that make you run faster. Now we’re moving to a moment where we’re trying to trip them in the race, that’s the change in mindset that we’ve experienced, and it’s not working to its most extreme form, but there is real cost imposition takes the form of the fact that SMIC has to operate at these dreadful yields. The economics are terrible, the fact that when they’re building all of these data centers, they’re having to use lousy chips, they’re having to buy more of them, and they’re having to deal with the higher energy costs of all of that.
It’s true that China does have just this extraordinary willingness to spend, but the point is we’re in this race, we’re in this competition, and it gives us an edge, not an infinite edge, but a meaningful edge.
This is a field, maybe you don’t have an answer to this, but there are some that argue that actually the better approach to some of these chips is a much more expensive, a much more high speed memory approach that has much lower latency using SRAM instead of High Bandwidth Memory. Is there a possibility that we actually pushed China down a different route towards developing these chips that maybe ends up being better because we thought HBM was the right way?
GA: I think that’s probably not what’s going to happen. It’s definitely worth saying that that could happen, a version of that kind of happened with YMTC and their NAND memory. There were multiple different approaches they could have taken technologically. All the Western and US allied Asian firms picked one way because it was obviously the best economics, and they held all the intellectual property, they held all the patents and so YMTC basically said, “Okay, we’re going to go down this other road and because we’re so heavily subsidized, it doesn’t really matter that it’s going to be more expensive”, and they did ultimately figure out how to get it work.
I think what you’re describing, the SRAM in massive quantities thing verges on the neuromorphic architecture, and it’s not that that’s impossible, and it’s not that that’s never going to happen, but it’s clearly not the right step for China right now. I think they have a path to domestic HBM production and that’s so much easier for them to chase than a SRAM revolution. I think traditionally they would just wait for somebody else to try and figure out and demonstrate that it’s possible and then they would throw infinite resources at it…
...For all of these chip controls, all this stuff that you’ve covered and written about, does any of it matter, if you add it all up, in comparison to that point that they don’t have EUV?
GA: EUV is the highest return on investment export control that we have had and are likely to have. It’s definitely the case that some of the other stuff hurts. If you talk about SMIC, for example, increasing their yields on their 7nm line and expanding the capacity of their 7nm line, they actually are bottlenecked by US equipment, a lot of US metrology equipment, etc. But if you want to talk about why they can’t—
But they do have the equipment, they just need to figure out how to duplicate it. The challenge with EUV is they don’t even have one, so duplicating it is that much harder.
GA: Yes exactly, it’s a lot harder to reverse engineer something that you don’t have a copy of, it really helps to have a copy of it. So I would say the EUV thing really matters, but there’s areas where China is facing headwinds that aren’t part of the EUV story.
So just to take one example, in DRAM, Micron still doesn’t use EUV in their production of DRAM, and they’re a globally competitive firm. So CXMT, the Chinese domestic champion of DRAM, the reason why they’re not currently globally competitive is not the absence of EUV, but I do think you could make a story that it is the absence of all this other stuff that we’ve been refusing to sell…
…You’re not necessarily like a geopolitical analyst, but the thing that scares me about all this, I think I’ve asked you this every time, it still scares me, is we’re talking and saying the administration needs to do better at enforcing these laws that guarantee a power imbalance in the long run, that is usually very destabilizing. China might think, if we’re going to have a fundamental power imbalance, then how about we take Taiwan off the board because that will screw everyone? Now we’re equal again. Do you worry about this? You’re a strong advocate for doing this better.
GA: So. Number one is, I don’t know that I ever agree that the balance of power is the stable universe. In 1994, the Taiwanese defense budget was half of that of the Chinese defense budget, now the Chinese defense budget is infinity times that of the Taiwanese defense budget. And by contrast, in 1997, I think there was a single U.S aircraft carrier battle group that was more than capable of defeating the entire Chinese Navy and the entire Chinese Air Force, that was a massive power imbalance and it was a very stable relationship. And by the way, it was a relationship in which a lot of people got rich and had productive free trade and all these kinds of happy relationships. So the idea that power parity is the path to peace here, don’t know that I necessarily agree with that, I don’t think the historical record really bears that out.
Now, you could argue if we’re going to make bold moves and try and seize a decisive advantage, could those bold moves be destabilizing? Yeah, I think definitely think so.
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