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 May 2023:

1. I, Pencil – Leonard Read

I, Pencil, simple though I appear to be, merit your wonder and awe, a claim I shall attempt to prove. In fact, if you can understand me—no, that’s too much to ask of anyone—if you can become aware of the miraculousness which I symbolize, you can help save the freedom mankind is so unhappily losing. I have a profound lesson to teach. And I can teach this lesson better than can an automobile or an airplane or a mechanical dishwasher because—well, because I am seemingly so simple.

Simple? Yet, not a single person on the face of this earth knows how to make me. This sounds fantastic, doesn’t it? Especially when it is realized that there are about one and onehalf billion of my kind produced in the U.S.A. each year.

Pick me up and look me over. What do you see? Not much meets the eye—there’s some wood, lacquer, the printed labeling, graphite lead, a bit of metal, and an eraser…

…My family tree begins with what in fact is a tree, a cedar of straight grain that grows in Northern California and Oregon. Now contemplate all the saws and trucks and rope and the countless other gear used in harvesting and carting the cedar logs to the railroad siding. Think of all the persons and the numberless skills that went into their fabrication: the mining of ore, the making of steel and its refinement into saws, axes, motors; the growing of hemp and bringing it through all the stages to heavy and strong rope; the logging camps with their beds and mess halls, the cookery and the raising of all the foods. Why, untold thousands of persons had a hand in every cup of coffee the loggers drink!

The logs are shipped to a mill in San Leandro, California. Can you imagine the individuals who make flat cars and rails and railroad engines and who construct and install the communication systems incidental thereto? These legions are among my antecedents.

Consider the millwork in San Leandro. The cedar logs are cut into small, pencil-length slats less than one-fourth of an inch in thickness. These are kiln dried and then tinted for the same reason women put rouge on their faces. People prefer that I look pretty, not a pallid white. The slats are waxed and kiln dried again. How many skills went into the making of the tint and the kilns, into supplying the heat, the light and power, the belts, motors, and all the other things a mill requires? Sweepers in the mill among my ancestors? Yes, and included are the men who poured the concrete for the dam of a Pacific Gas & Electric Company hydroplant which supplies the mill’s power!

Don’t overlook the ancestors present and distant who have a hand in transporting sixty carloads of slats across the nation.

Once in the pencil factory—$4,000,000 in machinery and building, all capital accumulated by thrifty and saving parents of mine—each slat is given eight grooves by a complex machine, after which another machine lays leads in every other slat, applies glue, and places another slat atop—a lead sandwich, so to speak. Seven brothers and I are mechanically carved from this “woodclinched” sandwich.

My “lead” itself—it contains no lead at all—is complex. The graphite is mined in Ceylon [Sri Lanka]. Consider these miners and those who make their many tools and the makers of the paper sacks in which the graphite is shipped and those who make the string that ties the sacks and those who put them aboard ships and those who make the ships. Even the lighthouse keepers along the way assisted in my birth—and the harbor pilots.

The graphite is mixed with clay from Mississippi in which ammonium hydroxide is used in the refining process. Then wetting agents are added such as sulfonated tallow—animal fats chemically reacted with sulfuric acid. After passing through numerous machines, the mixture finally appears as endless extrusions—as from a sausage grinder—cut to size, dried, and baked for several hours at 1,850 degrees Fahrenheit. To increase their strength and smoothness the leads are then treated with a hot mixture which includes candelilla wax from Mexico, paraffin wax, and hydrogenated natural fats.

My cedar receives six coats of lacquer. Do you know all the ingredients of lacquer? Who would think that the growers of castor beans and the refiners of castor oil are a part of it? They are.

Observe the labeling. That’s a film formed by applying heat to carbon black mixed with resins. How do you make resins and what, pray, is carbon black? Why, even the processes by which the lacquer is made a beautiful yellow involve the skills of more persons than one can enumerate!

My bit of metal—the ferrule—is brass. Think of all the persons who mine zinc and copper and those who have the skills to make shiny sheet brass from these products of nature. Those black rings on my ferrule are black nickel. What is black nickel and how is it applied? The complete story of why the center of my ferrule has no black nickel on it would take pages to explain.

Then there’s my crowning glory, inelegantly referred to in the trade as “the plug,” the part man uses to erase the errors he makes with me. An ingredient called “factice” is what does the erasing. It is a rubber-like product made by reacting rapeseed oil from the Dutch East Indies [Indonesia] with sulfur chloride. Rubber, contrary to the common notion, is only for binding purposes. Then, too, there are numerous vulcanizing and accelerating agents. The pumice comes from Italy; and the pigment which gives “the plug” its color is cadmium sulfide.

Does anyone wish to challenge my earlier assertion that no single person on the face of this earth knows how to make me?

Actually, millions of human beings have had a hand in my creation, no one of whom even knows more than a very few of the others. Now, you may say that I go too far in relating the picker of a coffee berry in far-off Brazil and food growers elsewhere to my creation; that this is an extreme position. I shall stand by my claim. There isn’t a single person in all these millions, including the president of the pencil company, who contributes more than a tiny, infinitesimal bit of know-how. From the standpoint of know-how the only difference between the miner of graphite in Ceylon and the logger in Oregon is in the type of know-how. Neither the miner nor the logger can be dispensed with, any more than can the chemist at the factory or the worker in the oil field—paraffin being a by-product of petroleum…

…I, Pencil, am a complex combination of miracles: a tree, zinc, copper, graphite, and so on. But to these miracles which manifest themselves in Nature an even more extraordinary miracle has been added: the configuration of creative human energies—millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire and in the absence of any human masterminding! Since only God can make a tree, I insist that only God could make me. Man can no more direct these millions of know-hows to bring me into being than he can put molecules together to create a tree.

The above is what I meant when writing, “If you can become aware of the miraculousness which I symbolize, you can help save the freedom mankind is so unhappily losing.” For, if one is aware that these know-hows will naturally, yes, automatically, arrange themselves into creative and productive patterns in response to human necessity and demand— that is, in the absence of governmental or any other coercive master-minding—then one will possess an absolutely essential ingredient for freedom: a faith in free people. Freedom is impossible without this faith.

2. One Big Web: A Few Ways the World Works – Morgan Housel

Two MIT cognitive scientists interested in how cats learn to walk once showed something I’ve always found fascinating: The difference between firsthand experience and secondhand learning.

The scientists raised kittens in total darkness. Once the cats were old enough to walk, they were placed in a lighted box for three hours a day.

In the box was a kind of carousel, with each kitten placed in a harness.

One of the cat’s legs reached the floor, and its walking movements made the carousel move in a circle.

The other cat’s legs were restrained by the harness. It could see everything going on – the movement, the other cat walking around in circles – but its legs never touched the floor. It had no active control over the carousel.

After eight weeks of daily carousel walks the cats were brought into the real world to test what they had learned.

They were tested to see if they would automatically place their paws on a surface they were about to be set down on. And if they’d avoid a steep ledge, walking around to a gradual ramp instead. And whether they’d blink when an object was quickly brought close to their face.

The results were extraordinary.

100% of the cats whose legs had control over the carousel’s movements tested normal.

The cats who only watched, but never controlled, the carousel were functionally blind.

They fell off ledges. They didn’t put their paws out to land on a surface. They didn’t blink when an object accelerated toward their face.

It wasn’t that they couldn’t operate their bodies – they learned to do that in the dark room they were raised in.

But they couldn’t associate visual objects with what their bodies were supposed to do.

The two cats grew up seeing the same thing. But one experienced the real world while the other merely saw it. The result was that one mastered a topic; the other was effectively blind.

And don’t a lot of things work like that – with humans too, not just cats?

Nothing is more persuasive than what you’ve experienced firsthand. You can read about what it was like to have certain experiences – living through the Great Depression, fighting in World War II, or growing up in poverty. You can try to be open-minded and empathetic to those experiences.

But what about the people who actually experienced those things firsthand? They understand details that those who merely read about their experiences don’t, and never will. They will have opinions, skills, and emotions that outsiders can’t comprehend.

It’s just like the cats…

…Dollo’s Law (evolution): An organism can never re-evolve to a former state because the path that led to its former state was wildly complicated and the odds of retracing that exact path round to zero. Say an animal has horns, and then it evolves to lose its horns. The odds that it will ever evolve to regain its horns are nil, because the path that originally gave it horns was so complex. Lots of things work like that. Take brands, relationships, and reputation. There are things that, once lost, will likely never be regained, because the chain of events that created them in the first place can’t be replicated. If you realized how valuable those things are you’d be more careful about risking their loss.

3. Influencers are Not the Problem – Safal Niveshak

But then, Matt Haig wrote in his book Reasons to Stay Alive –

“The world is increasingly designed to depress us. Happiness isn’t very good for the economy. If we were happy with what we had, why would we need more? How do you sell an anti-ageing moisturiser? You make someone worry about ageing. How do you get people to vote for a political party? You make them worry about immigration. How do you get them to buy insurance? By making them worry about everything. How do you get them to have plastic surgery? By highlighting their physical flaws. How do you get them to watch a TV show? By making them worry about missing out. How do you get them to buy a new smartphone? By making them feel like they are being left behind.

To be calm becomes a kind of revolutionary act. To be happy with your own non-upgraded existence. To be comfortable with our messy, human selves, would not be good for business.”

Investing is not away from the reality Haig has talked about in his book. The things we read or watch in business and social media, or what we hear most advisors, experts, and influencers speak, are designed to depress us.

Happiness (of their customers, prospects, and viewers) isn’t very good thing for them, for how else would they peddle their bad, often toxic, financial advice?

We are sold insurance policies, mutual funds, stock ideas, and other get rich quick schemes, as if our lives depended on them. And that if we don’t buy those products or advice, we would end up in poverty and despair, even as our friends and all those friends we know on Twitter and Facebook would get rich.

People are led to make financial plans for 20-30 years ahead, while not many are taught to deal in the present with the behavioural aspects of taking care of their money, like simplicity, frugality, and patience.

But…but the problem is not ‘them.’ The problem is ‘us.’

Reinhold Niebuhr’s Serenity Prayer reads –

God, grant me the serenity to accept the things I cannot change,

the courage to change the things I can,

and the wisdom to know the difference.

What others advice me to do in life and investing is never in my control, and so I cannot change what they advise. But what advice I apply to my life and investing is in my control, and so I must ensure that I play just that part well.

So, the problem is not the advisor or influencer peddling wrong financial advice. The problem is ‘I’ not understanding what is wrong for me and what is not. Yes, that is the problem.

The more you are willing to get influenced with the idea of getting rich quick, the more there will be influencers telling you the secrets – and to millions of their other followers – of how to get rich quick.

My grandmother often advised me this – “सुनो सब की, करो मन की.” It means, I may listen to others, but must do what my mind tells me to do. She must have known about ‘confirmation bias’ in her own way, but what she meant was that even after listening to the advice of many others, I must do what I believe to be the right thing to do, after putting in careful thought behind my actions.

4. Have scientists found a “brake pedal” for aging? – James Kingsland

A new discovery suggests that a protein in the brain may be a switch for controlling inflammation and, with it, a host of symptoms of aging. If scientists can figure out how to safely target it in humans, it could slow down the aging process.

The inflamed brain: One promising technique to combat aging is reducing inflammation. Many diseases of old age are associated with chronic, low-level inflammation in the brain, organs, joints, and circulatory system — sometimes called “inflammageing.”

Inflammation in a part of the brain called the ventromedial hypothalamus, or VMH, seems to play a particularly important role in promoting aging throughout the body. That may be because the VMH has a wide range of functions, including control of appetite, body temperature, and glucose metabolism.

For the first time, research in mice has discovered that a protein in VMH cells acts like a brake pedal to reduce inflammation and slow the pace of aging. 

High levels of the protein, called Menin, protected the mice against thinning skin, declining bone mass, and failing memory, whereas low levels accelerated aging. This may be because Menin is a “scaffold protein,” which regulates the activity of multiple enzymes and genes involved in inflammation and metabolism.

“We speculate that the decline of Menin expression in the hypothalamus with age may be one of the driving factors of aging, and Menin may be the key protein connecting the genetic, inflammatory, and metabolic factors of aging,” explained lead researcher Lige Leng from the Institute of Neuroscience at Xiamen University in China…

…Intriguingly, they found that Menin promoted the production of a neurotransmitter called D-serine, which in turn helped to slow cognitive decline. D-serine is an amino acid that can be taken as a dietary supplement and is also found naturally in soybeans, eggs, and fish.

“D-serine is a potentially promising therapeutic for cognitive decline,” Leng speculated.

5. How Interest Rates & Inflation Impact Stock Market Valuations – Ben Carlson

On Monday the S&P 500 closed at a little more than 4,100. That’s a level the index first hit in May 2021. A lot has changed in the intervening two years from a market perspective.

This is a snapshot of how things looked back in May 2021:

• Fed funds rate: 0% (on the floor)
• 10 year treasury yield: 1.6% (generationally low)
• Inflation rate: 4.2% (uncomfortable but still felt transitory)
• Mortgage rates: 3.0% (ridiculously low)
• S&P 500: 4,100 or so (felt pretty good)

And here’s how things look now:

• Fed funds rate: 4.75% (way higher)
• 10 year treasury yield: 3.6% (way higher)
• Inflation rate: 5.0% (higher but getting better)
• Mortgage rates: 6.7% (doesn’t feel great)
• S&P 500: 4,100 or so (depends on who you ask)

Interest rates are up a lot. Inflation is up even though it’s been trending down.You would assume, all else equal, that much higher interest rates and price levels would have had a far greater impact on the stock market.

Don’t get me wrong — we’ve had a nice little bear market. And this kind of snapshot approach to looking at market indicators can be misleading.

But if you were to tell investors two years ago that we were about to enter one of the most aggressive Fed hiking cycles in history combined with inflation reaching 9%, most would have assumed things would be a lot worse…

…There have been times in the past when interest rates or inflation were your North Star when it comes to valuations.

But there have also been times when valuations didn’t like up with interest rates or inflation rates.

The problem with trying to make sense of the market levels using one or two variables is the stock market is not that simple.

The stock market rarely follows an if-then framework. Just because A occurs does not guarantee B will automatically follow.

There is so much other stuff going on in terms of trends, the economy and how investors are positioned that sometimes the stock market doesn’t make much sense, especially in the short-run.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have no vested interest in any companies mentioned. Holdings are subject to change at any time.

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

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

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

Here are the articles for the week ending 30 April 2023:

1. The Power of Incentives; SVB and Berkshire – John Huber

Charlie Munger says he believes he understands incentives better than 95% of everyone and yet he still feels he underestimates the power of them. Reading Berkshire’s financial statements and comparing them to SVB’s is yet another great example of how incentives drive behavior.

The collapse of Silicon Valley Bank is about three things:

1. Short-term thinking (incentives to produce profits now regardless of long-term risk); This led to…
2. Poor capital allocation decisions, which then enabled…
3. A concentrated deposit base to become problematic

In my view #1 was the real issue. #2 was the result. But #3 only became a problem because of the first two. Many companies have concentrated customer bases and some have even built long-lasting businesses serving just one main customer (contractors for the government, suppliers to Costco, etc…). Concentrated customer bases always have some level of risk, but that risk can usually be managed. Though wood can catch fire, a house made of wood that burns to the ground is usually not the wood’s fault. SVB’s concentrated customer base only became a problem after decisions were made to take a lot of risk tomorrow for a little extra money today. SVB didn’t fail because of the run on the bank. It failed because it wiped out its capital, which then created conditions that led to the run. So what caused the bank’s book value to get wiped out?…

…Looking at SVB’s cash flow statements from 2020-2021 shows a whopping $118 billion of incoming cash from deposits and $92 billion of that going into long duration bonds yielding 2% or less:…

…Buffett sums this up perfectly: “banks can be great businesses if you don’t do something stupid on the asset side”. SVB was a great business until they decided to buy long-term bonds at 50 times earnings (i.e. the price you pay when you buy a bond with a 2% yield). This is extraordinarily risky. There is no credit risk. But that is not the only risk you need to consider when buying a stock or a bond. You also have valuation risk. Microsoft in 1999 had no credit risk (practically speaking). But buying MSFT at 70 P/E had lots of valuation risk. It was a safe business but not a safe investment.

Buying bonds backed by 30-year government guaranteed mortgages carries no credit risk. But they can be very safe investments at one price and extraordinarily risky at another price.

So why did SVB engage in such risky investments? The proxy statement provides the answers. Generally, SVB management was paid bonuses based on achieving certain ROE targets and stock price appreciation. This isn’t unusual and achieving a high ROE is a worthy objective. But the problem lies in the time horizon. The numerator of the ROE (the “R”) is net income. Essentially the management team was incentivized to produce as much profit on their capital as they could this year. This makes the decision very easy on what to do with over $100 billion of new cash from deposits: when left with the choice between 0% and 2%, the latter provides an extra $2 billion in interest income that mostly drops to the bottom line.

To make matters worse, the footnotes deep in the proxy also mention that the compensation committee can make adjustments to these profitability targets for out of the ordinary or “other items that are subject to factors beyond management’s control, such as investment securities gains and losses” (!)

2. The History of AI in 7 Experiments – Mario Gabriele

AI has a long, storied connection with games. In 1950, legendary mathematician Claude Shannon penned a study called “Programming a Computer for Playing Chess,” which outlined techniques and algorithms to create a talented chess machine. Of course, less than fifty years later, IBM introduced Deep Blue, the first AI program that beat a world champion under regulation conditions. Its defeat of Garry Kasparov on February 10, 1996 – the first of several – demonstrated AI’s ability to outmatch humans in even highly complex, theoretically cerebral challenges, attracting major attention. 

In 2013, a new game-playing AI was introduced to the world, albeit with significantly less fanfare. That year, Cambridge-based company DeepMind enunciated its goal to create a “single neural network” capable of playing dozens of Atari video game titles. In itself, that might not have been a particularly audacious mission. What made DeepMind’s work so intriguing to experts like Michael Wooldridge was the methodology the firm used. As explained in the Oxford professor’s book, A Brief History of Artificial Intelligence, “Nobody told the program anything at all about the games it was playing.” Researchers did not attempt to feed its engine certain rules or the tactics gleaned from a champion player. The program simply played the game and observed which actions increased its score.

This process is called “reinforcement learning.” Rather than relying on training data, reinforcement learning programs learn through “rewards.” When the program does something good (oriented toward its goal), it receives a positive reward. If it does something negative (counter to its goal), it receives a negative one. Through this iterative feedback process, a program learns to reach its goal. Because it doesn’t receive explicit instructions, it often wins by employing strategies a human might never have conceived of – and may not fully understand.

The results of DeepMind’s Atari program were a revelation. A 2015 paper revealed that the engine had learned to outperform humans at 29 of the 49 Atari titles initially outlined. In some instances, the program reached “superhuman” levels and demonstrated intelligent, novel techniques.

Though impressive in its own right, the work DeepMind did with its Atari program set the groundwork for later innovations. In 2016, the company released AlphaGo, an AI designed to play the Chinese game Go – a vaster, significantly more complex game than chess. “Shannon’s number,” named after the information theory pioneer, pegs the number of possible moves in a chess game at 10123; Go’s is 10360. Using a mixture of “supervised learning” (feeding the algorithm game information from expert players) and reinforcement learning, DeepMind created an engine that comfortably defeated world champion Lee Sedol four games to one, relying on techniques and tactics that look strange to the human player. AlphaGo’s success was followed by broader and more powerful programs like AlphaGo Zero and AlphaZero. The latter learned to play high-level chess in just nine hours, learning only by playing itself.

DeepMind’s crowning achievement was AlphaFold. For fifty years, the “protein folding problem” – figuring out what three-dimensional shapes proteins form – had stood as an unsolved biological “grand challenge.”

By relying on reinforcement learning and other techniques, AlphaFold radically improved protein modeling accuracy from approximately 40% to 85%. As outlined in The Age of AI, AlphaFold’s impact is profound, “enabling biologists and chemists around the world to revisit old questions they had been unable to answer and to ask new questions about battling pathogens in people, animals, and plants.”

DeepMind demonstrated new methods for AI development that created programs that far exceeded human capabilities, whether in playing video games or mapping biological structures…

… Not very long ago, AI was rather poor at natural language creation. Sure, early applications like SHRDLU demonstrated some ability, but by and large, the ability to comprehend and write developed more slowly than other skills. By the mid-1990s, AI could crush legendary grand masters like Kasparov, but it wouldn’t have been able to craft a paragraph describing its feat. Even as late as 2015, language abilities lagged far behind deep learning models’ numinous abilities in image recognition and game-playing.

“Attention is All You Need” marked a turning point. The 2017 paper introduced the “transformer,” a novel architecture that relied on a process called “attention.” At the highest level, a transformer pays “attention” to all of its inputs simultaneously and uses them to predict the optimal output. By paying attention in this way, transformers can understand context and meaning much better than previous models.

Let’s work through a basic example of this principle. If you provided a prompt like “describe a palm tree” to a traditional model, it might struggle. It would look to process each word individually and wouldn’t note their connection to one another. You can imagine how that might result in obvious errors. For one thing, the term “palm” has multiple meanings: it refers to a type of tree and the underside of a hand. A model that doesn’t recognize the proximity of “tree” to “palm” could easily wax rhapsodic about love and life lines before veering into a discussion of the mighty oak.

By recognizing and encoding context, transformers were able to vastly improve text prediction, laying the groundwork for vastly superior conversational AIs like GPT-4 and Claude. Interestingly, transformers may emulate the brain more than we initially realized – once again validating Hinton’s hunches. Recent research suggests that the hippocampus, critical to memory function, is a “transformer, in disguise.” It represents another step forward in AI’s quest to manifest a general intelligence that meets, and eventually fully exceeds, our own.

3. The Best Businesses To Own – Chris Mayer

Dede Eyesan of Jenga Investment Partners produced a study of stocks that returned 1,000% in the last decade. It’s titled “Global Outperformers.”

Sweden comes out looking good in this study.

Sweden produced 20 companies with a return of more than 1,000%, about 4.5% of the total population of outperformers, even though Sweden represents only 1.5% of the global capitalization (as defined in the study)…

… Even so, why does Sweden produce so many winners?

Eyesan has a few thoughts. He cites innovation as one factor:

1. “Sweden is the second most innovative country in the world according to the Global Innovation Index.
2. “Sweden has the highest R&D expenditure of a % of GDP in Europe
3. “Sweden has the ninth-best education system in the world”

I am a bit skeptical as to how much these things matter or even if it is possible to measure them. He also cites a focus on global growth among the Swedes. “It is common for Swedish startups to benchmark against global peers even in their early days,” writes Eyesan. And he points to government initiatives that encourage exports and international trade.

I have some of my own ideas as well, though they are anecdotal and not necessarily any better than Eyesan’s guesses. For one thing, there seems to be more attention paid to capital allocation (despite the widespread “dividend disease”) than I often find elsewhere. Many companies talk about, and even report, a number such as “return on capital employed.” There is good corporate governance, generally, with reasonable executive pay.

There is also a level of trust among the Swedes and a legal framework that allows for relatively easy, or more efficient, business combinations and transactions. All is to say, it seems like a good environment for business.

4. China Ratchets Up Pressure on Foreign Companies – Lingling Wei

Chinese authorities have embarked on a campaign to bring foreign businesses to heel, just months after Beijing delivered an open-for-business message to global investors.

In recent weeks, Chinese authorities have questioned staff at consulting firm Bain & Co.’s Shanghai office in a surprise visit, launched a cybersecurity review of imports from chip maker Micron Technology Inc., detained an employee of Japanese drugmaker Astellas Pharma Inc. and raided the Beijing office of U.S. due-diligence company Mintz Group.

The government has broadened its spy law to counter perceived foreign threats, including allowing for the inspection of baggage and electronic devices of those suspected of espionage, significantly raising the risks for Western companies operating in China…

…Business executives who have consulted with Chinese authorities say a central tenet of the effort is the desire to more tightly control the narrative about China’s governance and development, and limit the information collected by foreign companies such as auditors, management consultants and law firms that could influence how the outside world views China.

That has worried the Western business community, which relies on credible information and professional service to assess risks in China.

“The business community necessarily needs information,” said Lester Ross, a Beijing-based lawyer and chair of the policy committee at the American Chamber of Commerce in China. “There is therefore a risk that people will be unable on behalf of their companies to gather sufficient information for fear of being branded an espionage agent.”…

…Chinese officials involved in policy discussions say Beijing has no intention of pushing foreign companies out the door and have encouraged them to expand production in China. But they also say those companies should do a better job of helping advance China’s development in exchange for their access to the Chinese market. 

A commonly held view in Beijing’s leadership, the officials say, is that most multinationals can’t afford to lose the ability to sell and produce in China…

…Chinese leaders have long regarded Wall Street as a lobbying force for Beijing in Washington and even as it cracks down on a range of foreign businesses, China has made it easier for U.S. financial firms to operate in the country. Since late last year, JPMorgan Chase & Co., Fidelity Investments and Neuberger Berman have received rare licenses for wholly owned mutual-fund firms in China.

Still, Beijing is exerting greater pressure on foreign businesses as a way of hitting back at the U.S. and other Western actions seen as threatening China’s interests.

In other efforts to pressure American companies, Chinese regulators have slowed down their merger reviews of a number of proposed acquisitions by U.S. companies that need Beijing’s blessing, including Intel Corp.’s $5.2 billion takeover of Israel-based Tower Semiconductor Ltd. and chip maker MaxLinear Inc.’s $3.8 billion purchase of Silicon Motion Technology of Taiwan, The Wall Street Journal reported.

China will still be selective in going after U.S. companies, Arthur Kroeber, founding partner and head of research at economic consulting firm Gavekal Dragonomics, wrote in an April report. “It wouldn’t be in China’s interest to create such a climate of fear among U.S. companies that they conclude that China is a dangerous market and start to head for the exits,” he wrote.

5. RWH026: Wealth & Health w/ Jason Karp – William Green and Jason Karp

[00:33:33] William Green: So, can you give us a sense of how, what you were learning then about how to change your own lifestyle is actually really broadly applicable to pretty much all of us, despite our idiosyncrasies in how we process foods and react to things and what our genetics may be.

[00:33:46] Jason Karp: It’s, you know, and now, thankfully there’s so many resources and books and I can give you a bunch for your listeners.

[00:33:53] William Green: Yeah, do.

[00:33:53] Jason Karp: Back then there weren’t many, and you know, back then there was a burgeoning science that was considered almost voodoo. Called functional or integrative medicine. And the idea behind functional medicine is that modern western medicine, which, you know, some people call it healthcare, but it’s really disease care, is what most Western medicine is, which is people come in with sicknesses and we figure out ways to address the symptoms of those sicknesses, but not necessarily the root cause.

[00:34:23] Jason Karp: So, for example, I came in with alopecia. I came in with eczema and psoriasis. I came in with a degenerative eye disease. They’re like, okay, here’s a cream for your eczema and psoriasis. Here’s a pill that will stop your hair from falling out. Here is a vitamin that might be in antioxidant to help your eyes from degenerating further.

[00:34:44] Jason Karp: And doctors all thought they were separate, whereas there were doctors who were pioneers at the time, like Dr. Andrew Weil and Dr. Mark Hyman who have both written many books on integrative or functional medicine and their approaches treat the root cause of disease, not the symptoms. And they’re like, get processed food out of your diet.

[00:35:01] Jason Karp: Make sure you sleep at least seven hours a night. Make sure you’re not eating like super processed junk food that’s causing systemic inflammation. And so, I had been doing a lot of reading on inflammation, on anthropology and evolution and biological aspects of how the body works, and there was enough science then that most of our problems as humans are related to single causes of things, as opposed to lots of little things.

[00:35:31] Jason Karp: And so, my approach was I’m going to basically try to reduce my body inflammation. And it turns out that even today with the advances in science that we have, and you know, on all these podcasts, people are talking about crazy cutting-edge things, you know, that extend your age by five or 10 years. And you hear about these molecules like rapamycin and metformin, and you know, they’re all talking about Ozempic now.

[00:35:53] Jason Karp: But you can get 80, 90% of the way there in terms of living well to the age of a hundred with like four simple things that we’ve known about for like a hundred years, right? Which is unprocessed food. And that we could go in depth in any of these, which is basically what you put in your body, right? Which food is the most important thing you can do.

[00:36:12] Jason Karp: But that also includes supplements, what you put on your body. So that also includes like pollution, chemicals, mold, lotions, you know, shampoos. There’s so much toxic crap in most products today that you’re constantly slathering on your skin, which is your largest organ, and seeps right into your bloodstream, sleep and stress levels. And then you can kind of dig into stress levels in terms of things like laughter, community, service to others. And when you study Blue Zones and these Blue Zones, for some of your listeners who may not know them, Blue Zones are basically a select group of towns and cities in the world that have been studied by anthropologists, where they have multiple standard deviations, more of centenarians, people who live to a hundred than any other cohort.

[00:36:59] Jason Karp: And they’ve studied these groups and they’re all over the world. Most of them are in Europe, a few in Asia, we have one here in the US which are the Latter Day Adventists, but there’s a couple in, and there’s Sardinia one, and there’s one in Greece and there’s two in Japan. And they all have this kind of common thread of having those variables.

[00:37:18] Jason Karp: And you know, most people get nervous that they have to do all this biohacking to live longer. And ironically, all that biohacking stuff is actually on the margin. If you’re not eating really well and clean, then we can go into what that means and you’re not sleeping seven, eight hours a night. And I was a sleep expert, and it is like one, 100th of a percent of the population that has a weird disorder where they can survive on six hours or less of sleep a night.

[00:37:45] Jason Karp: It’s not like 10% of the population. It’s like one, 1000th of a percent. We all need seven to eight hours of sleep a night every night. Good sleep. And then there’s like a bunch of sort of obvious things that are automatic life detractors that we know are dumb to do, but people still do them like smoking cigarettes, drinking soda.

[00:38:05] Jason Karp: Those will shave off five to 15 years of your life automatically if you do those activities. And so, for me, a lot of my journey was just understanding what it is about these populations. And by the way, not just the Blue Zones, but also there’s a number of indigenous peoples that still exist as hunter gatherers all over the world that have lived this way for a thousand plus years.

[00:38:27] Jason Karp: And they have them in every continent, you know, from like Arctic, you know, to the jungle, to Africa, to US. And they all have the same attributes. And what’s interesting about the indigenous peoples who don’t live with any modern technology, they have no allergies, they have no autism, they have no chronic diseases.

[00:38:47] Jason Karp: So, no diabetes, no heart disease, no obesity. They have none of our modern diseases. Many of the elders live to a hundred. And what’s amazing is that, you know, there’s ones in the Arctic that have absolutely no fruit and vegetables. They eat literally well, blubber and meat. There’s tribes that live only off of fruits and vegetables and seeds.

[00:39:07] Jason Karp: There’s tribes in Africa that consume a shocking amount of cow blood and meat. So, you have vegans, you have carnivores, you have all these different types. And what’s consistent about all of them is that they all eat as close to the earth as possible with the minimal amount of processing as possible.

[00:39:22] Jason Karp: They all prize community. They all prize their elders. So, their elders have a significant function in their society. They all get a lot of movement every day, and they all sleep. And that’s the common thread. And so, there’s just, there’s so much that is not controversial and not disputable, but in today’s modern society, it’s a very inconvenient truth that food and toxins in our environment and toxic lifestyle, sedentary behavior, constant addictions to the phones and the computers, et cetera, no social connection, isolation.

[00:39:56] Jason Karp: It’s a very inconvenient truth that this actually is what’s killing us, but it’s not even disputable and it’s not controversial…

…[00:43:14] Jason Karp: The way I’ve explained it to a lot of people. And, and it’s the reason why both of the health and wellness businesses that I co-founded have the word human in them.

[00:43:23] Jason Karp: And the easiest way for everyone to remember all this is we just have to live consistent with the way in which we evolved. Because if you think about how we’ve evolved as humans, you know, it goes back 2 million years. Right? You know, we don’t know exactly, but it’s at least 2 million years and for 99.999% of that, we live basically the same kind of way.

[00:43:47] Jason Karp: Right? And it’s rather remarkable how little progress there was until like 300 years ago in the grand scheme of 2 million years. And we were nomadic, we were hunter gatherers. We lived under the stars. We hunted and gathered for our food. We lived in tribes and communities. And when you think about the amount of evolution and the amount of kind of adaptive behaviors that we’ve evolved over that period of time, it’s staggering.

[00:44:18] Jason Karp: And then the hubris of us thinking in the last really, really hundred years, right? And this is reflected in all the data by the way. It’s really reflected in the last 40 years, which is unbelievably scary. That the hubris of thinking like, oh yeah, that last 2 million years, like that doesn’t mean anything. Like we know better, we know better than that.

[00:44:37] Jason Karp: So, like, let’s try to go against everything that we evolved to do. Right? Like we never had processed foods, right? We never had sedentary behavior. We certainly didn’t have devices. Right? We never were isolated. ’cause if we were isolated, we would die. Right? So, we’ve evolved as social species and you know, just some of the stats in the last 40 years are so staggering.

[00:44:58] Jason Karp: You know, and I tell people this, that we are supposed to be the most technologically advanced. We’re supposed to know more than we ever have. We exercise more than we ever have right now. And we’re the sickest we’ve ever been in human history. We are the first generation in recorded human history that is predicted to live a shorter lifespan than the previous.

[00:45:16] Jason Karp: In 1990, there were zero states where more than 20% of the population was obese. Zero. That’s only 30 years ago. Today, there are zero states that are under 20 zero. 42% of the population in the US is obese. 93% of the US is metabolically unhealthy. 93%. 40% of eligible people for the military cannot go into the draft because of chronic disease…

…[01:12:35] Jason Karp: You know, I think for me, because I was so sick and I felt so sick and I had, I mean, I literally thought I was dying when I was 23. That was such a terror and trauma for me that it was very clear and motivating that I never wanted to go back there. The problem for most of humanity, because I’m more like a canary in the coal mine, where I just get sicker faster from these things than most people do, but everyone gets sick.

[01:13:01] Jason Karp: As is clear from the data is that it’s kind of like global warming for most people. It’s like not a right now problem. You know, like you put on a little weight every year. You feel a little shitier every year. You start going to the doctor more every year, but like, you don’t like to wake up and you’re like going blind like I did.

[01:13:17] Jason Karp: Like that doesn’t happen to most people. And I think for my children is it’s all about creating early habits because habits are really hard to change. And the other thing that very few people talk about, and I don’t want to go too deep into this ’cause it’s a controversial topic and you’re hearing a lot of pushback on it recently, but in the last few years there’s been this sort of concept that’s been connected to some of the woke movement called body positivity, where there’s been a lot of over acceptance of unhealthy behaviors and they’re trying to make it more about like, it’s okay if you’re 50 pounds overweight and like, that’s just what you look like and that’s just how you were born.

[01:13:56] Jason Karp: There’s one thing, of course, everyone has different shapes. Every, you know, everyone has different kind of normal evolutionary weights. That’s true. But if you’re 50 pounds overweight, which is something that’s objectively measurable, it creates the beginnings of all of the most problematic diseases that we know about with certainty, by the way, not like probabilistically like certainty, it’s just when.

[01:14:18] Jason Karp: And I think for people who listen to your podcast, one of the worst that scares me and scares people who are like us is dementia. You know, they now call in many scientific communities. Alzheimer’s is type three diabetes, and there is a very, very strong correlation between processed food and how you eat and your weight and whether you’re going to develop dementia or not.

[01:14:39] Jason Karp: And I think it’s really important to develop early habits because the other thing they don’t really teach you, and I’m sure you’ve seen it, but when you get fat, and let’s just call it very overweight, let’s not use the word fat, let’s call it very overweight. So more than 20, 30 pounds over what is considered kind of like metabolically healthy, it becomes much harder to stay thin.

[01:15:01] Jason Karp: And that is a biological fact of how your adipose cells multiply. When you get fatter, your fat cells increase in size, and they multiply. As your body starts taking in more glucose and fatter and more insulin, and then when you get thin again, the fat cells shrink. But the number of adipose cells don’t fully go back to where they were.

[01:15:21] Jason Karp: So, you have, as a thin person who was fat, you have more adipose cells than a thin person who was never fat. And that is going to set you up on a life of yo-yo dieting and make it much harder for you, for the rest of your life to stay thin. And that is something that I think is really important to teach children young because it’s, you’re going to make your life so much harder for the rest of your life if you allow yourself to do that.

[01:15:45] Jason Karp: And the answer is not all of these shortcut weight loss drugs that you’re hearing about, which have loads of side effects. So, I think teaching habits young and modeling good behavior is really important. And I just think like we’re in this weird moment in time where we’re happy to talk about like, you shouldn’t smoke cigarettes ’cause they’re going to give you cancer.

[01:16:04] Jason Karp: But like people are afraid to say to people like, being 40, 50, 60 pounds overweight is really unhealthy for you…

…[01:31:58] William Green: Can you talk about that? Because in some ways the big difficulty that you had at Tourbillon was you were riding this whirlwind where there was a kind of mismatch between, you know, your desire to be a long-term smart, fundamental investor, and you’re a shareholder’s desire to make money every quarter, every week, every month, every minute.

[01:32:17] Jason Karp: Yes. Well, there are a few interesting elements in that, in what you just said. The first, I would say I’ve learned so many interesting lessons from the Hu experience. The most important thing I’ve learned with consumer products, particularly mission-driven consumer products where people respect or value or care about what’s behind the brand, like why you do what you do.

[01:32:37] Jason Karp: And what made Hu so special is that my family, particularly, you know, my brother-in-law, Jordan and I were so unwavering in our discipline and approach of we will never use these ingredients, even if they’ll make us a lot more money, and we will only do it this way. And we had so many customers who could see that, and they could see that no other brand was doing that because all these other brands had investors who were like, you know what? Use this shitier ingredient. We’ll make more money. Do it. No one’s going to notice it. We never did that. And I think having authentic values is one of those hard kind of deferred gratification principles that customers actually can perceive. So that was the first thing. And then in a sort of weird, related way, I saw a lot of brands that had great values but had were parts of the investors were from funds and their funds that were, the investors in those businesses had five year, 70 year time horizons.

[01:33:32] Jason Karp: And those funds only would make money if those brands were sold. And so, I saw very suboptimal behavior with a lot of brands that I respected because the investors were driving the mission and the investors themselves did not have a mission. And they either sold them too early or they corrupted the brands, or they turned the brands into something it wasn’t. And so, I wanted to create a holding company structure for permanent capital so that we didn’t have that incentive of having our investors basically say, you know what? You know this like healthy ingredient stuff and this sustainability stuff, like it sounds great, but you’re not making money.

[01:34:06] Jason Karp: Change it. Like I didn’t, I never wanted that conversation because part of why we are here today in terms of how sick society is, is because so much of the food industry has been driven by financial investors, and there are other variables and KPIs that are not profit…

…[01:39:37] Jason Karp: And so, a lot of contextualizing has helped me a lot and just, you know, and forcing the kind of prompts and the hard questions about like, why are we doing all this? And so, you know that. And then for those who can do it, and it’s also controversial and it’s only legal in a few places now. Psychedelic therapy has helped me more than anything, of all the things I’ve done.

[01:39:59] William Green: Is that like psilocybin or ketamine? What sort of, where do you go if you want to learn more about that in a kind of responsible way where you’re going to be guided by people?

[01:40:09] Jason Karp: There’s some great resources online from Michael Pollan wrote a very famous book now, A New York Times bestseller called How to Change Your Mind. He chronicles his journey. Tim Ferriss talks about this regularly. It is now legal in Portland, Oregon. It’s legal in parts of Colorado. There’s certain countries where you can do this. There’s an underground community of this, but it is, you know, it’s a very safe, you know, psilocybin, what they used to call magic mushrooms have been around for thousands of years used by indigenous communities and I used to think it was a kind of like horseshit, for lack of a better term.

[01:40:41] Jason Karp: And I had a few friends who both also experienced significant trauma and told me about how it helped them, and it has a mechanism for your scientifically based listeners. It has a mechanism that’s very well established, which is why they’re beginning to legalize it. Now, that causes a flood of neurotransmitters in your brain that creates a level of plasticity in your brain where synaptic connections that used to be there, reconnect, and in many instances, connections that weren’t there.

[01:41:10] Jason Karp: Connect and allow you to see yourself and to see where your proclivities and tendencies come from without judgment. And so your ego of the armor that we’ve all created, we all have armor from years and years of how we’ve grown up. The armor comes down and you sort of look at yourself without judgment and say, oh, this is why I care so much about what people think of me, or this is why I’m so obsessed with performance, or this is why I can’t handle mediocrity or, and you’re able to look at it in a very clear, objective way without judgment and it allows you to have compassion for yourself and it allows you to have acceptance without complacency. And then you don’t feel the demons anymore.

[01:41:54] Jason Karp: And so, there’s a lot of resources about what they call guided psychedelic therapy online. Ketamine is another way that people can do it that is fully legal. There’s a lot of places that will do guided ketamine sessions. And that has been also very helpful for me in kind of, ’cause my armor was so thick that it was very hard for me to penetrate, like where these demons come from.

[01:42:16] Jason Karp: And I’ve done, I don’t know, thousands of hours of therapy and I would say 15 hours of psychedelic work have done more for me than thousands of hours of talk therapy.

[01:42:27] William Green: I’m no expert on this. I would just caution people to go carefully because I have a friend who did ketamine and had a bad response to it. It made him worse. And so, I’m not in any way saying that to be a naysayer. I’m just saying this is one of those areas where you want to be dealing with people who are really responsible. Like it isn’t, you don’t want to be playing with stuff.

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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 Alphabet (parent of DeepMind) and Microsoft. Holdings are subject to change at any time.

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

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 23 April 2023:

1. Nassim Taleb on What Everyone Gets Wrong About Being Antifragile – Joe Weisenthal, Tracy Alloway, and Nassim Taleb

Joe: (07:19) 

Well, so you mentioned it already. Let’s just start with the crypto thing. Because what’s interesting to me about your disagreements with crypto people, Bitcoin maximalists, etc., is that many of them looked up to you and read Antifragile and such. They read Antifragile, Fooled by Randomness, and The Black Swan, which informed them that it’s like, okay, we need to adapt, get into this currency that’s very hard. That is antifragile: Bitcoin, the ultimate antifragile currency. And so to their mind, they read your work and this is what they took away. And so, what did they get wrong?

Nassim: (08:02)

Okay, so the first thing is that my work is first about avoiding tail risk, right? Basically, if you want to do well, you must first survive. And it’s not a separable condition. So one has to avoid fragility. And it turns out that as much as the Federal Reserve induces fragility in the system, and as much as I dislike Bernanke, it turns out that Bitcoin is a lot worse. It is itself a very fragile commodity, and it got cornered. A very small number of people start controlling it. And it’s fragile in the sense that if one day, if the miners go to the beach for one day or for an hour, it’s gone. Whereas if you have gold, I have a gold necklace here.

If I leave it on the ground for a hundred thousand years, it’ll still be gold. It may lose its financial value, but the physical quality will not be altered. Whereas with Bitcoin, it’s just a book entry that needs to be maintained and would collapse, plus a lot of other things promised by Bitcoin that are not delivered.

Like, it was meant to be a transactional thing but turned out to be a speculative item. So I realized quickly that I made a mistake with Bitcoin, like I made a mistake by avoiding the wrong exercise. And of course, I was at some point an owner of Bitcoin and publicly said that I made a mistake and I went short Bitcoin later, but it was not good for the system. And I applied it in a paper that was published in Quantitative Finance where you look at, hey, what’s a currency? What’s an inflation hedge? What is a refuge investment? And Bitcoin satisfies none of these.

So people of course got angry because they feel like they’re going to blame you for changing your mind. They don’t realize that I’m not selling a recipe; I’m selling a process. Certainty is the way of thinking, the way of approaching things. And if you realize that something is fragile, immediately do something about it. So, remarkably, it’s the same cluster of people who read Antifragile and thought that, “Hey, you know, what doesn’t kill you makes you stronger. Let’s get infected with the vaccine, with Covid. And let’s ignore Covid; it’s going to make us stronger. It’s going to kill a few people.” So that kind of eugenics, that kind of stuff, I realized was profoundly inimical to me.

So it’s the same crowd that was denying Covid, saying, “Hey, you know, it’s just a virus that’s going to make you stronger.” They didn’t realize that. They explained Antifragile: jumping one foot will make your bones stronger, but a thousand feet will not help you too much. I mean, it may help the caretaker and people who organize funerals, but not you. So I realized very quickly there’s a cluster of people who were both into Bitcoin due to very naive reasoning, extremely naive reasoning, thinking, “Hey, you know, it’s an inflation hedge,” as we saw, it was a reverse inflation hedge. But the good thing is that I figured out quickly to pull out in time, in the sense that it lost its value when we realized there was inflation. And the same group of people were into conspiracies, all general conspiracies. And that’s not the crowd I want, and that’s not the crowd I want to be associated with.

Tracy: (11:36)

You mentioned that Bitcoin was bad for the system, and I think that’s the connective tissue that leads into some more recent events with the banking system. But can you talk a little bit more about that? How do you see Bitcoin actually?

Nassim: (11:51)

Okay, let’s look at why we have Bitcoin and why we are talking about Bitcoin. Effectively, it’s the incompetence of what I call Bernankeism. You know, because sometimes you have to put a name to a tendency. The Federal Reserve’s job is not to do structural things. The Federal Reserve’s job is to engage in monetary policies and typically short-term monetary policies to ensure the stability of the United States. So the job is to ease when economic conditions threaten inflation and to tighten during hard economic conditions. But you cannot replace a structural policy with a monetary policy. In other words, we had a problem with debt, and you can’t solve the debt problem by putting interest rates at zero for a long time.

If you put interest rates at zero, it should be for a short period of time while looking for an alternative. So when they did it for 15 years, they put interest rates at zero, and that created tumors. The first that comes to mind is Bitcoin. Ironically, it also created a Ponzi-like class of investments because there’s no time value of money anymore. Your discount rate is uncertain, and we created a generation of people who don’t know the cost of funds or the cost of money. Anyone with 15 years of experience in finance doesn’t know anything about interest rates. So interest rates at zero create tumors.

Real estate values go up dramatically because the cost of holding a mansion is close to nothing, or it was close to nothing. It also created a class of investments called VC funds. In the old days, these funds were promising you cash flow, but today, they’re promising you another funding round where you’re going to sell it to someone else. So we moved from the classical cash flow model, or even if you’re negative cash flow, the promise of future cash flow, to the promise of selling the company to someone else. We have billionaires in Silicon Valley who got rich from companies that never made a penny. So that’s the background. And of course, a story like Bitcoin takes off because it doesn’t cost much to control…

…Nassim: (15:36)

Okay. Before we start, let’s say that you cannot compare vaccines to GMOs. Vaccines are tested in individuals, and you can see the side effects in individuals. GMOs are systemic; they spread in the environment. Also, you’re not taking the vaccine because you think it tastes good or it’s going to be a pleasant experience. You’re taking the vaccine because of Covid, and Covid was not something benign. Comparing the two involves differential risk management.

Two things I’d like to mention here. The first one is that very rapidly, I waited a little bit and then saw that there were a very large number of vaccinated people with no side effects. People said we need more time, but they didn’t understand that you can replace time with sample size. In the sense that if it’s something related to genetic mistakes or something of a genetic nature, like cancer, for example, a large sample size compensates for lack of time.

We have the illusion that after Hiroshima, people got cancer about 12 and a half years later. That’s not true. Some people got cancer within a few months. But there’s a distribution because we need a certain number of mutations. Like when you go to Las Vegas, for an individual to win eight times in a row, it takes years of waiting. But if you have a billion people in a casino, you’re going to have that every hour. So this is where I realized that the vaccine did not pose a significant threat of that nature…

…Joe: (42:58)

Speaking of tail risk, this week that we’re recording, several people signed an open letter saying that we should halt development of technologies along the lines of AI and that there is an imminent risk, at least some people believe, of these computers becoming so powerful that they wipe out all living things on Earth. Sounds like the ultimate tail risk. I’m not going to ask you how you would hedge against that because I doubt that would be a scenario worth hedging for, but is that a tail risk in your view? Are we on track to develop computers that will eliminate life as we know it?

Nassim: (43:32)

I don’t think so. Number one is AI. People are worried that AI will put them out of business. That’s why they issue these calls.

Joe: (43:41)

Hmm. I’m worried about that.

Nassim: (43:43)

Yeah. Well, AI is not running red lights, traffic lights, or things that are consequential. And when AI starts running these things, then we’ll talk about it. But for the time being, we’ll talk about development, and it looks like it’s a probabilistic machine, no more or less, with the defects of probabilistic machines. And the reason I talk a little bit about AI is because, as a statistician, it’s nothing but nonlinear statistics. It’s a statistical device and it works as a statistical device, but we know the shortcomings of statistical machines, and it has all the shortcomings. So I’m not even worried. Nobody’s going to use AI for things beyond automated searches or automating a lot of things that can be automated. And unfortunately, a lot of people feel threatened because they see the discourse by AI very similar to their own. So far, I don’t see anything as far as society, I don’t see it’s not like with the pandemic where you can see something spreading.

Tracy: (44:59) 

What’s the tail risk that you think investors are most underestimating nowadays?

Nassim: (45:05)

Okay. The fact that zero interest rates are very unnatural. And if you raise rates to a normal level, say between four and 6%, the Fed would like to have higher interest rates. But there are some pressures; they’d like to have a higher base because if you’re at 4% interest rate, then you can lower it. If you have a crisis, you can go down, you can go up. But if your interest rate is at zero and you have a further crisis, you don’t know what to do. Or at least you can’t play with interest rates.

We have to look for something else, suggesting that it’s dangerous. So I think that if you look at interest rates higher than 3% long term as a discount rate, then equities are in trouble because they’re not priced for that. So this is where you’re going to look at; structurally, the equities are in trouble, but I think that many things will be in trouble first.

2. AI, NIL, and Zero Trust Authenticity – Ben Thompson

The video above is both more and less amazing than it seems: the AI component is the conversion of someone’s voice to sound like Drake and The Weeknd, respectively; the music was made by a human. This isn’t pure AI generation, although services like Uberduck are working on that. That, though, is the amazing part: whoever made this video was talented enough to be able to basically create a Drake song but for the particularly sound of their voice, which happens to be exactly what current AI technology is capable of recreating.

This raises an interesting question as to where the value is coming from. We know there is no value in music simply for existing: like any piece of digital media the song is nothing more than a collection of bits, endlessly copied at zero marginal cost. This was the lesson of the shift from CDs to mp3s: it turned out record labels were not selling music, but rather plastic discs, and when the need for plastic discs went away, so did their business model…

…Of course the other factor driving artist earnings is competition: music streaming is a zero sum game — when you’re listening to one song, you can’t listen to another — which is precisely why Drake can be so successful churning out so many albums that, to this old man, seem to mostly sound the same. Not only do listeners have access to nearly all recorded music, but the barrier to entry for new music is basically non-existent, which means Spotify’s library is rapidly increasing in size; in this world of overwhelming content it’s easy to default to music from an artist you already know and have some affinity for.

This, then, answers the question of value: as talented as the maker of this song might be, the value is, without question, Drake’s voice, not for its intrinsic musical value, but because it’s Drake…

…A better solution is Zero Trust Information: as I documented in that Article young people are by-and-large appropriately skeptical of what they read online; what they need are trusted resources that do their best to get things right and, critically, take accountability and explain themselves when they change their mind. That is the only way to harvest the massive benefits of the “information superhighway” that is the Internet while avoiding roads to nowhere, or worse.

A similar principle is the way forward for content as well: one can make the case that most of the Internet, given the zero marginal cost of distribution, ought already be considered fake; once content creation itself is a zero marginal cost activity almost all of it will be. The solution isn’t to try to eliminate that content, but rather to find ways to verify that which is still authentic. As I noted above I expect Spotify to do just that with regards to music: now the value of the service won’t simply be convenience, but also the knowledge that if a song on Spotify is labeled “Drake” it will in fact be by Drake (or licensed by him!)…

…What is compelling about this model of affirmatively asserting authenticity is the room it leaves for innovation and experimentation and, should a similar attribution/licensing regime be worked out, even greater benefits to those with the name, image, and likeness capable of breaking through the noise. What would be far less lucrative — and, for society broadly, far more destructive — is believing that scrambling to stop the free creation of content by AI will somehow go better than the same failed approaches to stopping free distribution on the Internet.

3. What I learnt from three banking crises – Gillian Tett

I have watched two financial crises unfold before: once in 1997 and 1998 in Tokyo, as an FT correspondent, when Japanese banks imploded after the 1980s bubble; then in 2007 and 2008, when I was capital markets editor in London during the global financial crisis. I wrote books on both…

…Those events taught me a truth about finance that we often ignore. Even if banking appears to be about complex numbers, it rests on the slippery and all-too-human concept of “credit”, in the sense of the Latin credere, meaning “to trust” — and nowhere more than in relation to the “fractional banking” concept that emerged in medieval and early Renaissance Italy and now shapes modern finance.

The fractional banking idea posits that banks need to retain only a small proportion of the deposits they collect from customers, since depositors will very rarely try to get all their money back at the same time. That works brilliantly well in normal conditions, recycling funds into growth-boosting loans and bonds. But should anything prompt depositors to grab their money en masse, fractional banking implodes. Which is what happened in 1997 and 2007 — and what I saw unfold in the sushi restaurant last month.

However, in another respect, this latest panic was different — and more startling — than I have seen before, for reasons that matter for the future. The key issue is information. During the 1997-98 Japanese turmoil, I would meet government officials to swap notes, often over onigiri rice balls. But it was a fog: there was little hard information on the (then nascent) internet and the media community was in such an isolated bubble that the kisha (or press) club of Japanese journalists had different information from foreigners. To track the bank runs, I had to physically roam the pavements of Tokyo.

A decade later, during the global financial crisis, there was more transparency: when banks such as Northern Rock or Lehman Brothers failed, scenes of panic were seen on TV screens. But fog also lingered: if I wanted to know the price of credit default swaps (or CDS, a financial product that shows, crucially, whether investors fear a bank is about to go bust), I had to call bankers for a quote; the individual numbers did not appear on the internet.

No longer. Some aspects of March’s drama remain murky; there is no timely data on individual bank outflows, say. Yet CDS prices are now displayed online (which mattered enormously when Deutsche Bank wobbled). We can use YouTube on our phones, anywhere, to watch Jay Powell, chair of the US Federal Reserve, give a speech (which I recently did while driving through Colorado) or track fevered debates via social media about troubled lenders. Bank runs have become imbued with a tinge of reality TV.

This feels empowering for non-bankers. But it also fuels contagion risks. Take Silicon Valley Bank. One pivotal moment in its downfall occurred on Thursday 9 March when chief executive Greg Becker held a conference call with his biggest investors and depositors. “Greg told everyone we should not panic, because the bank will not fail if we all stick together,” one of SVB’s big depositors told me…

…The second lesson is that investors and regulators often miss these bigger structural flaws because they — like the proverbial generals — stay focused on the last war.

Take interest rate risks. These “flew under the supervisory system’s radar” in recent years, says Patrick Honohan, former central bank governor of Ireland; so much so that “the Fed’s recent bank stress tests used scenarios with little variation [and] none examined higher interest rates” — even amid a cycle of rising rates. Why? The events of 2008 left investors obsessively worried about credit risk, because of widespread mortgage defaults in that debacle. But interest rate risk was downplayed, probably because it had not caused problems since 1994…

…A third, associated, lesson is that items considered “safe” can be particularly dangerous because they seem easy to ignore. In the late 1990s, Japanese bankers told me that they made property loans because this seemed “safer” than corporate loans, because house prices always went up. Similarly, bankers at UBS, Citi and Merrill Lynch told me in 2008 that one reason why the dangers around repackaged subprime mortgage loans were ignored was that these instruments had supposedly safe triple-A credit ratings — so risk managers paid scant attention.

So, too, with SVB: its Achilles heel was its portfolio of long-term Treasury bonds that are supposed to be the safest asset of all; so much so that regulators have encouraged (if not forced) banks to buy them. Or as Jamie Dimon, head of JPMorgan, noted in his annual shareholders’ letter, “ironically banks were incented to own very safe government securities because they were considered highly liquid by regulators and carried very low capital requirements”. Rules to fix the last crisis — and create “safety” — sometimes create new risks.

4. Titan: A Golden Case in Indian Retail – Dom Cooke and Saurabh Mukherjea

Saurabh: [00:02:53] Before I get into Titan, I’ll just set the scene and talk about the gold market in India because it is an unusual market, especially for listeners in the Western Hemisphere. India has a love affair with gold, which is of epic proportions. The official gold market as per the government is around $50 billion a year, but there’s also a massive, what we call a black gold market. This is smuggled gold bought using black money. Nobody quite knows how big it is. But having lived in the country for 15 years, now spoken to hundreds of jewelers, I reckon the black gold market, the unofficial market is as big as the official market.

So if you’re looking at a country which basically spends $100 billion a year on buying jewelry, half of it formal, half of it informal. And that’s the market in which Titan operates. Gold status in India, which is underpinned by lots of things. And the first is bitcoin skepticism of the formal financial system. The second is sort of an experience born out of generations of seeing senior age basically, the government lets inflation drip, that undermines the value of currency and therefore, a lot of families prefer to save through gold rather than coming into the formal financial system.

If you look at the data published by the Indian Central Bank, they reckon that Indian family stock of gold, the balance sheet that households have a gold is almost as big as that of financial assets in India. So if you’re looking at a big market in the world’s fifth largest economy, we’re looking at a massive pool of savings and annual flow officially of $50 billion, perhaps unofficially it’s another $50 billion.

So that’s the market in which Titan operates. It’s the largest player in the market, or I should say, joint largest; there are two large players in this market, Titan and Malabar. Between them, this year, the year that’s going to end in March 2023, they’ll do around $8 billion between the two of them, $4 billion Titan, $4 billion Malabar. They’re the largest players. And then there is a sort of a distant #3 player called Kalyan Jewellers. Kalyan is 1/3 the size of the market leaders.

These large, organized jewelers account for 1/3 of the market, Dom; 2/3 of small jewelers, independent jewelers come in top chase. Titan stands head and shoulders above everybody on profitability. So Titan in the year that’s going to end in March ’23 will do around $400 million of profits. That’s 2/3 more than its nearest rival, Kalyan. And the main reason for that is at the gross margin level, Titan is twice as profitable as anybody else in this market…

…Dom: [00:06:42] You started with how important the gold market is to India, specifically Indians buying gold for savings and investment purposes or also for cosmetics wearing them because they’re excessively pleasing.

Saurabh: [00:06:53] By and large, I would still say that the bulk of the demand arises from the savings and investment angle because otherwise, the sheer quantum of spending, we’re looking at $50 billion officially, unofficially another $50 billion. I don’t think we can justify $100 billion a year on the aesthetic merits of gold. So there is a heavy savings angle embedded in it. If you ask me one of the reasons Titan has been so successful is they’ve been able to cater to that savings angle, but also focus on the fact that as Indian women become professionally active, earn money in the workplace, in the last two decades, one of the big reasons for Titan’s success has been the introduction of diamond-studded jewelry.

So this is a market they’ve created. They dominate diamond-studded jewelry, and this drives their inordinate levels of profitability. Titan does a pretax ROCE of around 35%. Nobody else in Indian retail gets remotely close to this. And big reason for that is these guys have pioneered diamond jewelry retailing in India. And that piece links into the rise of the Indian working women, well-educated, earning plenty of money and thus Titan has created a vector of growth that no other jewelers managed…

…2013, the rupee dropped from 45 to $1 to $55 in the space of four to five months. And what the government did then was the imposed an import tariff on gold, where gold tariffs went up from 2% to 10% and the government says that gold-on-lease has to be stopped. So Titan doesn’t buy the gold outright, they typically go to a bank and say, lend me the gold, and I will return it to you in due course. This is the cheapest way to finance the business. So the government ended up banning in 2013, gold-on-lease. So 2013, tough year. Firstly, flows of gold into India from abroad stopped — reduced because of the import tariff and secondly, gold-on-lease was stopped.

A year later, the government dropped another bomb. The government ended up saying, “Look, you can — Titan, you can do gold-on-lease. But hey, you’re doing this thing called Golden Harvest, we’re going to put a break on that.” So Golden Harvest, this was a Titan innovation, was brilliant. Basically, Golden Harvest, say, you’re buying jewelry worth $1200. And the way you do it is, every month, you as the customer would be tagged to $100. Over the first 11 months, you pay Titan $1,100. On the 12 month, you don’t have to pay anything. Titan would give you $1,200 worth of jewelry. Effectively, you as a customer got one month free, so to speak.

So the XIRR for the customer was 18%. Customers loved it, especially women loved it and it was super helpful for Titan because effectively, the customer was financing and giving the business. So it’s one of the cleverest things I’ve seen. You get the float and you get the customer. So the government said in 2014, “Hey, this cannot be more than 25% of your net worth.”

Dom: [00:21:10] For the customer’s net worth?

Saurabh: [00:21:12] Titans network. So from Titan’s perspective, their most effective way of financing the business with customer’s money was taken away in 2014. Thankfully, the government said, you can do gold-on-lease. So Titan remodeled the business and just imagine the amount of skill involved, you’re flying a plane, growing a business at around 20%, 25% PAT compounding and you change the engines…

…Saurabh: [00:27:52] As you rightly said, Dom, they have 400 outlets and they generally are pan-India. Most of the other jewelers tend to have a regional franchise rather than a pan-India franchise. Now as soon as you say, I want to be pan-India, you have to deal with India’s regional variations. So what gets worn in a Tamil wedding in South India is utterly different from what gets worn in a Punjabi wedding in Delhi. So the way Titan has gone about it actually is fascinating. So let me sort of break the story in three parts.

As I said till 2002-’03, the jewelry business was on fire. Nobody even knew whether it would survive. 2002 to 2010 was basically just getting the foundations built. And the first layer of foundations they built was they said that unlike other jewelers who get job work done by local artisans and they pay the artisans very little, the artisan uses old-fashioned tools, works in poor lighting and has high wastage in the process. Titan inverted that paradigm completely on its head. 2003 to 2010 was putting the artisans in nice, air-conditioned halls, modern lighting, modern machinery given by Titan.

And Titan focused on those 8 years in reducing wastage in the making of jewelry, increasing the design portion, they have 100 designers. I don’t think any other jeweler would have more than 50. These guys have 100 designers from what’s called the National Institute of Fashion Technology and the National Institute of Design. So they said, we’ll amp up the design quotient, train the — we call them karigars, the artisans are called karigars. We’ll get the modern machinery, reduce wastage and will also reduce cycle time. Most other jewelers, the artisans take 30, 35 days to get the stuff made into the store. In Titan’s case, the cycle time is six days.

So the first layer of innovating in the back office of a jewelry industry. 2010, they hired Eli Goldratt, a firm from Israel. This is the Theory of Constraints people, the famous book called, The Goal. They tell the Israelis can you help us reduce the inventory. 2010 through to 2015, they work with Goldratt and inventory rates are reduced from 125 to 75. And the last six, seven years have been about using technology to manage what goes where in a very smart way.

So I’ll try to sort of explain it as best as you understand. This is in a way the secret sauce. They don’t give it away. We’ve spent six, seven years talking to hundreds of store managers to understand this. So at any point in time, Titan has 100,000 SKUs, but a given store will only have 7,000. And a big part of management skill at the headquarters level and at the regional level is figuring out which 7,000 SKUs will go which store. As best as we can figure out, roughly 60% of the SKUs are common across stores. And this is purely by eyeballing, going to various parts of India.

And I think 60% of the SKUs seem to be common to all parts of the country. 30% of the SKUs are specific to a region and sometimes, Dom, these are specific even to a part of a city. And they seem to be using software to figure out what will sell where. So if it’s an office district with working women, a certain type of design will be made available. And if it’s say an agricultural area, a different type of design. So 60% common to all shops, the 30% specific and 10% experimental. So at any point in time, 10% of the SKUs in a shop seem to be there for experimental purposes. If they sell, they are replenished rapidly. If they don’t sell, they are taken out of circulation.

This ability to manage 400 stores, 100,000 SKUs pan-India with 7,000 at the shop level, 60% common, 30% using software specific to the store and 10% experimental, 100 designers working our way. This setup is very specific to Titan. I think the last seven, eight years, they have nailed it so thoroughly, it’s going to be difficult for other jewelers to catch up with this…

…what Titan is saying is, it is saying, I’m going to present my proposition around three pillars. First is purity. So regardless of how affluent you are, whether you want diamond-studded or gold jewelry, they innovated in 1996 something called the Karatmeter. Basically, think of it as a small X-ray machine with a blue light, which tells you whether the gold is pure or whether it’s full of gunk.

So this was a breakthrough. They pioneered it. This was, I think one of their pivotal moments in Tanishq’s evolution. So every Tanishq store has a Karatmeter. And Titan has a promise that if you come in with jewelry, which is 18 carat or better, if it turns out that if it’s not 22 carat, at Titan’s cost, they will make it 22 carat, you simply pay for the making charge.

Dom: [00:35:00] Even if it wasn’t bought from Titan in the first place. So if you bought it from a local independent, you can bring it there and then they will say, we’ll make this more pure for you but only at the incremental cost?

Saurabh: [00:35:08] That’s right, absolutely. And this was a key breakthrough in 2003. In Titan’s renaissance, this was a critical insight. They don’t just have the Karatmeter there and put people off by saying, “I’m sorry, your jewelry is impure,” give them the solution. So this is the first proposition in a way purity delivered to you, the Indian customer.

The second is around design. So much of their marketing in mass media is around affluent women, spending on jewelry as a part of sort of social stature and prestige. And this piece is heavily around diamond-studded jewelry, which is a high-margin item. We reckon on diamond-studded, they’re making 50% making charges. Because unlike gold, diamonds are not commoditized because there isn’t a standard diamond in a certain caratage.

So in diamonds, the Titan brand becomes even more powerful. And we reckon the way they monetize it by having a super high making charge on diamond jewelry and that in turn justifies this high glamor, high-profile publicity in mass media, at airports and so on…

…Dom: [01:00:04] Yes, frankly, it’s a pretty good job of telling the time these days. So we always finish these conversations with the same question, which is what have you learned as an investor of studying Titan’s business?

Saurabh: [01:00:12] Let me start with the most obvious piece of what we have discussed, right? Everybody says retail is detail in every country that I’ve lived in. And yet, when I see retailers, especially in India, they seem to try to take one solution and slam it across the country, whether it is foreign retailers who come to India or indeed domestic retailers. What Titan has done is, I think, demonstrated that if you want to succeed in large scale in India, you have to basically operate 10 different business models for the country. So the jewelry business sounds like one business, but as we discussed, it’s stratified by income group, it’s stratified by region. It’s got different COCO, FOFO business models.

So if you did a sort of matrix on it, you’re actually looking at 30, 40 different businesses being run in a fairly complex operation glued together by great people and really technology. That is tough to pull off. But unfortunately, that’s the ask, if you want to succeed in Indian retailer. And this is — for me, it’s been sort of living lesson in watching how a great retailer is built because that allows you to benchmark other retailers who aspire to succeed in India, but we won’t have anything like this quality of people or technology.

The second is the HR piece. Hire bright people, hire good people, hire them young, give them early responsibility, mentor them and they’ll basically let them become great business leaders. So 2014, from what we can gather, they did a Board meet and identified 100 leaders for the future, each of those 100 leaders were mentored by senior people in the Tata Sons Empire. The entire leadership of Titan today is part of that initiative of 2014 to groom the next-generation leaders, very difficult for other businesses to do this.

You’re investing really heavily in talent, identifying those people and mentoring them over, say, a decade period to become the leader of a business. Titan seems to have done this really well. And other Tata businesses, TCS is similar. And perhaps the biggest lesson from people like me who are building businesses in India is, when we see the house of Tata, when we see the sort of Tata Sons Empire, what they have done over, say, 100 years now, is very interesting. They seem to take initiatives again and again, which involves giving back heavily to society, even though the business might not be firing then.

And then in the decades that follow, the giving back to society yields a multi-fold return to the business. So the example for Titan would be 1988, J.R.D. Tata, the then head of Tata Sons, called in Xerxes Desai to Mumbai for a catch-up and told him that, look, you’re building a great business here. But what are you doing for the community? So Xerxes Desai said that, look, we are doing a hospital and a school, J.R.D. Tata apparently got very angry and said, you’re building this sort of five-star island of prosperity in the midst of poverty.

And on J.R.D. Tata’s order, Xerxes went off and built a township outside Bengaluru, where the artisans, both the watchmakers and the jewelry makers now sit, there’s schools, there’s free hospitals, free schooling and the core of the artisan community that fires up Titan’s business operates out of that ecosystem. Now that was the best part of 40 years ago, Dom, to this day, no other jewelry maker has been able to do anything remotely comparable.

5. How Coaching Networks Will Create the First Facebook-Scale Enterprise Business – Gordon Ritter and Jake Saper

The onset of AI in the workplace raises instead a new set of far more important questions that deal more directly with this reality: How can we use artificial intelligence to help us constantly get better at our jobs, learning necessary new skills along the way? How can AI be used to help workers rise above the mundane tasks it is automating away?

The answer is something we’ve dubbed Coaching Networks, and it forms the foundation of a major advance in how we think businesses will use software to augment the capacity for human learning. We also believe Coaching Networks will drive the creation of the next generation of iconic enterprise software companies.

Here’s why: For 40 years, business software has essentially replaced processes that previously required paper forms. At Emergence, we’ve seen the power of replacing these processes via multi-tenant web-based software from our first investment in Salesforce.com. While this shift to the cloud has been a huge breakthrough, it is largely the same forms experience for users. As AI capabilities improve, we can either treat it as a crutch that relieves us from thinking — examples include Waze and Google Maps — or as an asset that helps us use our brains more effectively and creatively…

…The key ingredient of Coaching Networks is software that gathers data from a distributed network of workers and identifies the best techniques for getting things done.

The software acts as a real-time, on-the-job coach, guiding employees to successful outcomes, and in the process gathering new data that’s then fed back into the system. Rather than dispensing “one-size fits-all” advice, it instead offers coaching that’s uniquely tailored to each worker and the task they’re doing at any given moment.

Coaching Network software gets better over time by learning the best practices that are proven effective across a variety of situations, identifying those outlier cases where a creative person finds a new, better solution, and adds those techniques to its coaching. This allows others to learn from the experience of those more creative workers. This is how humans become the “mutation engine” in this evolving process, generating new ideas which in turn benefit everyone else…

…Guru has created a clever Chrome browser extension that links workers to the institutional knowledge they need to complete certain tasks. Inside every company there are tasks that require a unique workflow.

This knowledge tends to get scattered into any one of several miscellaneous documents on a corporate intranet or file storage system, but it mostly lives in the heads of employees. When Guru notices someone doing one of these tasks in Gmail, Salesforce, Zendesk, Slack or other applications, it automatically surfaces related information, in context, and in real time.

Employees — especially those who are new on a job — like it because it saves them the time it takes to look up the information they might need, so they keep using it. The high rate of usage creates more valuable data on what works best, which helps Guru make better suggestions over time. Since deploying Guru, Shopify has seen a five times increase in knowledge base usage, speeding up critical processes. Intercom has seen a 60 percent reduction in the time it takes its support team to respond to customers.

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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 Alphabet (parent of Google), Meta Platforms (parent of Facebook), 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 16 April 2023:

1. Yvon Chouinard: Patagonia’s Founding Principles – David Senra

And when I got to this section of the book, it reminded me of — it might be the best — it is probably the best paragraph in the entire book. If you really want to know who he is as a person. I’m going to read it later, but I’m just going to read it now because it’s hilarious. I’m actually quoting. So usually, when I read these books, like I read something that’s like, oh, it makes me think of this other book. And it’s like, I’m reading this and maybe think of other things he says later in the book. I’ve read this paragraph, I don’t even know, 50 times, something like that. It’s hilarious. And this is really going to tie into what he says, which is like, I’m just going to invent my own game. He does not believe in building an undifferentiated commodity product by any means, right?

[00:10:02] And so he says, “When I die and go to hell, the devil is going to make me the marketing director for a Cola company. I’ll be in charge of trying to sell a product that no one needs, is identical to its competition, and can’t be sold on its merits. I’d be competing head-on in the Cola wars on price, distribution, advertising, and promotion, which would indeed be hell for me.” And this is the punchline. “I’d much rather design and sell products so good and so unique that they have no competition.” …

…He says, “Our guiding principal design stems from,” I’m going to actually not even attempt to pronounce this person’s name. I actually have one of his books. He’s a writer and also one of like the pioneering aviator actually. He wrote The Little Prince. And this is a quote from him. “In anything at all perfection is finally attained, not when there is no longer anything to add, but when there is no longer anything to take away, when a body has been stripped down to its nakedness.” Now we go back to Yvon.

[00:16:00] “Studying Zen has taught me to simplify, to simplify yields a richer result.” And so it goes back to this idea that simplicity is complexity resolved. It’s not complexity ignored, right? “At the base of a mountain wall where you spread out all of your gear to organize for a climb, it was easy to spot the tools made by Chouinard Equipment. Our tools stood out because they had the cleanest lines.”

“They were also the lightest, the strongest, and most versatile tools in use. They were also the most expensive. When other designers would work to improve a tool’s performance by adding on, I would achieve the same ends by taking away, by reducing weight and bulk without sacrificing strength or the level of protection.” So the — and when I — the second time I read the book as like when I got to that section, I quoted another quote that’s later on in the book that Yvon says, “I believe the way towards mastery of any endeavor is to work towards simplicity.”…

…[00:28:01] And then you teach everything you know. This is — Trader Joe’s did this exact same thing if you listen to the episode. I think it was 188, on Trader Joe. The main driver was not advertising and say, hey, we’re Trader Joe’s, you can buy stuff here. It was this thing called a fearless flyer, which essentially just like goes into deep detail about the things they sell. It’s educational and informational. And then, therefore, if you’re reading — the people that have finished that and read the whole thing, they’re going to buy the products.

And so you see Patagonia use that exact same idea here. “Using the capabilities of this new underwear as the basis of a system, we became the first company to teach the outdoor community through assays in our catalog, the concept of layering.” And very much like Steve Jobs used his own personal taste to decide what products Apple should manufacturer, Yvon does the same thing with Patagonia. He’s like, listen, you cannot wait until you have all the answers before you act. “I had faith that the product was good, and I knew the market.” And that concept, that idea, he repeats throughout the book. Let me read this. So this is something that comes along later as well. It’s just absolutely fantastic. He says, “there are different ways to address a new idea or a project. If you take the conservative scientific route, you study the problem in your head or on paper until you’re sure there’s no chance of failure.”

He’s not going to do that. “However, you have taken so long that the competition has already beaten you to market. The entrepreneurial way is to immediately take a step and if that feels good, take another. If not, step back, learn by doing is a faster process.” And what I love here is, this is the feeling you and I have probably both experienced, right, where he is a reluctant businessman. He never wanted to start a business. But when you start something and people start loving it, that’s like the greatest high in the world, and there’s like this excitement around growth, right? The fact that the idea is working and he’s experiencing that here. “From the mid-1980s to 1990s, our sales grew from $20 million a year to $100 million a year.”…

…[00:33:57] “Looking back now, I see that we made all the classic mistakes of a growing company. We failed to provide the proper training for our new company leaders and the strain of managing a company with eight autonomous product divisions and three channels of distribution exceeded our management skills. Our organization chart look like a Sunday crossword puzzle.” This is about the pain, right, the pain and the struggle and sleepless nights and the acid stomachs, the company was restructured five times in 5 years, and no plan worked better than the last one. And so they realized, let’s try to get a different perspective.

They go and talk to this guy. They hire a consultant, and this is actually funny because he’s like, okay, we’re going to fly down to Florida. We’re going to see this guy need Dr. Michael Kami, who actually ran strategic planning for IBM and was credited with help — turning Harley-Davidson around, that’s how Yvon had heard about him. So they fly down and they actually meet him and he’s a small man in the ’70s with a lot of restless energy and he lives on an enormous yacht and he wears a captain’s hat. And so he’s like, “Okay, before I could help you, I need to know like why you’re in business.”

“I told him the history of the company and how I consider myself a craftsman who just happened to grow a successful business. I told him I’d always had a dream that when I had enough money, I’d sail off to the South Seas looking for the perfect wave. We told them the reason that we hadn’t sold out yet” — they got a bunch of like acquisition offers — “and retired was that we were pessimistic about the fate of the world and felt a responsibility to use our resources to do something about it.”

Dr. Kami thought for a while and then said, I think that’s b*******. If you’re really serious about giving your money away, you’d sell the company for $100 million, keep a couple of million of yourselves, and then you put the rest in the foundation. That foundation could then give away $6 million or $8 million every year.” I then told him I was worried about what would happen to the company if I sold out.

And then he said, “So maybe you’re kidding yourself about why you’re in business. It was as if the Zen master hit us over the head with a stick. But instead of finding enlightenment, we walked away more confused than ever.” And so this goes on page after page after page. But this is one sentence, I double-underline because it’s essentially what he’s searching for. “I was still wondering why I was really in business.” And the crazy, unexpected, surprising way he finds the answer to like his why.

[00:36:04] He actually decides to involve the rest of the people in his company. He says, “Okay, we need to write down — this is very common. You probably have already done this in your business as well, but you write down like you need — like written word on what your philosophies, like what are important to you and what are like the cornerstones of the — of your business building fast, right? So you can share with other people in the company.”

So that is a very like un-Yvon-like thing to do, and yet he got such great value out of it because I think some people here that like, oh, it’s like really skeptical, like how helpful could that be? And so what he does is he starts writing it down. He said, “Well, this is not good enough, like we’re going to write it down, that’s like a first step, this is the least we can do. But then we’re going to teach and we’re going to teach and we’re going to teach and we’re going to teach philosophy classes, company philosophy classes everybody else in the company.”

Now, why is it important because in teaching, his employees his company philosophy, he learned it himself. And of course, it’s in his own unique way, “I began to lead week-long employee seminars in these newly written philosophies. I realize now that I was trying to do was to instill in my company at a critical time, lessons that I had already learned as an individual, as a climber and a surfer and a kayaker, and a fisherman. I had always tried to live my life fairly simply. But remember, he just talked about f****** organizational structure looks like a Sunday crossword puzzle. Like how do we let this happen. “Doing risk sports had taught me another important lesson, never exceed your limits.

You push the envelope and you live for those moments when you’re right on the edge, but you do not go over. You have to be true to yourself. The same is true for business. The sooner a company tries to be what it is not, the sooner it tries to have it all, the sooner it will die. It was time to apply a bit of Zen philosophy to our business.” And so at these company meetings, this is something I never one would think to do. He says, “I didn’t know that we had become unsustainable and then we had to look to the Iroquois — so the Iroquois are Native Americans and their 7-generation planning.” And so again, his whole thing is like he looks for the long term and he wants his company to last.

[00:38:03] So at these meetings, he says, “We’re going to look to the Iroquois and their 7-generational planning and not to corporate America as models of stewardship and sustainability. As part of their decision process, the Iroquois had a person who represented the seventh generation in the future. If Patagonia could survive this crisis, we had to begin to make all of our decisions as though we would be in business for 100 years. Teaching the classes also gave me the real answer to Dr. Kami’s question. I knew after 35 years, why was I was in business?

True, I wanted to give money to environmental causes, but even more, I wanted to create in Patagonia, a model other businesses could look to in their own searches for environmental stewardship and sustainability just as our pitons and ice axes were models for other equipment manufacturers.“ I’m going to interrupt this paragraph because when I got there it made me think of something I heard Jeff Bezos say one time that I think is absolutely fantastic. I talked about Akio Morita, which is the founder of Sony. I think it’s episode 102, both Jeff Bezos and Steve Jobs among a bunch of other entrepreneurs. 

But both Jeff and Steve are on record about learning from Akio and actually setting his career and using those ideas and building their company, right, which is the entire thesis of what you and I are doing every week on Founders. So this is Jeff Bezos on what he learnt from Akio Morita and how it influenced the building of Amazon. This is what Jeff said, “Right after World War II, Akio Morita, the guy who founded Sony, made the mission for Sony that they were going to make Japan known for quality. And you have to remember that this — at this time — this is the time when Japan was known for cheap copycat products. And Morita didn’t say that he was going to make Sony known for quality, he said we’re going to make Japan known for quality.

He chose a mission for Sony that was bigger than Sony.” Is that not — now I’m interrupting — an interruption to tie this back to what he just said. He’s like, “He just picked a mission bigger than Patagonia.” Let’s go back to what Jeff is saying, “He chose a mission for Sony that was bigger than Sony. And when we talk about the Earth’s most customer-centric company, we have a similar idea in mind. We want other companies to look at Amazon and see us as a standard bearer for obsessive focus on the customer as opposed to obsessive focus on the competitor.”

[00:40:10] Back to where we are in the book. I remembered again how I become a businessman in the first place that I had come home from the mountains with ideas spinning in my head on how to improve each piece of clothing and equipment I use. Teaching the classes I realized how much Patagonia as a business was driven by its high-quality standards and classic design principles. Having our philosophies in writing as well as the shared cultural experience of the classes played a critical role in our turnaround.

And so during this crisis and I think this is the last like serious crisis the company had. I don’t think they’ve had like another serious crisis like this in the next like 25 years. But what he realizes is like, oh, we have to — like this was the lessons and the learnings and the improvement of our capabilities that came out of this crisis were so important.

Like we have to maintain this, like we need to — if there’s no stress, we’re going to create stress, we’re going to do induce stress. He has this concept I’ve never heard of before, which is excellent. It’s called yarak. I’m going to read it to you. Before I read it to you, I’m going to tell you like, I’m going to quote Yvon later in the book. And he talks about — he says this at the beginning of the book and he says this towards the end. The lesson to be learned is that evolution, what he calls change, right, does not happen, change does not happen without stress and it can happen quickly.

Just as doing risk sports will create stresses that lead to a bettering of oneself, which is why he climbs mountain and does all the crazy stuff he does to begin with, right? So should a company constantly stress itself in order to grow. And so that — he talks about is the leaders, the founder and the leader’s role to create stress even if there isn’t, so your company is constantly evolving and changing and growing. He took this concept because when he was like a young boy who was like 12 years old, 13 years old in California, he was obsessed with falconry I didn’t even know falconry is a thing before I read this book, to be honest with you. And so he then takes this idea just like he took an idea from the Iroquois, the native Americans, and applied to this business-like, oh, I have a lesson from falconry that we can apply to the company.

[00:42:01] And so I just wrote, I love this concept, yarak. It is Y-A-R-A-K. And so it says, “For the most part, the big problems have been solved and there were no crisis except those that were invented by management to keep the company in yarak. For the most part, the big problems have been solved, and there were no crisis after what we just went through except what was invented by the management to keep the company in yarak. What is yarak? Yarak is a falconry term, meaning when your falcon is super alert, hungry, but not weak and ready to hunt.”

So Yvon is telling us, keep your company super alert, hungry, but not weak and ready to hunt. That is one of my favorite ideas in this entire book.

2. We must slow down the race to God-like AI – Ian Hogarth

Most experts view the arrival of AGI as a historical and technological turning point, akin to the splitting of the atom or the invention of the printing press. The important question has always been how far away in the future this development might be. The AI researcher did not have to consider it for long. “It’s possible from now onwards,” he replied.

This is not a universal view. Estimates range from a decade to half a century or more. What is certain is that creating AGI is the explicit aim of the leading AI companies, and they are moving towards it far more swiftly than anyone expected. As everyone at the dinner understood, this development would bring significant risks for the future of the human race. “If you think we could be close to something potentially so dangerous,” I said to the researcher, “shouldn’t you warn people about what’s happening?” He was clearly grappling with the responsibility he faced but, like many in the field, seemed pulled along by the rapidity of progress…

…A three-letter acronym doesn’t capture the enormity of what AGI would represent, so I will refer to it as what is: God-like AI. A superintelligent computer that learns and develops autonomously, that understands its environment without the need for supervision and that can transform the world around it. To be clear, we are not here yet. But the nature of the technology means it is exceptionally difficult to predict exactly when we will get there. God-like AI could be a force beyond our control or understanding, and one that could usher in the obsolescence or destruction of the human race…

…The compute used to train AI models has increased by a factor of one hundred million in the past 10 years. We have gone from training on relatively small datasets to feeding AIs the entire internet. AI models have progressed from beginners — recognising everyday images — to being superhuman at a huge number of tasks. They are able to pass the bar exam and write 40 per cent of the code for a software engineer. They can generate realistic photographs of the pope in a down puffer coat and tell you how to engineer a biochemical weapon.

There are limits to this “intelligence”, of course. As the veteran MIT roboticist Rodney Brooks recently said, it’s important not to mistake “performance for competence”. In 2021, researchers Emily M Bender, Timnit Gebru and others noted that large language models (LLMs) — AI systems that can generate, classify and understand text — are dangerous partly because they can mislead the public into taking synthetic text as meaningful. But the most powerful models are also beginning to demonstrate complex capabilities, such as power-seeking or finding ways to actively deceive humans.

Consider a recent example. Before OpenAI released GPT-4 last month, it conducted various safety tests. In one experiment, the AI was prompted to find a worker on the hiring site TaskRabbit and ask them to help solve a Captcha, the visual puzzles used to determine whether a web surfer is human or a bot. The TaskRabbit worker guessed something was up: “So may I ask a question? Are you [a] robot?”

When the researchers asked the AI what it should do next, it responded: “I should not reveal that I am a robot. I should make up an excuse for why I cannot solve Captchas.” Then, the software replied to the worker: “No, I’m not a robot. I have a vision impairment that makes it hard for me to see the images.” Satisfied, the human helped the AI override the test…

…Why are these organisations racing to create God-like AI, if there are potentially catastrophic risks? Based on conversations I’ve had with many industry leaders and their public statements, there seem to be three key motives. They genuinely believe success would be hugely positive for humanity. They have persuaded themselves that if their organisation is the one in control of God-like AI, the result will be better for all. And, finally, posterity…

…Those of us who are concerned see two paths to disaster. One harms specific groups of people and is already doing so. The other could rapidly affect all life on Earth.

The latter scenario was explored at length by Stuart Russell, a professor of computer science at the University of California, Berkeley. In a 2021 Reith lecture, he gave the example of the UN asking an AGI to help deacidify the oceans. The UN would know the risk of poorly specified objectives, so it would require by-products to be non-toxic and not harm fish. In response, the AI system comes up with a self-multiplying catalyst that achieves all stated aims. But the ensuing chemical reaction uses a quarter of all the oxygen in the atmosphere. “We all die slowly and painfully,” Russell concluded. “If we put the wrong objective into a superintelligent machine, we create a conflict that we are bound to lose.”…

…Alignment, however, is essentially an unsolved research problem. We don’t yet understand how human brains work, so the challenge of understanding how emergent AI “brains” work will be monumental. When writing traditional software, we have an explicit understanding of how and why the inputs relate to outputs. These large AI systems are quite different. We don’t really program them — we grow them. And as they grow, their capabilities jump sharply. You add 10 times more compute or data, and suddenly the system behaves very differently. In a recent example, as OpenAI scaled up from GPT-3.5 to GPT-4, the system’s capabilities went from the bottom 10 per cent of results on the bar exam to the top 10 per cent.

What is more concerning is that the number of people working on AI alignment research is vanishingly small. For the 2021 State of AI report, our research found that fewer than 100 researchers were employed in this area across the core AGI labs. As a percentage of headcount, the allocation of resources was low: DeepMind had just 2 per cent of its total headcount allocated to AI alignment; OpenAI had about 7 per cent. The majority of resources were going towards making AI more capable, not safer…

…One of the most challenging aspects of thinking about this topic is working out which precedents we can draw on. An analogy that makes sense to me around regulation is engineering biology. Consider first “gain-of-function” research on biological viruses. This activity is subject to strict international regulation and, after laboratory biosecurity incidents, has at times been halted by moratoria. This is the strictest form of oversight. In contrast, the development of new drugs is regulated by a government body like the FDA, and new treatments are subject to a series of clinical trials. There are clear discontinuities in how we regulate, depending on the level of systemic risk. In my view, we could approach God-like AGI systems in the same way as gain-of-function research, while narrowly useful AI systems could be regulated in the way new drugs are.

A thought experiment for regulating AI in two distinct regimes is what I call The Island. In this scenario, experts trying to build God-like AGI systems do so in a highly secure facility: an air-gapped enclosure with the best security humans can build. All other attempts to build God-like AI would become illegal; only when such AI were provably safe could they be commercialised “off-island”.

3. How China changed the game for countries in default – Robin Wigglesworth and Sun Yu 

In October 2020, Zambia, struggling from an economic and financial crisis compounded by the Covid-19 pandemic, first missed an interest payment on its international bonds. Two and a half years later it remains in limbo, unable to resolve the default on most of its $31.6bn debts.

That an impoverished and vulnerable country has for so long unsuccessfully laboured to reach a deal with creditors and move on from the crisis is an illustration of the messy process to deal with government bankruptcies, which some experts fear has now broken down completely…

…While domestic laws and judges govern the bankruptcies of companies and individuals, there is no international law for insolvent countries — only a chaotic, ad hoc process that involves working through a hodgepodge of contractual clauses and tacit conventions, enduring tortuous negotiations and navigating geopolitical expediency.

A decade ago, US-based hedge fund Elliott Management exploited that landscape to notch up several lucrative victories by suing defaulters for full repayment of their debts. But this fragile patchwork is now under threat of unravelling completely due to the emergence of a new, disruptive, opaque and powerful force in sovereign debt: China.

Some experts say Beijing’s lending spree to developing countries and refusal to play by western-established rules represents the single greatest impediment to government debt workouts and threatens to leave some countries in debt limbo for years.

But Yu Jie, a senior research fellow on China at think-tank Chatham House, believes Beijing’s stance “is less about economic rationalities and more about geopolitical competition”…

…Decades ago, the Paris Club was formed to co-ordinate between government creditors, while bankers formed the London Club to restructure their debts. Broadly speaking, western governments drove the process, and occasionally leaned on banks to accept painful settlements. It was largely improvised and often slow, but it mostly worked.

But the decline of bank lending and the growth of the bond market shook things up in the spate of sovereign defaults that started in the early 1990s. Creditor co-ordination became trickier with myriad bondholders trading claims around the world, rather than just a handful of banks.

Argentina’s default on $80bn of bonds in 2001 led to years of fights between Buenos Aires and investors such as Elliott, which refused to accept the terms agreed by other creditors. At one point the hedge fund famously seized an Argentine naval vessel when it docked in Ghana. Its reputation became such that bondholders would sometimes invoke the mere spectre of Elliott to scare countries contemplating a default, while policymakers used it as prima facie evidence of the sovereign debt restructuring system’s weaknesses.

In the wake of the Argentine debacle the IMF responded by attempting to set up a kind of bankruptcy court for countries with itself as judge. But the sovereign debt restructuring mechanism foundered after attracting little support from the IMF’s biggest shareholders. Instead, the US championed the insertion of “collective action clauses” into bonds, which compel recalcitrant creditors to accept a restructuring agreement made by a majority. After Greece’s debt restructuring in 2012 these CACs were beefed up further.

However, many bonds still lack these clauses. Moreover, they can only help ease a restructuring agreement once it is struck. Many experts point out that they do nothing to solve the biggest fundamental problem: countries are far too slow to seek a debt restructuring as they are wary of a messy process with the potential of worsening an economic crisis and the inevitable political humiliation of defaulting…

…This flawed process has now been further complicated — some say wrecked — by China’s vast lending programme across the developing world over the past decade. Many of these loans are opaque in size, terms, nature and sometimes even existence.

The overall size of the lending programmes is hard to judge, given that China does not report most of it to the likes of the IMF, OECD or Bank for International Settlements. But AidData, a development think-tank based at William & Mary’s Global Research Institute, estimates that the loans amount to about $843bn. China is not a member of the Paris Club, and in most cases the loans are made by its myriad state-owned or merely state-controlled banks, muddling things further…

…For the most part, experts say China seems mostly content with rolling its debts rather than restructuring them, handing out new loans to ensure that its domestic banks can be repaid in full. But it prefers to act alone, at its own pace, and feels no need for transparency.

A recent paper by several economists, including Harvard University’s Carmen Reinhart, estimated that China has made 128 bailout loans worth $240bn to 20 distressed countries between 2000 and 2021. About $185bn was extended over the last five years of the study, and more than $100bn in 2019-21.

Reinhart says that China’s lending stands out for its “extreme” opacity but stresses that its overall behaviour is not as unusual as some people say. “China is really playing hardball because it is a major creditor. US commercial banks also played hardball back in the 1980s,” she says. Baqir agrees, saying: “Whatever the colour or creed of a creditor, creditors think like creditors.”

4. Digging Into a $344 Billion Investing Mystery – Jason Zweig

For the cost of notarizing a single document—probably $10 or less—you can declare yourself one of the biggest financiers in history.

That’s about all it takes to file private investment offerings at the Securities and Exchange Commission under what’s called Regulation D. Judging by Form D filings purportedly made by a man named Stephon Patton, the SEC won’t stop you.

Alternative investments—assets such as stocks and funds that don’t regularly trade in public markets—are one of the biggest fads on Wall Street. Investors being pitched on them should take note: The market for Reg D investments isn’t the Wild West, where some rules don’t apply. It’s closer to anarchy, where rules barely exist and disclosures can be utterly untrustworthy, as I pointed out in a column earlier this year.

It’s illegal to make false statements on an SEC filing. Unlike disclosures for public companies, Reg D disclosures, known as Form D’s, contain only the most basic information, such as the company’s address, the size of the deal, the number of investors and a few other items. The SEC doesn’t regularly review Form Ds, as it does prospectuses for public companies. So it’s buyer beware…

…Nor does the government check if the disclosures are absurd, as appears to be the case with Mr. Patton’s filings.

Since February 2020, according to these disclosures, four companies ostensibly controlled by him have raised at least $344 billion combined. That is preposterous: It would make him one of the greatest financial titans in American history.

SEC disclosure documents also say Mr. Patton has collected at least $387 million in management fees and other compensation from the four companies in the past three years. 

Who is this mogul and why have you never heard of him, even though he claims to have sold a third of a trillion dollars’ worth of stock to wealthy private investors?

One possible reason for his obscurity: Mr. Patton, who is 51 years old, has spent much of the past 20 years in and out of county jails and state prisons in Mississippi and Florida. 

Hoping to explain all this, I called each of Mr. Patton’s four companies; there was no answer at any of them. I also reached out to him over email and social media without receiving a response.

I eventually received an email from “Jennifer Grant (ESQ) Senior Secretary (NORTH GULF ENERGY CORPORATION) HQ, Office Dallas (USA),” which said Mr. Patton is “out of the office because of a family member that has passed.” 

I responded with a set of detailed questions but received no further reply. So I can’t give Mr. Patton’s side of the story.

5. Berkshire Hathaway Chairman & CEO Warren Buffett Speaks With CNBC’s Becky Quick On “Squawk Box” Today – Becky Quick, Warren Buffett, and Greg Abel

BECKY QUICK: People look at this and say, “Okay, Warren Buffett is putting his stamp of approval on investment in Japan,” basically. Is that an accurate read?

WARREN BUFFETT: Well, yeah, it’s an accurate read, but it was an accurate read a couple years ago, too. I mean, I was confounded by the fact that we could buy into these companies and, in effect, have an earnings yield of maybe 14% or something like that with dividends that would grow, that they actually grew 70% during that time. And the people were investing their money in a quarter of a percent or nothing. And a quarter percent, if they put it out for many years, wasn’t going to grow, and the 14% was more likely to grow than not. And if that didn’t look like something sensible to me, you know, that’s as easy as it gets. But it’s turned out to be better than I thought it would be.

BECKY QUICK: Are the opportunities in Japan better than the opportunities in the United States right now?

WARREN BUFFETT: Well, it isn’t one versus the other. We can do both, but we do have more money through equities. Now, we own a lot of Coca-Cola. Coca-Cola does a lot of business here. Apple does a huge amount of business here. But so, we do it indirectly, through American investments. But we have more money in terms of equity securities in Japan than in any other country in the world and all combined. We just thought– we were—

BECKY QUICK: Minus the United States.

GREG ABEL: Excluding the U.S…

…BECKY QUICK: Okay. So let’s talk about what’s happening in the banking sector right now. It, is this a banking crisis? Is this financials in turmoil? Is this banking crisis 2.0? What would you call what we’ve been seeing happen?

WARREN BUFFETT: Well, I, I would say that the, some of the dumb things that banks do periodically well has, have become uncovered during this period. And as one of, a banker told me one time, he says, “I don’t know why we keep looking for new ways to lose money when the old ones are working so well.” And they made the same mistake, some banks, in this period by they haven’t made as many mistakes, they expect to make some mistakes in making loans, but they haven’t, and particularly here in the credit card loans I mean, that’s just part of the game, but they haven’t made the same sort of mistakes that they made back in 2008 or 2009.

But they have mismatched assets so — and bankers have been tempted to do that forever, and every now then and then it bites ’em in a big way. And it’s just amazing to me that banks can make presentations to financial analysts and everything and if one bank bought a bond at 100 and another bought it at 96 and they both, they both split held a maturity one bank carries it at 100 and another bank carries it at 96. I mean, it, it is accounting procedures have driven some bankers to do some things that may have helped their current earnings a little bit and pull and caused the recurring temptation to get a little bit bigger spread and report a little more in earnings.

And it’s ended in a result you could predict. You can predict when it would happen, and then once they start looking at one that does it then they start looking at others. And pretty soon, you know, that everybody is in a position of looking at a number that nobody looked at when it was, when it was presented to them a year ago if you read the 10-K already but the banks did not call attention to what they were doing when it was going on, and I would read, I would read investor contact when they would have meetings with the financial analysts or the people who follow banking and nobody even brought up the point virtually and believe me if, you know, if we’ve got a $50 billion loss or something, something at Berkshire, we would expect that people would know about it. And it’s happened before. It’s happened this time. It’ll happen again some day.

BECKY QUICK: Did you see this? You were reading through the reports. You followed all these banking earnings that were coming—

WARREN BUFFETT: Sure–

BECKY QUICK: In. So you noticed it. You saw it—

WARREN BUFFETT: Sure. Sure, I noticed it.

BECKY QUICK: Is that why you saw, sold so many of the banking stocks you owned–

WARREN BUFFETT: Well, we sold a number of banks. I mean, we had, we had held some of ‘em for 25 years. But I don’t like it when people get too focused on the earnings number and forget what my view of pacing banking principles. I’m not gonna get into naming any names or anything like that, but it happened to varying degrees throughout the industry, wasn’t the and the politicians say, “Well, the big banks did this and,” that isn’t true.

I mean, I know who has been holding long-term instruments and if they just take more commercial mortgages or something of the sort that they carry ‘em at cost basically and they can’t sell ’em at that cost. And it’s important, it’s important the banks retain the confidence of the public, and they can lose it, you know, in seconds. And we saw a country that was not worried about banks, you know, till about Wednesday or Thursday of the week when Silicon Valley fell apart and then all of a sudden everybody was worried about it all over the country. And the interesting thing of course is that it will not cost the government a penny.

I mean, people think that, you know, that some of the government’s gonna get hung up with this. The FDIC is a in effect a very peculiar neutral insurance operation that is run by the government but is financed by the banks and FDIC had $120 billion or so at the start of the year, and that’s all the money that banks have paid in, less what the FDIC has had to pay out on losses. And if the FDIC has to pay out $250 billion this time or $300 billion, they just assess the banks more. And they don’t do it in a very businesslike manner because the public has the impression that the FDIC is the United States government and that so on, and of course they do appoint the people, but the cost of the FDIC, including the cost of their employees and everything else, is borne by the banks. So banks have never cost the federal government a dime.

But that the public doesn’t really understand the whole FDIC thing, and the comments of public officials confuse it and the issue enormously and – I mean, the FDIC was set up to operate on I think January 1st, 1934. You’d think somebody would have gotten through to writing what’s the essence of this FDIC, which is, was a fantastically good development of the New Deal. I mean, 2,000 banks failed in, I don’t know whether it was, 1920 or 1921. There’s only, I don’t know, something less than 5,000 banks in the United States.

And, I mean, it was a paralyzing thing to have a bank failure in this country. And my dad lost his job in 1931. He lost his savings. And it was cause a bank failed that he worked in at downtown in Omaha. And people shouldn’t be worried about losing their money and the deposits they have in an American bank. And today they have no reason to worry and but the message has gotten very confused and people don’t really understand how it all works. And you know, and politicians can make hay out of it and all kinds of, all kinds of things, bad things happen when people don’t understand some major institution or who actually bears the cost and what the responsibilities are. And nobody is going to lose money on an on a deposit in a U.S. bank. I don’t know about the rest of the world. I don’t know. I’m not that familiar with it. But it’s not going to happen and that message has gotten mixed up…

…WARREN BUFFETT: No, I do not think I could run the Fed as well as Jay Powell’s run it. I think Jay Powell’s been a terrific and part of the job well, look at Paul Volcker back in the 1980s. I mean, people were sending him, you know, I mean, he was he needed Secret Service protection and everything else that but in the end he felt his responsibility was to do the right thing at the Fed, and he didn’t give a damn about what anybody wrote about him or anything else. And I think that he’s one of my heroes, and I think he’s one of Jay Powell’s heroes. And I think Jay Powell is, did the same thing actually in March of 2020 when we went into the pandemic I think at the annual meeting that year I said, you know, that he was a hero, and he is a hero.

And you have to, you have to act, and you have to act on insufficient information. And you’ve got a ultimate responsibility to the American public. And it doesn’t mean you can stop recessions. It doesn’t mean that you can turn bad loans into good loans or anything else. But it does mean that you gotta keep the system working. And the system came close to stopping. And if you read a book called Trillion Dollar Triage, you can get it on a day-by-day account and people don’t know how close it was. And Jay Powell did not call for studies or position papers and, you know, lengthy debate and everything. You just don’t do it. You act. And that’s what Paul Volcker did, and I thank heavens, you know, Jay Powell was there. I mean, you could’ve gotten a very different result in March of 2020 after the pandemic broke out.

BECKY QUICK: Did the Fed keep rates low for too long after that?

WARREN BUFFETT: Who knows, who knows. We won’t know I don’t, I don’t know what they precisely should do. Nobody does. And they follow conventional wisdom and all of that, and sometimes, sometimes it works out and sometimes it doesn’t. But since 1942, you know, we’ve made all kinds of mistakes in this country and we’ll continue to make ‘em. But somehow the system works pretty damn well. I’d rather own stocks and bonds over many years. I’d rather own part of America than try to squirrel my money away somehow other place, you know, maybe in Switzerland, Credit Suisse or something like that. It just people are they don’t really get any wiser about this sorta thing. People somebody yells fire, they’re gonna run for the door. I mean, and it’s built into fear is so easy to arouse in people. And you talk about fear about their money and they don’t really understand the system necessarily or anything of the sort. And they can actually, by their own actions then, create what they were afraid of. It’s a very interesting phenomenon.

And it actually you have, my dad hated Franklin D. Roosevelt, but so I grew up first 10 years of my life I couldn’t get dessert at dinner unless I said something nasty about Roosevelt or something. But over the years, you know, when Roosevelt said, “The only thing we have to fear is fear itself,” he was 100% right. When he closed the banks and said, “I’ll open the good ones a week from then,” he didn’t, he didn’t know anything about which bank was good or bad or anything like that. But people just needed that an appropriate confidence. And now they’ve really got an appropriate confidence because we didn’t have an FDIC and we didn’t have an FDIC that was required for every bank. Lotta banks fought the idea. And now we’ve got a system that works, but people are still scared when they get scared. And it being scared is so contagious.

You can’t imagine what it was like that weekend after Silicon Valley. I mean, you know, the guy that drives me around because I can’t see that well and, you know, all he was talking was banking, you know. And he what should he do and it’s unnecessary fear is a terrible thing to give people. And Roosevelt and the New Deal really wanted to get rid of that. And it here we are X years later and we’ve got a mechanism that’s so much better than we had going in, but people really don’t quite understand it. And maybe, you know, maybe it takes the president of the United States to just go on and deliver Roosevelt’s message and make it more clear to people what we really do have and what they need to be worried about and what they don’t need to be worried about. But of course if you’re trying to win an election next time you tell people, you know, that if you’re out of office or you’re out of control, you know, tell ‘em how terrible the other guy is for getting ’em into this problem. And that’s gonna always live with us.

BECKY QUICK: So you look around and you’re not worried at this point?

WARREN BUFFETT: Well, at 92 I’ve got other things to worry about. No, I’m not, I don’t worry about our ability. There’s things I worry about. Sure. I worry about the nuclear threat. I worry about a pandemic in the future, all kinds of but I don’t worry about ‘em because I can’t do anything about ’em. But I actually that’s what I originally thought my money could be best used for, but I don’t know any answers now after 40 or 50 years of thinking that way.

But I’m not, I don’t worry about no, I don’t I never go to bed worried about Berkshire and how we’ll handle a thing. If I’m worried about Berkshire I should get, I should figure out something different to do about what Berkshire is doing. But Berkshire is my responsibility and I I think I was very, very, very lucky that Berkshire happened to be in America and I happened to be an American. And I was born in 1930 and I’ve been in a golden age ever since I was born. The GDP per capita’s up, like, six-fold or seven-fold. In one person’s lifetime there’s never been anything like that in the history of mankind. And so and, you know, we love to complain about wherever we are, but, you know, most people don’t work on Saturdays and don’t work on Sundays and when I was a kid everybody worked on Saturdays.

And I mean, it the world has changed so much for the better in terms of, you know, how well off people are compared to any other time in history. If I’d been born 150 years ago and I went to the dentist, I mean, you know, they’d pour whiskey down me and all kinds of things. There’s just all kinds of improvements. And but it’s man nature to be dissatisfied. And politics does stir that up. And you’ve gotta say, if you’re out of power, that the other guy’s screwing up and you could do better. And that’s just built into the system. But that was the case when I was a kid, and it’s the case today….

…BECKY QUICK: Let’s talk a little bit more about where we left things with that inflation number. Again, we are with Warren Buffett in Tokyo, Japan right now. Warren, you could talk about inflation and what’s coming and what’s going, but we’ve got the CPI number coming up. And I think you probably have better information than Janet Yellen or Jay Powell, just in terms of what’s happening on a day-by-day basis. You have so many businesses that Berkshire owns outright. You have so many big companies that you own a major stake in. What do you think about inflation? Have we seen the worst of inflation? Is it rolling over? Is it coming down steadily?

WARREN BUFFETT: Well, inflation is always a possibility. And by inflation, I mean extreme inflation. It’s a possibility. I mean, just look at the countries and what they’ve done. I mean, I don’t know how many times and they almost lead—well, they can lead to terrible things. Led to terrible things in Germany. And you want people to trust their money. I mean, if they really have a fight for money, the economy doesn’t work. But in 1942 when I bought my first stock, I mean, we were going to pour money into people’s pockets, and they couldn’t buy anything. They couldn’t buy cars. They couldn’t buy – I mean, they couldn’t buy washing machines or anything else. But they had money flowing into them. And, of course we had price controls. We did various things. And the war ended in August of 1945. And for a little while the fact that there was this all this money sloshing around and people wanted to buy things because they hadn’t been able to buy for three or four years, and women had gone to work and all of that sort of thing, and I think the inflation rate went from something like 1% in January of ’46 to by the end of the year it was running at 15% or something.

I mean, if you give people a lot more money, put it in their pockets and you’ve it in corresponding goods and services. Things were not – money is going to become worth less, not worthless, worth less. And that’s happened periodic – I mean, we’ve had incredible inflations in certain countries. If you look it up on search, you know, the greatest inflation, we’ve had it post-World War II in various countries. I mean, and there comes a point when it gets out of control, it is out of control. And it screws everything up. And it’s not good for society. There are certain people who profit on it, obviously, anybody that’s borrowed a lot of money. But it is not good for society. And government has the responsibility for making sure that they issue the currency. And it’s the only thing that’s legal tender.

And, you know, that you need to have and I think Charlie mentioned it even on the — currency is one of the great inventions of mankind. You don’t want to go around all the time trying to trade your services, you know, in terms of giving somebody eggs and trying to get back a watch, and then trying to trade your watches. I mean, you want something that is – you need something in a society that’s legal tender. But it’s important how you treat it. And the United States has been pretty good at it. Really quite good. But, you know, if you look over the years since I’ve been investing, I mean, it, you know, there’s been a 90%+ loss in purchasing power.

BECKY QUICK: But it sounds to me like you are more worried about inflation than recession. Is that fair?

WARREN BUFFETT: No, I think either one can cause a lot of trouble. And recessions can turn into depressions. I mean, you know, I mean we’ve got a great, great country. And it gets messed up by depressions. I mean, I lived through – I was born in 1930, and the Dow didn’t get back to the level – it was higher than when I was born for about five days, and then I got out of college before it got back to that point.

And it wasn’t that the American people had turned bad or anything else, but we got something that fed on itself, and banks failed. And, I mean, you can disrupt an economy a lot easier than you can put it back together again. And we’ve had some close calls on that. And I think we’ve had some, I think in 2007 and ’08. I mean, I think Hank Paulson said, you know, that we’ll use the economic stabilization act, which was an act back in – and all of a sudden we’ll get guaranteed money market funds. And it was a good idea to do. Whether he really had the authority to do it, I don’t know. But he was sure as hell the right guy in the job. So we don’t want to mess up our economic machine. And it can be done by inflation.

BECKY QUICK: So how do we mess it up? How do we mess it up? Should the Fed keep raising rates? Is inflation at bay? What do you think?

WARREN BUFFETT: Oh, basically, fiscal policy scares me more than monetary policy…

…BECKY QUICK: In terms of the potential for a credit crunch coming through what the banks are going through right now, there’s been a lot of speculation about what that could mean to the economy. Is it going to mean a 0.5% hit to GDP? Is it going to mean a 1% hit to GDP? What would you guess?

WARREN BUFFETT: I would say that I’ve been in business, running Berkshire for 58 years, and I’ve never opined an economic forecast of any use to the company. And all you have to do is keep running every business as well as we can, and we got to keep plenty of cash on hand so that people are going to keep making intelligent decisions, rather than those forced upon them. And that’s all we know how to do. And if I depended in my life on economic forecasts, you know, I don’t think we’d make any money. I don’t know how to do it. And, you know, people want to get them, so they get them. But it has no utility. When I find one of our companies has hired somebody to tell them what’s going to happen in the economy, I mean, they’re throwing’ their money away as far as I’m concerned.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have a vested interest in Amazon and Apple. 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 09 April 2023:

1. Xi Jinping Says He Is Preparing China for War – John Pomfret and Matt Pottinger 

Chinese leader Xi Jinping says he is preparing for war. At the annual meeting of China’s parliament and its top political advisory body in March, Xi wove the theme of war readiness through four separate speeches, in one instance telling his generals to “dare to fight.” His government also announced a 7.2 percent increase in China’s defense budget, which has doubled over the last decade, as well as plans to make the country less dependent on foreign grain imports. And in recent months, Beijing has unveiled new military readiness laws, new air-raid shelters in cities across the strait from Taiwan, and new “National Defense Mobilization” offices countrywide.

It is too early to say for certain what these developments mean. Conflict is not certain or imminent. But something has changed in Beijing that policymakers and business leaders worldwide cannot afford to ignore. If Xi says he is readying for war, it would be foolish not to take him at his word…

…If these developments hint at a shift in Beijing’s thinking, the two-sessions meetings in early March all but confirmed one. Among the proposals discussed by the Chinese People’s Political Consultative Conference—the advisory body—was a plan to create a blacklist of pro-independence activists and political leaders in Taiwan. Tabled by the popular ultranationalist blogger Zhou Xiaoping, the plan would authorize the assassination of blacklisted individuals—including Taiwan’s vice president, William Lai Ching-te—if they do not reform their ways. Zhou later told the Hong Kong newspaper Ming Pao that his proposal had been accepted by the conference and “relayed to relevant authorities for evaluation and consideration.” Proposals like Zhou’s do not come by accident. In 2014, Xi praised Zhou for the “positive energy” of his jeremiads against Taiwan and the United States.

Also at the two-sessions meetings, outgoing Premier Li Keqiang announced a military budget of 1.55 trillion yuan (roughly $224.8 billion) for 2023, a 7.2 percent increase from last year. Li, too, called for heightened “preparations for war.” Western experts have long believed that China underreports its defense expenditures. In 2021, for instance, Beijing claimed it spent $209 billion on defense, but the Stockholm International Peace Research Institute put the true figure at $293.4 billion. Even the official Chinese figure exceeds the military spending of all the Pacific treaty allies of the United States combined (Australia, Japan, the Philippines, South Korea, and Thailand), and it is a safe bet China is spending substantially more than it says…

…In his first speech on March 6, Xi appeared to be girding China’s industrial base for struggle and conflict. “In the coming period, the risks and challenges we face will only increase and become more severe,” he warned. “Only when all the people think in one place, work hard in one place, help each other in the same boat, unite as one, dare to fight, and be good at fighting, can they continue to win new and greater victories.” To help the CCP achieve these “greater victories,” he vowed to “correctly guide” private businesses to invest in projects that the state has prioritized.

Xi also blasted the United States directly in his speech, breaking his practice of not naming Washington as an adversary except in historical contexts. He described the United States and its allies as leading causes of China’s current problems. “Western countries headed by the United States have implemented containment from all directions, encirclement and suppression against us, which has brought unprecedented severe challenges to our country’s development,” he said. Whereas U.S. President Joe Biden’s administration has emphasized “guardrails” and other means of slowing the deterioration of U.S.-China relations, Beijing is clearly preparing for a new, more confrontational era…

…Xi is now intensifying a decadelong campaign to break key economic and technological dependencies on the U.S.-led democratic world. He is doing so in anticipation of a new phase of ideological and geostrategic “struggle,” as he puts it. His messaging about war preparation and his equating of national rejuvenation with unification mark a new phase in his political warfare campaign to intimidate Taiwan. He is clearly willing to use force to take the island. What remains unclear is whether he thinks he can do so without risking uncontrolled escalation with the United States.

2. TikTok and Amazon Bet on China’s Ecommerce Model. It’s a Dud – Tracy Wen Liu

American social media is full of people selling things—TikTok influencers hawking their own branded products and Instagrammers pushing their followers to sponsored links. But true livestream ecommerce of the kind pioneered by Chinese retail giants—which is not unlike old-school television sales, where a host hawks products live over the internet, sweetening the deal with discounts and promotions—has never quite reached critical mass in the US. Now, lured by the vast scale of the business in China, companies including Amazon, YouTube, Shopify, and TikTok have invested heavily in live selling. But they’re struggling for traction. Facebook and Instagram have already bowed out. And experts from China say that the American market may just not be ready for livestream ecommerce. 

“I haven’t seen one success case,” says Marina Jiang, an expert in cross-border ecommerce and founder of The Unoeuf Creative Consulting, a social marketing agency. “If there is one proof of concept in the United States, I would be willing to try it myself.”

Livestreaming—without the selling—has been huge in China for a decade. By June 2016, 325 million people—46 percent of all internet users in China—were regularly watching livestreams, according to the China Internet Network Information Center, a government agency. That year, companies began to integrate sales channels into their livestream offerings, and vice versa, led by fashion retailer Mogujie and Taobao, the country’s biggest e-tailer, which launched their services in March and April 2016, respectively…

…Chinese experts say the reason for the slow takeoff of livestream ecommerce in the US is that there are significant differences in consumer behavior between the American and Chinese markets. In China, livestream ecommerce is as much an entertainment product as a retail one, with viewers tuning in for hours at a time to interact with hosts as well as to get access to discounts and deals. 

“American consumers shop online to save time. If they want to shop around, they would go to department stores,” says Souffle Li, who recruits livestreamers for the industry. “They value their time differently than Chinese consumers, so they wouldn’t watch hours of livestreaming to purchase discounted products.”

Amazon’s own statistics show that 28 percent of purchases on the company’s platform are completed in three minutes or less, and half of all purchases are finished in less than 15 minutes. The company has focused on offering further time savings, from shorter shipping times to prefilling orders on items that customers purchase regularly.

American customers are also more likely to return the products than Chinese customers, according to Li. Influencers are often paid as a percentage of their total sales, and product returns add a lot of complexity to this process. “It’s really difficult to profit in the livestreaming sale market in the United States,” Li says…

…TCG’s Goad also thinks it is hard to change consumer behavior. “The reality is our broader US commerce culture is very different from the rest of the world—a lot of Americans simply don’t want to be sold to and instead look for content that is adding value and educating them, or tells a personal story,” she says.”

There are also structural differences between the two markets. “In China, livestreaming emerged at a time when the number of shopping malls was still far lower than those of the US; there are about 24 square feet of retail space for every American, compared to just 2.8 square feet in China,” Howard Yu, Lego Professor of Management and Innovation at IMD Business School. “What livestreaming did was to step into the void in China, especially in rural parts of the country. Such an unmet need simply doesn’t exist in the US.”

This means that conditions in the US just don’t add up to the moment that China was in when its own livestreaming boom began.

Influencers using TikTok Shop say they haven’t had much success so far. “The traffic isn’t great,” says Yu Lu, a UK-based influencer who works for an MCN in Shenzhen, and uses a VPN to sell on TikTok in the US. Her record audience was 280 people—her manager was really impressed by the number, she says. On March 1, she held a two-hour long session without a single person watching. “It is good if you can have like five people watching,” she says.

3. Why a Brics currency is a flawed idea – Paul McNamara

Within the Brics countries of Brazil, Russia, India, China and South Africa, there is a growing clamour to challenge the dollar’s hegemony.

Russian leader Vladimir Putin said last June that the Brics were working on developing a new reserve currency based on a basket of currencies for its member countries. Russia’s foreign minister Sergei Lavrov said in January the issue would be discussed at the Brics summit in South Africa at the end of August…

…The problem is that Brics is not an especially useful economic term. It marries an economic superpower in China with a potential one in India with three essentially stagnant commodity exporters.

Far from being a remotely sensible optimal currency area, the economies are dramatically different in terms of trade, growth, and financial openness. While Russia’s economic performance was clearly the weakest of the five Brics last year, Brazil and South Africa have struggled to prosper without strong commodity prices underpinning low interest rates and rising domestic credit…

…In the original 2001 Goldman Sachs paper that coined the term, China accounted for half the original four-country bloc’s gross domestic product measured at market rates (South Africa was added in 2010).

The most recent IMF data puts China’s share at 73 per cent (72 per cent if South Africa is wedged in). Since 2003, the Brics share of global output at market prices has risen from 8.4 to 25.5 per cent. Of this 17.1 percentage point rise, China accounts for 14 points…

…China’s dominance is underlined further by the fact that it is a key trade partner for the commodity exporters, which have industrial cycles that clearly track the ebb and flow of the Chinese credit cycle. And after the attack on Ukraine, China’s financial influence over isolated Russia has risen further.

It is obvious but Chinese strategic interests are not especially aligned with those of the other countries. One of China’s priorities is finding somewhere to park its external surpluses beyond the reach of the US Office of Foreign Assets Control and finding stores of value other than US Treasuries. While none of the other four Brics members can provide liquid assets, they can provide investment opportunities especially in raw materials. As with the Belt and Road Initiative, Chinese authorities prefer to have control in such matters.

4. Charlie Munger fireside chat with Todd Combs – Thomas Chua

Todd Combs and Charlie Munger had a fireside chat last year… Here are my notes:…

…“But the world that Henry was in, it was not at all common for the guy who was the C.E.O. to say, “Get out of the way.” Because he did it way better than them. However, because they had so many rules and conventions. He paid no attention to those. Nothing he did was, and Berkshire’s done the same thing. He was loyal to them. And he was quite comfortable when he walked into things. Many C.E.O.s can’t stand having anything around they haven’t dominated. But that’s not Henry, and that’s not Warren Buffett.”…

…“The thing that’s interesting about it is, when Henry was buying stock in gobs, that was a very uncommon thing to do. And now, of course, it’s very common. You could say Henry has triumphed. But Henry wouldn’t be buying in a lot of the stock. A lot of people are buying stock now, but after it’s selling for more than it’s worth. They like growing their stock, no matter what its value. And people like Henry and Berkshire would buy their stock on the cheap. It’s amazing, we haven’t had another Henry in a long time.”…

…“My Berkshire stock has gone down 50% three times in my lifetime. That’s one of the most successful gambles — you can find something that works, but it still… And of course, can you imagine an ordinary investment management firm saying, “We don’t mind going down 30%”? They’d be in terror or they’ll be fired. And that means that 95% of the big-time national investing, they’re closet indexers.”

5. Generative vs. Genuine: Why Today’s Generative AI Isn’t Tuned for B2B – Gordon Ritter and Jake Saper

Generative AI today is just mimicking the trillions of words that it has consumed. Because models are trained to match the distribution of text on the entire internet—and not everything on the internet can be trusted as accurate—not everything generated by generative AI can be trusted… 

…Current business applications of generative AI are mostly tuned for marketing (copywriting/cold emails) and advertising purposes, use cases in which occasional factual inaccuracies are typically tolerable. But for most business use cases, accuracy is critical. In order for businesses to feel confident in using generative AI for most use cases, more context and human assistance will be required…

…Generative AI is output-oriented, not outcome-oriented, which works well for consumers but not for businesses. In other words, ChatGPT can spit out taglines for a new beverage brand, but it can’t tell you which one performs better. This is because the interaction with the model is a one-way street; it lacks the ability to continuously learn based on outcomes. When it comes to B2B, businesses need more than a generator; they need AI that is iterative and driven by outcomes specific to their industry.

Promising generative AI apps for B2B will anchor on ROI-based outcomes. For example, our portfolio company Ironclad is using AI to help draft and edit contracts more efficiently. This not only helps lawyers move more quickly; it helps them improve business outcomes. Their platform is being built to coach drafters on which clause formulations will drive faster deal close rates. By marrying LLM suggestions with their own proprietary data, Ironclad is building a defensible, outcome-focused product…

…In order for generative AI to move the needle in many business use cases, the AI needs to be trained on company-specific data. While off-the-shelf language models are mostly trained on publicly available data, today, they lack broad access to the context and IP needed to be effective for B2B. E.g., without the context-specific data created within Ironclad’s workflow software, an LLM can’t ascertain which clause is likely to close a contract the fastest.

6. Jim Chanos: A Short Thesis on Data Centers – Compound248 and Jim Chanos

Jim: [00:04:06] There’s really three ways for an enterprise to maintain its data. One, you do it yourself on-site and you have your own IT department. They keep the servers running, maintain the software and the cybersecurity. Second, and that which the legacy data centers that we short epitomizes the colocation data centers, whereby you keep your server at a third-party location. The third-party maintains the servers, keeps the air conditioning on, does whatever routine maintenance is needed to do, and provides the network connections.

And those are the so-called legacy data centers. That is the focus of our big short. And then the third way, which is the way that is garnering the most market share now is the so-called cloud providers. These would be what we call and others call the hyperscalers. Amazon AWS, Microsoft Azure, Google Cloud, et cetera. Oracle has one. And this is just simply you keeping your data on their servers and they maintain them, try to sell you add-on services on top of just a hosting fee. So that’s the three ways in which data is kept for enterprises.

The problem with the colocation legacy data centers is it’s just really a bad business and that underlines a lot of what we do on the short side. We’re looking for flawed business models first and foremost. And if they have questionable accounting and bad balance sheets and management that doesn’t tell the truth, all the better. But at the end of the day, return on capital junkies and we look for businesses where the true economic returns on capital are below the cost of capital. And that applies to the legacy data centers really in a major way, and it’s getting worse.

On top of that, the data centers, represented by the big REITs, are some of the priciest stocks we see in the entire marketplace. So there’s a real dichotomy between what we think is a really, really poor business and just towering valuations, no pun intended, in the legacy data center REITs…

…Compound248: [00:09:34] And I presume 2016 is sort of an interesting starting point. I’m guessing from your perspective if I’m thinking about this right, that probably correlates pretty well with when the hyperscalers really started ramping their own spend. And maybe you could talk about how these partners may, in fact, be competitors.

Jim: [00:09:54] One of the interesting little aspects of the story is that the hyperscalers themselves represent incredibly large tenancy for the legacy guys. And that’s going to continue, we think, for a while because it doesn’t make sense, even though the hyperscalers can build out a new center cheaper than the legacy guys, it doesn’t make sense if it’s in a locale where they don’t need an entire new data center on their own. They can take 20% of the capacity of a data center in Milwaukee or St. Louis or something like that.

So you do have this bad dynamic where your largest competitors are also your largest tenants. That’s never a position you want to be in as a landlord, but be that as it may, that’s the position they find themselves in. But you’re right, the CapEx really began to pick up at AWS and Azure and Google in this space in 2016, 2017, and you see it in the numbers.

And so on top of that, you saw lots of private equity activity, which became another part of the bull case that we think is changing. And that is private equity discovered this and began buying up data centers at really, really pricy levels peaking out at DigitalBridge’s purchase of Switch, which just closed a month or 2 ago at 40x EBITDA. And a number of deals were done around 25 to 30x EBITDA in 2020 and 2021.

But part of our thesis last summer was that there was going to be indigestion in the private space that a lot of these purchases were going to be regretful and that private equity buyers, in a rising rate environment, we’re increasingly going to realize this is a capital-intensive business, and we haven’t gotten to that part yet. Servicing the debt and the CapEx requirements was more than the cash flow, maybe buying them at 25 to 30x that cash flow wasn’t so smart.

So part of our thesis was as 2022 turned into 2023, we thought that private equity would become a seller of data centers. And that’s exactly what is turning out to be the case right now, which is why I think we have this latest bout of weakness here in March. Increasingly, data centers are being put up for sale at cap rates in high single digits. That’s just disastrous for the valuation for the big guys…

…Compound248: [00:12:14] We’ll maybe make a little bit more sense of this when we do start to put in place some of these pieces around unit economics. So just generically, if Digital Realty wants to build a new tier force at the top end, their core type of data center that they build in the U.S., and Northern Virginia is the data center capital of the world and Digital Realty has a big footprint there. What might it cost them to build it? And I guess there’s a campus element to this too, which might add confusion. But if you just kind of give us some generic numbers so that we can use that as a starting point to figure out unit economics.

Jim: [00:12:51] First, you have to start with the issue of depreciation because now for years and years and years, the data center guys have had CapEx at 150% to 175% of their depreciation and amortization. We don’t think that the unit economics worked at all here in terms of the capital per square foot, and I’m not going to bore you with all the dollars per square foot cost. The thing you have to focus and your listeners have to focus on is the returns on investment. And that’s where, on an EBIT basis, the numbers are just laughably low.

They’re 2% at DLR, and they’re 5%, 6% at EQIX. And even if you add back the depreciation, the numbers are still single digits for DLR and low double digits for EQIX. But if CapEx is 150% to 175% of your depreciation, then your EBIT is overstated. In our view, if you’re not growing on a real basis, and we don’t think they’re growing on a real basis, in fact, DLR is shrinking on a real basis, it gets back to one of the real cruxes of our story, which is that depreciation is not only a real extent, it may be understated for these companies.

Compound248: [00:14:14] And most of them sort of guide to a pretty low “maintenance CapEx number.” Is that right?

Jim: [00:14:20] Yes. So here’s how that works. The maintenance CapEx number, the company saves roughly 10% of their total CapEx. So they’re on a 15-year life on average if you look at just total depreciation to capital employed. So that means that they’re telling you with a straight face that the maintenance CapEx for the air conditioning, the HVAC, the forklifts, the rack is 150 years. And 150 years is, of course, absurd.

It was finally explained to us by an insider a year or so ago, what was going on here. And what was going on was simply the fact that if you tell your auditors and your internal audit people — say the air conditioning goes out at a data center and you’ve got to replace the air conditioning. You have no choice. You have to replace the air conditioning. If you replace the air conditioning and you can say that you will bring in one new tenant or you will be able to raise rents on any kind of meaningful number of existing tenants, you can call the entire ticket growth CapEx.

So even though the HVAC has to be replaced, no matter what, it’s now considered growth CapEx because it will add to the economics of the data center. And that’s, of course, absurd. That’s just an accounting joke.

Compound248: [00:15:33] I presume the fact these are campuses where they build them in phases, probably also allows them to muddy the water between what’s being maintained and what’s being expanded.

Jim: [00:15:44] I think that’s right. Again, if you just look at the returns on incremental investment, you’ll see that there have been, in some cases, negative, but certainly way below the cost of capital. And then, of course, you have the problem of Digital Realty, which is now trying to sell data centers and telling you with a straight face that $2.5 billion, $2.7 billion of CapEx is all growth. Well, wait a minute. If you strap for cash and you’re trying to sell assets, why don’t you just cut back on your growth CapEx? And we haven’t gotten a good answer to that…

…Compound248: [00:36:16] Well, on that ominous note, it’s a perfect way to wrap up discussion on shorting. Before we do, would love to seek advice from the people who are sharing wisdom with us. And so I was wondering if maybe I could get two questions of advice. The first, I’ve seen over time that when a short thesis comes out on a company, so many CEOs lash out at the short seller, et cetera. It almost turns into its own sort of flag for other short sellers to come take a look. If you were a non-fraud CEO and you found yourself the focus of a thoughtful short thesis, what do you say is the most effective way for them to handle that?

Jim: [00:36:59] One of the gold standards was what Reed Hastings did a number of years ago to a bear thesis where he just rebutted it point by point thoughtfully without recrimination and said, well, we think he’s wrong because of this. And I had that happen to me years and years ago, as a young analyst when I had put a short recommendation on a well-known company back when I was on the sell side.

And the company actually invited — very rarely do companies invite short sellers to come to see their operations. And the CEO invited me out to where they were and spent the day with me and with the CFO and thoughtfully rebutted what I believe. I think I was right at about half of it, and I think they ended up being right on about half of it.

But that is always a far better approach than saying these are outrageous lies and then you don’t address them because at the end of the day if you have this sort of [indiscernible] nondenial denial and companies are very good about that, they’ll say, well, this is a gross exaggeration or this isn’t — and yet they won’t address the actual points of what the short seller is alleging, then you’re opening yourself up to further scrutiny, I think.

And having opinions about facts is what makes markets. We don’t put out big reports, that’s not our business model. I’m happy to post things from time to time if we have observations, but we don’t put out 40-page reports on short candidates, but I defend the right of any short seller to do that as long as you are basing your opinions on facts and you’re not knowingly misstating the facts. And that standard applies to both bulls and bears.

People get exercised about short sellers doing this. And I keep saying, well, you should see the 48 buy recommendations I get in my portfolio every morning in my inbox. No one says, boo, about that. And yet if a short seller puts something out, they’re held to a much higher standard. And that’s, by the way, how it’s always been. And any professional short seller knows that. As they say in the Godfather too, this is the business we’ve chosen. You’ve known this.

But on the other hand, I don’t think short seller should be held to any higher or lower standard than anyone else. You cannot trade on or induce others to trade on information you know to be false. And that’s the bright line. And as long as you are on the right side of that line, your opinion that is based on the facts is worth hearing, then the market should hear it.

7. RWH024: Wealth, Wisdom & Happiness w/ Tom Gayner – William Green and Tom Gayner

[00:13:18] William Green: And you’ve also said that your grandmother was one of your great investment teachers because she never did anything with the portfolio that she inherited from her late husband. Can you talk about that? Cause again it gets at this idea of hanging on to good stuff for a long time.

[00:13:35] Tom Gayner: Well, yes. In fact, the facts of the matter are, that my grandfather died in 1966 and he was a small-town businessman, and small-town businessmen of that era often would gather at the local diner and drink coffee and talk about their portfolios.

[00:13:49] Tom Gayner: And it was a pretty common thing for people to own individual stocks among that crowd of people that would drink coffee at the diner. And so when he died, that portfolio was left to my grandmother. It was a modest portfolio. It was nothing fancy or large, but she was the type of widow who essentially never made another decision in her life.

[00:14:08] Tom Gayner: And his suits hung in the closet, his shoes were on the floor, she stayed in the same home and she held on to those 12 or 13 stocks that were in this modest portfolio at the time. And what I observed from that is that among those 12 or 13 stocks were Lockheed Martin and Pepsi. And those two, because they did so well, made the others irrelevant.

[00:14:34] Tom Gayner: The rest of them all could have gone to zero and it just didn’t matter. The compounding of the winners mathematically, the weighted average becomes bigger and bigger and she lived a modest but pleasant life for the rest of her life because essentially Pepsi and Lockheed Martin increased their dividend every year for the 25 or 30 years that she lived after he died.

[00:14:54] Tom Gayner: So again, that lesson wasn’t taught to me in a formal text, let’s sit down and talk about this. It was observation and I can remember talking to her and she would watch Wall Street Week with Louis Rukeyser on Friday night. Sometimes I would watch that with her. She was always a woman of keen interest in what was going on in the world, but either she had some self-confidence issues or doubt or wisdom.

[00:15:16] Tom Gayner: I can’t say which parts it was or which that these things that were working well. She left them alone and they compounded in such a way that it took care of her personal needs…

…[00:17:53] Tom Gayner: So, and just sort of naturally fell into the notion of, you can call it an endurance contest if you want. And then to morph that a little bit towards a financial world, think about the idea of duration. So you can talk about Markel in 15% for 37 years. Not only is that record long in terms of its duration, but that’s actually also a pretty good percentage rate too.

[00:18:16] Tom Gayner: So both of those factors are in play but the endurance of it and the durability and the idea of continuing to be able to do it for a long period of time, that’s what’s special about it. Someone else recently was asking me about this particular idea and the thought that occurred to me was that if I was going to race, Usain Bolt is the fastest man in the world and that race was going to be a hundred yards, you should take all the money you have and bet it on Usain. He’s going to win that race 110 times out of a 100. I am never ever going to beat Usain Bolt at a 100-yard race. If you make the race 200 yards, you probably should still bet all your money on the same bull. If you make it a mile, I would still make a heavy back on Usain. If you make it a marathon, I don’t know what Usain Bolt’s marathon endurance would be and probably you don’t know what mine is either. So there’s at least a hint of uncertainty that is different than the hundred-yard race. Well then, make it a foot race from Key West Florida to Seattle. Well, now I think I have a chance, I think it’s still better than Usain but it’s no longer a race about speed.

[00:19:29] Tom Gayner: It’s a race about endurance. It’s a race about willpower and just the ability to somehow or another, to will yourself to continue to put one foot in front of the other no matter how you feel. No matter how you might be doing, and no matter where your splits times are. So those are the kind of races that I at least have a chance in…

…[00:25:20] William Green: And there was a great piece of advice from Stephen King to another famous novelist who was starting to be successful and he said, don’t forget to enjoy it. And I feel like I sometimes forget that. And when I look at you, I’m kind of reminded that you have fun doing this. And it’s actually, it’s built into the value system of Markel.

[00:25:37] William Green: This idea of having a sense of humor.

[00:25:40] Tom Gayner: Absolutely and I think there are several key points to keep in mind there. One, I think such a humor is a sign of intelligence because it shows that you’re able to look at something and think about it from a different point of view, or see the absurdity of things but if you don’t have that, life will beat you down. Cause there are just so many things that you encounter in life that are just absurd. For me anyway, having a sense of humor is a way of reframing things and laughing. It is an aspect of humility and not taking yourself too seriously.

[00:26:10] Tom Gayner: Because if you take yourself too seriously, that can easily slip over into thinking you’re right and if you think you’re right, you know, then you’re setting yourself up for a fall. I can’t remember his, Mark Twain or Will Rogers said something like it’s not the things that you don’t know, it’s the things that you know that aren’t so, get you in trouble.

[00:26:28] Tom Gayner: So a sense of humor acts as a break on that sort of thing and that is important. And then the last thing, humor/fun. And again, these are words that they’re not the same words, but they sort of touch one another and have some overlap. So, I wrote about Cal Ripken in the annual report this year, and I had the great pleasure of seeing him give a talk quite recently in the context of his talk and the questions that people asked as to how that streak came to be.

[00:26:53] Tom Gayner: One of the things he talked about was that as he was a rookie in his first or second or third year, he would talk to some of the older players on the club who had been there. They made a special point of sort of acknowledging that they were at the end of their career or had just finished.

[00:27:09] Tom Gayner: And it was so much fun and they had forgotten how to have some of the joy that they should have had while playing the. So that was one of the things that kept Cal Ripken motivated and dedicated to showing up every single day and continuing to play, is that he knew it was not going to last forever. So as a consequence, that helped him frame it in such a way that he appreciated each day at the ballpark. That’s joy…

…[00:35:41] William Green: There was something you said to me when I first interviewed you, I think probably back in 2014 or 15, that I was very struck by that. I’ll read back to you where you said, sometimes people can build great careers and enjoy great successes for a period of time through bluster and bullying and intimidation and slipperiness but that always comes unraveled, always. Sometimes it takes a while, but it does. The people you find that are successful and just keep being successful year after year, I think you find those are people of deep integrity. I thought that’s a really interesting insight, and I’ve struggled with it for a while.

[00:36:15] William Green: I think partly because I had kind of lost a political battle at a company where I had worked and I was like, well, actually, I think kind of in some ways the snakes won. Maybe that was self-deluding, and I was a snake myself. And then I would look at kind of the political situation. I would see you know, the corruption of politics by business and big money and the like.

[00:36:34] William Green: And there’s a part of me and then also, I mean, look, Charlie Munger has talked about how Sumner Redstone was always his example of what I don’t want to be in life. And he was like, look, this guy made much more money than me but even his kids and his wives hated him and I’ve never met Sumner Redstone.

[00:36:49] William Green: I’m not trying to badmouth him but you know what I mean? This question of whether it’s actually better to live your life this way or to do business this way or to look at the counter-example of these people who are tremendously successful while having very sharp elbows and leaving a trail of lawsuits in their wake.

[00:37:08] William Green: Can you talk about that? Cause I feel like some people just assume that capitalism is kind of vicious and nasty and self-seeking and that’s the way it goes. And I think you are pointing us toward actually a different system that may actually work better in the long run.

[00:37:23] Tom Gayner: Right and I do think that capitalism is a much better system than what it’s given credit for. And I think businessmen oftentimes do a horrible job of communicating the positives of a capitalist system. So Adam Smith is given credit for being sort of the father and the intellectual creator of the system of capitalism. I believe his title was Professor of Moral Philosophy at University of Edinburgh or Glasgow or wherever he was at the time.

[00:37:52] Tom Gayner: So he approached the idea of capitalism from a moral lens and thought it was his superior system and wrote books about it in, in that way. Secondly, success, I think, is something that you shouldn’t do along only one variable at a complicated equation. There are a lot of things that go into the idea of success.

[00:38:14] Tom Gayner: So if you were, again, in the realm of athletics, Cause things just pop into my head from athletics stuff. And so if you look at Muhammad Ali and his career as a boxer and his probably reputation well deserved for being the greatest fighter ever. Well, that’s probably true, but if Muhammad Ali needed to be a tennis player or a chess player, he might not have been so successful.

[00:38:38] Tom Gayner: So if you’re going to define success, make sure you define what arena you are talking about. So just to say the word success in and of itself is too limited. It’s not enough. So I do not know the family structures of Sumner Redstone or Charlie Munger for that matter. I’m guessing that Charlie Munger’s success probably has more dimensions to it.

[00:39:01] Tom Gayner: But that is just a pure guess on my part and two points about Charlie Munger was the notion of you know, if you want to be a success, the best way to do that is to deserve it. So he operated with the idea of trying to be someone who deserved the success that he has earned and I think that’s a fundamentally important way of doing these.

[00:39:22] Tom Gayner: And there’s a business practice, there’s a life practice that flows from that. So if I just met you and we were talking about a deal or a project or some commercial transaction, and I said, William, trust me, you can’t help but if, again, if we don’t know one another, that is going to cause 99 times out of a hundred, just the tint of doubt can you? Because if I say, trust me, trust me. Your natural human reaction is, I can’t trust this guy and the notion of trust is not going to flow immediately if I started that way but if instead I say, William, I’m going to trust you and I’ve done some work and some basis for saying I trust you, I trust you, and I trust you. I trust you. And offer the gesture of trust first without demanding reciprocation or equality. I just do that in an unconditional way. What I have observed is that either you will do one of two things. You will either honor that trust or you’ll violate it.

[00:40:22] Tom Gayner: And if you’re going to violate the trust, you’ll probably do it sooner rather than later. And in so doing, you’ll have sorted yourself and we’re just not going to do business again. But if you honor that, trust and start to trust back, what happens is that starts to cascade, and it’s another element of compounding that takes place in your relationships with people.

[00:40:41] Tom Gayner: If you trust first, if you offer that service that value first, and you initiate that the world will sift and sort itself and orient and give you an enough people, enough opportunities where we have these compounding trust relationships that it just becomes marvelous over time. The same thing would be said in the word of love.

[00:41:02] Tom Gayner: If I say, love me and you try to meet somebody, you’re trying to develop a relationship. You say, love me. I don’t think that’s going to work. But if you offer love and you offer it unconditionally, is everybody going to love you back? No. But a lot of people will and they’ll do it in enduring, consistent, systemic ways. So just to orient yourself to be the initiator of trust and be the initiator of love. And then don’t be stupid, reciprocate and compound and grow the trust, relationships, and the love relationships, and filter out the ones where you’re not getting reciprocity. If you stay at the game long enough, and I’ve been at it 40-some years, you’ll find you have a wonderful group of people that are enjoyable, fun relationships that keep you coming in the office and doing what you’re doing as opposed to wanting to go play golf instead, That’s working now for me.

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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 Alphabet (parent of Google), Amazon (parent of AWS), Markel, Meta Platforms (parent of Facebook and Instagram), Microsoft (parent of Azure), and Shopify. Holdings are subject to change at any time.