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 May 2020:
1. Why the Most Futuristic Investor in Tech Wants to Back Society’s Outcasts – Polina Marinova
As humans, we construct this very linear narrative where you say, “I did X, and then I did Y, and it led to Z.” If you’re really intellectually honest, it’s really this crazy ball of randomness. You just never know. So randomly, there was a guy in my investment banking group whose dad worked with a famous investor. We got to pitch that famous investor, whose name was Bill Conway, one of the co-founders of the Carlyle Group.
Bill’s disposition at the moment when we met was one of enthusiasm and support for a bunch of young entrepreneurially naive guys. And he bet on us. What that meant was helping us capitalize our management company, which would become Lux Capital.
2. Does Covid-19 Prove the Stock Market Is Inefficient? – Robert Shiller & Burton Malkiel
The economics profession has an explanation for this difficulty based on the idea that markets are “efficient.” If markets are perfect, prices will incorporate all publicly available information about the future. Speculative prices will be a “random walk,” to borrow a phrase from the physicists and statisticians. The changes in prices will look random because they respond only to the news. News, by the very fact that it is new, has to be unforecastable, otherwise it is not really news and would have been reflected in prices yesterday. The market is smarter than any individual, the theory goes, because it incorporates information of the smartest traders who keep their separate real information secret, until their trades cause it to be revealed in market prices…
… EMH [Efficient Market Hypothesis] does not imply that prices will always be “correct” or that all market participants are always rational. There is abundant evidence that many (perhaps even most) market participants are far from rational. But even if price setting was always determined by rational profit-maximizing investors, prices (which depend on imperfect forecasts) can never be “correct.” They are “wrong” all the time. EMH implies that we can never be sure whether they are too high or too low. And any profits attributable to judgments that are more accurate than the market consensus will not represent unexploited arbitrage possibilities.
3. Israeli engineers created an open-source hack for making Covid-19 ventilators – Chase Purdy
A team of scientists in Israel this week unveiled what they’re calling the AmboVent-1690-108, an inexpensive ventilator system made from a handful of off-the-shelf items. Project leader David Alkaher also heads the technology work of the Israeli Air Force’s confidential Unit 108, which is comprised of electronics specialists. Whereas a typical hospital ventilator costs around $40,000, the AmboVent system can be made for about $500 to $1,000…
… More on the makeshift side, the French sporting goods company Decathalon has been selling scuba gear to the Rome-based Institute of Studies for the Integration of Systems, where it’s being enhanced with 3D-printed valve parts to make basic ventilator systems. The institute notes the devices are only for emergencies where it’s impossible to find official healthcare supplies.
4. The Most Important Stock Investment Lessons I Wish I Had Learned Earlier – Safal Niveshak
Tony shares the story of an Arabic date farmer he met who had inherited an orchard that had about a thousand trees. As the farmer was showing Tony around his orchard, and took him to something like a hundred trees that were recently planted, Tony asked him out of curiosity, “How long will it take this tree to bear fruit?”
The farmer replied, “Well this particular variety will bear fruit in about 20 years. But that is not good enough for the market. It may be about 40 years before we can actually sell it.”
Tony replied, “I have never heard this. I did not know this. Are there other date trees that would produce faster?” Meanwhile, he looked at all those trees that were being harvested and realized that this farmer could not have possibly planted them.
The farmer tells Tony, “Okay. Here’s my grandfather and my father, great grandfather.”
5. Does Better Virus Response Lead to Better Stock Market Outcomes? – Ben Carlson
I went through each of these lists to check the year-to-date performance of each country’s stock market to see if there is any correlation between getting a handle on the virus and stock market performance in 2020. I looked at both ETF and local currency performance..
… I guess my main takeaway after going through the data is this — the stock market is rarely a good gauge of the health and strength of your country, especially when dealing with a crisis like this.
The stock market is not the economy but it’s also not its citizens or government leaders or crisis response team either.
6. The Great Depression – Gary Richardson
An example of the former is the Fed’s decision to raise interest rates in 1928 and 1929. The Fed did this in an attempt to limit speculation in securities markets. This action slowed economic activity in the United States. Because the international gold standard linked interest rates and monetary policies among participating nations, the Fed’s actions triggered recessions in nations around the globe. The Fed repeated this mistake when responding to the international financial crisis in the fall of 1931. This website explores these issues in greater depth in our entries on the stock market crash of 1929 and the financial crises of 1931 through 1933.
An example of the latter is the Fed’s failure to act as a lender of last resort during the banking panics that began in the fall of 1930 and ended with the banking holiday in the winter of 1933. This website explores this issue in essays on the banking panics of 1930 to 1931, the banking acts of 1932, and the banking holiday of 1933.
7. One Young Harvard Grad’s Quixotic Quest to Disrupt Private Equity – Richard Teitelbaum
Bain’s investment process was flawed, according to the report. For example, for a prospective target to pass muster, the firm required a projected internal rate of return of 25 percent over the life of the investment. That was a common projected IRR. “The first thing I noticed was this massive dispersion of returns,” Rasmussen says. Bain would generate seven or eight times on some of its investments, but with others, zero, and the number that hit the 25 percent return bogey was infinitesimally small. The upshot was thousands of man-hours wasted modeling investment outcomes because the forecasts were inevitably wrong.
There was another surprise. The single best predictor of future returns had nothing to do with the amount of leverage employed, operational changes, company management, or even the underlying soundness of the business. The driver of superior returns was the price paid by the private-equity firm — companies purchased at a lower ratio of price to earnings before interest, taxes, depreciation, and amortization tended overwhelmingly to outperform.
The cheapest 25 percent of private-equity deals based on price-to-Ebitda accounted for 60 percent of the industry’s profits. Cheap buys made good investments. “With the inexpensive ones, there’s a margin of safety,” Rasmussen says.
The firm’s touted skills for selecting companies, arranging financing, and improving operations proved to be a mirage. Instead the best private-equity deals relied on a simple formula — “small, cheap, and levered,” as Rasmussen puts it. He expected the study to prompt major changes at the firm. “Now that we have the data, how do we change our behavior?” he wondered.
8. Young Bulls and Old Bears – Michael Batnick
What do Bill Gross, Sam Zell, Jeremy Grantham and Carl Icahn have in common? They’re all old, they’ve all had brilliant careers, and they’re all bearish on the stock market. (From April 2016)
Whether it be in music or in sports or in markets, the prior generation never thinks “kids” will ever measure up. Even Benjamin Graham- the man who basically invented value investing- fell victim to the “get off my lawn syndrome.”
From Roger Lowenstein’s Buffett: The Making of an American Capitalist.
“I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook “Graham & Dodd” was first published; but the situation has changed”
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