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

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

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

Here are the articles for the week ending 15 January 2023:

1. How Complex Systems Fail – Richard Cook

Complex systems are intrinsically hazardous systems.

All of the interesting systems (e.g. transportation, healthcare, power generation) are inherently and unavoidably hazardous by the own nature. The frequency of hazard exposure can sometimes be changed but the processes involved in the system are themselves intrinsically and irreducibly hazardous. It is the presence of these hazards that drives the creation of defenses against hazard that characterize these systems.

Complex systems are heavily and successfully defended against failure.

The high consequences of failure lead over time to the construction of multiple layers of defense against failure. These defenses include obvious technical components (e.g. backup systems, ‘safety’ features of equipment) and human components (e.g. training, knowledge) but also a variety of organizational, institutional, and regulatory defenses (e.g. policies and procedures, certification, work rules, team training). The effect of these measures is to provide a series of shields that normally divert operations away from accidents.

Catastrophe requires multiple failures – single point failures are not enough.

The array of defenses works. System operations are generally successful. Overt catastrophic failure occurs when small, apparently innocuous failures join to create opportunity for a systemic accident. Each of these small failures is necessary to cause catastrophe but only the combination is sufficient to permit failure. Put another way, there are many more failure opportunities than overt system accidents.  Most initial failure trajectories are blocked by designed system safety components.  Trajectories that reach the operational level are mostly blocked, usually by practitioners…

…Human practitioners are the adaptable element of complex systems.

Practitioners and first line management actively adapt the system to maximize production and minimize accidents.  These adaptations often occur on a moment by moment basis.  Some of these adaptations include: (1) Restructuring the system in order to reduce exposure of vulnerable parts to failure. (2) Concentrating critical resources in areas of expected high demand. (3) Providing pathways for retreat or recovery from expected and unexpected faults. (4) Establishing means for early detection of changed system performance in order to allow graceful cutbacks in production or other means of increasing resiliency…

…Change introduces new forms of failure.

The low rate of overt accidents in reliable systems may encourage changes, especially the use of new technology, to decrease the number of low consequence but high frequency failures.  These changes maybe actually create opportunities for new, low frequency but high consequence failures.  When new technologies are used to eliminate well understood system failures or to gain high precision performance they often introduce new pathways to large scale, catastrophic failures. Not uncommonly, these new, rare catastrophes have even greater impact than those eliminated by the new technology. These new forms of failure are difficult to see before the fact; attention is paid mostly to the putative beneficial characteristics of the changes. Because these new, high consequence accidents occur at a low rate, multiple system changes may occur before an accident, making it hard to see the contribution of technology to the failure…

…Safety is a characteristic of systems and not of their components.

Safety is an emergent property of systems; it does not reside in a person, device or department of an organization or system. Safety cannot be purchased or manufactured; it is not a feature that is separate from the other components of the system. This means that safety cannot be manipulated like a feedstock or raw material. The state of safety in any system is always dynamic; continuous systemic change insures that hazard and its management are constantly changing.

2. “Portrait of a Disciplined Investor” – Alex Morris

On January 8th, 2022, Lou Simpson passed away at the age of 85.

Lou, who grew up in Highland Park, Illinois, attended Northwestern University for a short stint before transferring to Ohio Wesleyan University, where he earned a double major in accounting and economics in 1958; two years later, he earned a master’s degree from Princeton (Lou was an economics professor at Princeton from 1960 – 1962). After Princeton, Lou returned to Chicago to work at Stein, Roe, and Farnham, becoming a partner at the investment firm in 1969; after, Lou moved to Los Angeles, where he would eventually be named president and CEO of Western Asset Management.

In August 1979, Lou joined GEICO as an investment manager after meeting with Warren Buffett (“Stop the search. That’s the fellow.”). He clearly made a quick impression at GEICO: in the 1982 shareholder letter, Buffett called Lou “the best investment manager in the property-casualty business”.

Over the next three decades, Lou was responsible for managing the auto insurers’ investments, which grew to $5 billion by his retirement in 2010.

How was Lou’s track record at GEICO? In a word, astounding.

Thankfully, in the 2004 shareholder letter, Buffett disclosed the annual performance of GEICO’s equities portfolio under Lou’s management (the section was titled “Portrait of a Disciplined Investor”). As shown below, an investment of $1,000 in 1979 was worth ~$101,600 by 2004 (>100x growth), compared to ~$23,700 if it had been invested in the S&P 500 (compounded returns of ~20.3% for GEICO’s equities, or roughly 700 basis points higher than the ~13.5% annualized for the index over the same 25-year period)…

…As outlined in GEICO’s 1986 annual report, Lou’s investment approach had five key guidelines: (1) Think independently; (2) Invest in high-quality businesses run for the shareholders; (3) Pay only a reasonable price, even for an excellent business; (4) Invest for the long-term; (5) Do not diversify excessively (Lou has often mentioned Buffett’s 20-hole punch card idea).

Here’s how Lou described his process (applying those guidelines): “My approach is eclectic. I try to read all company documents carefully. We try to talk to competitors. We try to find people more knowledgeable about the business than we are. We do not rely on Wall Street-generated research. We do our own research. We try to meet with top management… What we do is run a long-time-horizon portfolio comprised of ten to fifteen stocks. Most of them are U.S.-based, and they all have similar characteristics. Basically, they’re good businesses. They have a high return on capital, consistently good returns, and they’re run by leaders who want to create long-term value for shareholders while also treating their stakeholders right.” (We also know that he liked to operate with a small team, not an army of research analysts: “He supervises only two employees, an assistant and an analyst… ‘The more people you have, the more difficult it is to do well.’”)

In addition, Lou considered management quality a key part of the investment decision: “One of the things I’ve learned over the years is how important management is in building or subtracting from value. We will try to see a senior person and prefer to visit a company at their office, almost like kicking the tires. You can have all the written information in the world, but I think it is important to figure out how senior people in a company think.”

3. Investing lessons for 2023 – Chin Hui Leong

If there was a single villain that caused the 2022 market crash, most would point their finger at rising interest rates. But not everyone may be learning the right lesson here.

In particular, the market crash last year may have persuaded some investors to equate rising interest rates to falling stock prices. This way of thinking may cause them to sell at the next sign of a US Federal Reserve rate hike.

However, such a conclusion ignores how unusual last year’s interest rate increases have been. According to data compiled by the Visual Capitalist, the effective federal funds rate rose past the two-percentage mark within six months in 2022, its fastest increase in more than three decades. That’s abnormal, to say the least. In comparison, the US central bank took 36 months to reach the same rate level in its previous rate hike cycle between December 2015 and December 2018.

Furthermore, avoiding stocks within this three-year period would be a mistake. For example, shares of Amazon and iFAST Corporation would have netted investors returns of 164 per cent and 349 per cent, respectively, if both counters had been held from the start of 2016 till the end of 2022.

Missing out on the basis of misguided beliefs would be detrimental to investors…

…Finally, investors tend to put too much weight on recent events. This bias could be especially egregious after last year’s market crash. Given the beating that investors have taken while holding stocks, some may end up waiting on the sidelines.

Instead of holding back, investors may wish to consider the odds of a market downturn.

For context, wealth manager Ben Carlson pointed out that the 2022 performance of the S&P 500 was among its worst ever in history. Last year’s decline of nearly 20 per cent was only exceeded by the major market crashes in the past, such as the Great Depression in the 1930s, 2002 dot-com crash, and the 2008 global financial crisis.

That, in my eyes, is the definition of an abnormality. To be clear, it’s not to say that another 20 per cent decline is completely out of the question. But what we can say is with every passing year, the odds of a positive outcome increase, based on historical data stretching back to the 1920s.

Considering the probabilities, I would argue, would be a better way to think about the future, compared to reacting to the stock market’s performance over the past 12 months.

4. RWH020: The Disciplined Growth Investor w/ Fred Martin – William Green and Fred Martin

[00:58:25] William Green: That’s a very profoundly important point. And hence it is and it’s, you wrote to me the other [00:58:30] day, I think we may have uncovered the greatest risk manager of all time, the climber, the documentary free solo.

[00:58:36] William Green: And wonder if you could talk a bit about this guy, Alex Honnold, who is a master of I, I don’t know how many of our listeners have watched the movie. There’s a great documentary that called Free Solo that’s about this guy Alex Honnold, who decides to climb, I think it’s El Capitan. So this 3000 or so foot sheer granite, aha.

[00:58:56] William Green: Cliff, I mean, he gave me a heart attack just watching the thing. Can you talk about what you can learn from someone like Hon about dealing with uncertainty, dealing with risk, de mitigating risk in a really intelligent, thoughtful way? Since we don’t know what can happen or what will happen, we can guess what can happen, but we don’t know what will happen.

[00:59:15] William Green: Did you watch the documentary? Yeah. And then yesterday I watched something about the filming of the documentary, which is terrifying in it, its own Right. And you know, one of the things that he, that the cameraman said while making the film is that they had to record part of it with remote cameras because he said he didn’t want them to see him die because they were friends of his.

[00:59:36] William Green: Sure. Okay. So during the most dangerous bit, they actually had to set up remote cameras.

[00:59:39] Fred Martin: Oh my God. Okay. So it’s so funny. So Rob is working on, he’s spearheading the piece on risk. This has been in our hands for years. Right. This idea of trying to get better. And I really believe if you really want to learn something, well teach it, you know?

[00:59:52] Fred Martin: And so the teacher always learns the most. And so he writes this thing on.

[00:59:56] William Green: This is Rob Naski, who’s your right hand write chief investment?

[00:59:59] Fred Martin: He [01:00:00] starts with free solo. And I freak out about it because I’m going, you know, wait, we’re not talking about falling off cliffs here. And then, but as I started thinking about it more and more, and I about a month ago I called Rob up and I said, I think I’m not looking at this right.

[01:00:11] Fred Martin: This guy was one of the greatest risk managers of all time. And we need to look at it. I need to look at it differently and say, my goodness, he took this thing with a binary outcome, and he made it. And there were a thousand little threads to make that. And so this has to do, this is really deep stuff, but what this has to do with is risk and risk mitigation.

[01:00:36] Fred Martin: Okay? And what’s in your control and what’s not in your control. And so what he did is he systematically, he climbed it many times. He was a very stur climber. He was physically fit, and he practiced those moves with a rope over and over again. Right now. He also is part of the thing. One of the things that struck me as so profound in the whole thing is, I don’t know if you remember the movie he was going to climb and he got part we up and said This isn’t right.

[01:01:02] Fred Martin: And he went back down again. I don’t know if you remember that. And I remembered that I’d forgotten that. Yeah. I thought, oh my goodness gracious, this guy, he’s got the risk meter going in his head, he’s not ready, it’s not right. And he knows that this isn’t the right day and just think of the humiliation. He must have fell in the def sense of deflation because he, because you don’t just show up when we, he is having a climate.

[01:01:25] Fred Martin: You build to it; you’re all fired up. You start up there and you part where up and [01:01:30] goes, well not right, comes back down.

[01:01:32] William Green: It’s interesting also, Fred, I saw an extraordinary video of him last night where he was teaching a famous Scandinavian climber to free climb. And he said to the guy, when you get stuck, just be patient and take the time to figure it out.

[01:01:45] William Green: He said, you get in trouble when you’re in a hurry. So when you can’t figure out how to get out of it. Oh goodness. Just pause. Be patient and give yourself time to figure it out. And I, you know, and he’s talked about not letting your emotions spiral out of control when you were stuck. And so there’s a kind of an incredible ability to get his ego under control.

[01:02:05] William Green: That’s astounding.

[01:02:06] Fred Martin: This is you should, by the way, you should try to get him on your podcast.

[01:02:10] William Green: That would be great. Yeah. He’s a fascinating guy.

[01:02:12] Fred Martin: I just, well, just because if you look, he had a binary outcome, but he also had the ability to practice over and over again. Every He climbed it.

[01:02:22] Fred Martin: Right. Anyways, I mean, he stacked a lot of things in his favor. He didn’t guarantee that he didn’t fall, but boy, he sure did a lot of risk mitigation. He also, there is another idea that we’re also, we’re debating, and that is, Buffett said this many times, so it is possible to get the market return.

[01:02:42] Fred Martin: You can buy an index, an s and p 500 index, but anybody can do it when you try to get an excess return. The field gets really narrow and it becomes all about process and implementation, and the ability to take intelligent risk if you’re going to do superior results, because if you try to do superior, you may end up with [01:03:00] inferior results.

[01:03:00] Fred Martin: So this kid had the potential to rise to the top of this, but he had to really do risk mitigation to make it, and it’s true investing. As you move up the food chain, as your performance gets better, you better really manage the risk because it’ll kill you. And so I’m still turning my head over on his comment about be patient.

5. Jay Gould: The Dark Genius of Wall Street – David Senra

[00:48:29] And so one of his first advantages derives from the fact that he had this monk-like dedication. He studied and read everything. This is not the sexy part of business by any means, but it’s something that you and I have seen over and over again. The most explicit statement of the importance of studying regulations came all the way back from the guy that founded Trader Joe’s. I read his autobiography, it’s called Becoming Trader Joe. I did a podcast on it, it’s number 188. And he says in that book, “As I learned time and time again, success in business often rests on a minute reading of the regulations that impact your business.” And that comes into play. This is how he gets involved in railroads for the very first time.

As Gould knew, the New York General Railroad Act of 1850 … That must make for good reading, right? Or for fun reading. The New York General Railroad Act of 1850 allowed directors or railroads to issue bonds of their own on their own authority to finance expansion. It also permitted the easy conversion of these same bonds into common stock and then back again into bonds. Jay must have quickly realized that just a small percentage of Wilson’s bonds … Wilson is the guy offering to sell bonds in this R&W Railroad for 10 cents on the dollar. So this is why Jay realized, “Oh, I got to jump on this right now.” Jay must have quickly realized that just a small percentage of Wilson’s bonds when converted would establish a controlling interest in the R&W Railroad. Wilson offered Jay all of his bonds at just 10 cents on the dollar. So this is where we see Jay take control of his first railroad. This is something he’s going to do for the rest of his career. Thereafter, for a solid year and a half, Jay is 27 years old at this time. I should bring that to your attention. Thereafter, for a solid year and a half, Jay spent four to five days a week working to improve the infrastructure, traffic, and profitability of the R and R railroad. And we see this monk-like dedication again. What he didn’t know about the railroad business was considerable. And so he made a point of learning it. He says, “I left everything else and went into railroading. I took entire charge of that road. I learned the business and I was president and treasurer and general superintendent. I kept at my work.”…

…[00:52:54] And so in 1865, Jay sold control of the R and W to this guy named William T. Hart, who was a steamboat entrepreneur who like other old Steamboat entrepreneurs, Daniel Drew and Cornelius Vanderbilt saw the future and was now interested in redwood. So that’s an important part. Why are all these… What is it taking place? What do you know as a steamship operator, right? You’re in the business of transporting goods and people from one spot to another. Now they’re building out railroads, which just seems to be a way larger opportunity than steamboats. So Hart saw this, Daniel Drew saw this and Vanderbilt saw this as well. And so just like Vanderbilt before him, Hart is like, oh, I have a steamboat business. Let me combine it with a railroad business. So he had taken control over… These names are so hard. I’m just going to, it’s irrelevant what it’s named. Do you want me to say Rensselaer and Saratoga? It is a bigger railway than the one at this point that Jay has control of.

So he’s going to merge. He’s going to sell, his interests are going to merge. Jay realized more than a hundred thousand dollars on this one transaction. That seems like a lot of money. There’s single transactions that Jay does later in his life that he makes 40 million on. It’s bananas. Jay realized more than a hundred thousand dollars on this one transaction, his first truly enormous payday, but he was not done. A week later he and Hart incorporated this other railroad. So essentially they’re all combining, they all have the same playbook, right? That’s what I meant up was like, yeah, you could see the same opportunity, but if you’re more creative and your execution is better, you’ll yield better results. So they just take a bunch of small railroads and they consolidate them and make them into larger railroads.

[00:54:30] And this is why Jay tells us exactly, because we see a note that he wrote his partner, just a guy named Hart. I believe that consolidation will prove both essential and inevitable for a score or more roads in the coming decade. He’s predicting the future and he is right about that. Far better than mere cooperation is tight coordination, close vertical integration, economy of scale and unchallenged market domination whenever possible. So that’s Jay’s playbook that he’s writing when he is in his twenties. That’s what Hart’s trying to do. That’s what Drew, Vanderbilt, Rockefeller, Morgan, all these guys are doing the same thing at this point in time. And so he is like, let’s not stop here. What is his advantage? Ever since boyhood, he had a fascination with maps. How crazy does this… All these experiences he could not have predicted when he telling your sister as a teenager, what was he? 15, 16?

Hey, surveying, making maps, studying to terrain, understanding the strategic ports, how to link quarries, forests, and other resources together in a transportation network. All of that, there’s no way he could have predicted what he’s going to use that skillset 10 or 12 years later, which is exactly where we’re in at this point. So he’s like, listen, I had a fascination with maps. Now the one-time surveyor scrutinized his maps with a freshly engaged eye. He studied the small railroads, dotting, and landscape. As one would study the pieces of a complex jigsaw puzzle, pondering which among the myriad possible combinations might yield maximum economy and profit that is not exclusive to Jay Gould.

We have studied multiple entrepreneurs on this podcast that were obsessed with the physical landscape and they used their understanding of the physical landscape to gain an advantage over their competitors. Is that not what Sam Walton did? He was the only retailer in the south that had his own plane. So he’s flying over, he’s studying traffic, but he can get it down really low. Studies traffic patterns. He picked out what? If my memory serves me correct, the first 130 Walmart locations himself out of his little Cessna plane. It’s the same thing that Rockefeller was doing when he set up his first refinery in Ohio, way before he had… At one time he was what? Refining I think 90%. He owned like 90% of all the refinery market in the United States. Way before that, he realized, hey, I should set this up so I can actually transport the refined oil by both railroads and by boat.

[00:56:49] And now we see Jay Gould taking the same idea and applying it to hey, which railroads give me a strategic advantage if I can overtake and consolidate them. That’s really cool. It’s really cool to me at least. And what’s even like cooler is the fact that he’s like, oh, I found my life’s work. This is what I’m going to do forever. Oh, this is so good. This is Jay’s words, this is what makes it like exciting for me. We are at a moment he wrote where there is a particular inevitable future waiting to be made. I see things very, very clearly. I feel inspired with an artist’s conception. My road is laid out before me in the plainest of ways. He’s talking about his path in life, not his railroad. He felt as if all the wheels had finally been installed in his life. Not only did he have professional focus, but also the meaning that is family, a wife, and child. This is so good.

Check out this writing. A wife and child to fight wars and build castles. Now that I am in this place, it is a puzzlement to me how I endured before. Everything prior seems to have been boxing in the dark, scraping without reason. Now I have my road to walk and my reason for walking it. So not only do I know what I’m doing in my life, I’m dedicating it to the consolidation of railroads and the building up of railroads. But I’m doing it for my family. 

6. The Semiconductor Madman – Brent Crane

When Zhao took over Tsinghua Unigroup in 2009, the Tsinghua University-adjacent firm1 was struggling with both its purpose and its profits. Zhao shifted its focus from consumer electronics to semiconductors at the perfect time: just four years before Beijing published its National Integrated Circuit plan, a component of the Made in China 2025 initiative, which called on China to domesticate 70 percent of its semiconductor needs by 2025 and reach parity with leading international chip companies by 2030. Beijing went on to flood the industry with an estimated $100 billion.

Zhao put all that money to use. He identified high performing smaller companies and gobbled them up — spending tens of billions in the process. Unigroup now has 286 subsidiaries, two of which — UNISOC and Yangtze Memory Technologies Co. (YMTC), an Apple supplier — are major players in the global chip industry, specifically for older model chips, such as chips for 3G. 

Given his swashbuckling style, Zhao — himself worth $2.2 billion last year — earned the nickname “the semiconductor madman” within the industry. Yet, like any madman, Zhao’s daring had a downside.

According to industry insiders, he developed a reputation as something of a “serial bullshitter,” with a penchant for excessive self-promotion. For instance, numerous sources indicate that Zhao was born in November — not April, which is when he claimed Xi Jinping wished him a happy birthday. 

He is also not known for being particularly strategic or wise in his financial decisions.

“Unigroup threw money around in this extraordinarily wild and reckless fashion,” says Chris Miller, an economic historian at Tufts University and author of Chip War: The Fight for the World’s Most Critical Technology. “If you’re looking to attract attention, Zhao knew how to do it.”

And attract attention he did. In July, Zhao, 55, was arrested alongside a dozen other leaders from China’s state-managed semiconductor industry.

No charges have been publicized — elite machinations in China are notoriously opaque — but the arrested individuals were targeted for “serious violations of discipline and laws,” which often implies corruption.

Others jailed include Xiao Yaqing, China’s Minister of Industry and Information Technology (MIIT); Ding Wenwu, manager of the “Big Fund”2, Beijing’s $50 billion quasi-governmental chip investment fund launched in 2014; and Diao Shijing, a former co-president of Unigroup. Others connected with the Big Fund, from academics to venture capitalists, have also been arrested or are under investigation by the Central Commission for Discipline Inspection (CCDI), an anti-corruption body.

While many observers say the arrests signify Beijing’s recognition of the enormous graft plaguing China’s chip industry, there are open questions about what the microchip dragnet means for the industry’s future, especially as Beijing’s ambitious goals come crashing into roadblocks from Washington…

… Whatever the reason, Beijing certainly has grounds to worry about its chip drive. Despite the dizzying sums invested into it, the industry remains years, even decades, away from achieving global dominance. Foreign firms are forecast to supply over half of China’s chip consumption until at least 2026, according to IC Insights, a U.S. semiconductor research group…

…Unigroup, which has since undergone “restructuring,” will remain a major player in China’s politically-charged chip sector. But the fall of Zhao and other chip giants suggests a reevaluation — some even say an abandonment — of Beijing’s silicon dreams.

Since the Trump administration, the U.S. and its allies have restricted key technologies and know-how from reaching Chinese chip firms, severely limiting China’s ability to keep pace with industry innovations. In October, the Biden administration introduced even tougher restrictions, including placing YMTC on the Entity List, which has dramatically upended China’s semiconductor grand strategy…

…“Would we be so anxious about [semiconductors] if there was no risk that Xi Jinping would invade Taiwan?” asks Willy Shih, a professor at Harvard Business School and member of an IC advisory committee for the Department of Commerce. “It’d be a very different picture. Before 2012, this never came up.” 

Now that it has though, the U.S. is taking significant action. In August, Washington adopted the $280 billion CHIPS and Science Act, which will provide $52 billion in subsidies and R&D investment for chip firms operating in the United States. Intel and TSMC are investing stateside as a result. The European Union proposed similar legislation last year with a $49 billion price tag, hoping to double its global market share to 20 percent by 2030. 

The Taiwanese public, polls show, are increasingly wary of the PRC as well — and its prized semiconductor industry is becoming more defensive as a result. Chinese chip firms have long been a regular presence in Taiwan, luring talent and, crucially, I.P. to mainland firms with salaries up to five-times higher than in Taiwan. 

But that, like so much in the global semiconductor ecosystem, is changing. A more bellicose and Covid-closed China lessened the country’s attraction for Taiwan’s IC workforce. The Taiwanese government, too, has made it harder for Chinese firms to attract talent, banning unregistered Chinese headhunters from operating on the island. The overall result has been less poaching and more suspicion…

… So how will companies like Unigroup proceed after the dust settles? One option is to abandon advanced chips and settle for the older technologies, a strategy which the greater Chinese chip industry seems to be shifting towards. 

“In the past few years, the more we tried to make up for our deficiencies, the more passive we have become,” said Wei Shaojun, an official at the China Semiconductor Industry Association, in a December live-streamed speech. “We should focus not on overcoming weaknesses, but on enhancing our strengths.” 

On the flip side, China could attempt more semiconductor “moonshots” — technology advances that don’t present much prospect for profit but that are strategically important. Ultraviolet lithography machines, for example, are a vital technology that China is currently restricted from accessing by U.S. sanctions. Although the hurdles remain high, some analysts and insiders are not willing to rule out such advances. Scott Moore, a Chinese tech expert at the University of Pennsylvania likens the situation to nuclear weapons and the failures of non-proliferation. 

“What technology is more tightly controlled than nuclear weapons?” he says. “But that has not stopped many countries that have said, ‘We’re willing to make any investment of resources into acquiring this technology.’” 

7. No Recession – Michael Batnick

It’s a new year, but recession fears still abound. Two-thirds of economists expect one in 2023. I was also in that camp in 2022, but now I’m not so sure.

We spoke with Derek Thompson last week about the economy’s prospects for 2023, and I did a lot of on the one hand, on the other hand. I can see both sides now more than ever. He made me choose between yes or no, and I surprised myself when I said, “No recession.”

The economic data that came out on Friday made me feel better about a possible soft landing.

With all eyes on inflation, the stock market would ordinarily respond negatively to a strong jobs number, but there was something inside this report that the market loved; wages. Earnings are one of the biggest drivers of inflation; unfortunately, it’s the hardest area for the fed to influence.  So when year-over-year numbers fell to 4.6%, their lowest level since last August, the market cheered. The fears of a wage spiral seem to have been overblown.

In an uncertain economy that faces a myriad of risks, the fed seems to be the biggest one. But now that we’re getting some good numbers on the wage front, the market is expecting them to slow down dramatically.  So what if after all this worrying about the fed being behind the curve and then going too far too fast, they actually pull off the soft landing? We’re already seeing signs that inflation peaked and is on its way down. The job market is strong, but wages aren’t spiraling. We still need to see stabilization in the mortgage market for the housing market to thaw out, but the good news is stocks are acting like that might happen.

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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, Apple, and TSMC. Holdings are subject to change at any time.

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

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

Here are the articles for the week ending 08 January 2023:

1. Base editing: Revolutionary therapy clears girl’s incurable cancer – James Gallagher

All other treatments for Alyssa’s leukaemia had failed.

So doctors at Great Ormond Street Hospital used “base editing” to perform a feat of biological engineering to build her a new living drug.

Six months later the cancer is undetectable, but Alyssa is still being monitored in case it comes back.

Alyssa, who is 13 and from Leicester, was diagnosed with T-cell acute lymphoblastic leukaemia in May last year.

T-cells are supposed to be the body’s guardians – seeking out and destroying threats – but for Alyssa they had become the danger and were growing out of control.

Her cancer was aggressive. Chemotherapy, and then a bone-marrow transplant, were unable to rid it from her body.

Without the experimental medicine, the only option left would have been merely to make Alyssa as comfortable as possible…

…The team at Great Ormond Street used a technology called base editing, which was invented only six years ago.

Bases are the language of life. The four types of base – adenine (A), cytosine (C), guanine (G) and thymine (T) – are the building blocks of our genetic code. Just as letters in the alphabet spell out words that carry meaning, the billions of bases in our DNA spell out the instruction manual for our body.

Base editing allows scientists to zoom to a precise part of the genetic code and then alter the molecular structure of just one base, converting it into another and changing the genetic instructions.

The large team of doctors and scientists used this tool to engineer a new type of T-cell that was capable of hunting down and killing Alyssa’s cancerous T-cells.

They started with healthy T-cells that came from a donor and set about modifying them.

• The first base edit disabled the T-cells targeting mechanism so they would not assault Alyssa’s body
• The second removed a chemical marking, called CD7, which is on all T-cells
• The third edit was an invisibility cloak that prevented the cells being killed by a chemotherapy drug

The final stage of genetic modification instructed the T-cells to go hunting for anything with the CD7 marking on it so that it would destroy every T-cell in her body – including the cancerous ones. That’s why this marking has to be removed from the therapy – otherwise it would just destroy itself.

If the therapy works, Alyssa’s immune system – including T-cells – will be rebuilt with the second bone-marrow transplant…

…”She’s the first patient to be treated with this technology,” said Prof Waseem Qasim, from UCL and Great Ormond Street.

He said this genetic manipulation was a “very fast-moving area of science” with “enormous potential” across a range of diseases…

…Dr Liu said the “therapeutic applications of base editing are just beginning” and it was “humbling to be part of this era of therapeutic human gene editing”, as science was now taking “key steps towards taking control of our genomes”.

2. Battered by Covid, China Hits Pause on Giant Chip Spending Aimed at Rivaling US – Bloomberg News

China is pausing massive investments aimed at building a chip industry to compete with the US, as a nationwide Covid resurgence strains the world’s No. 2 economy and Beijing’s finances.

Top officials are discussing ways to move away from costly subsidies that have so far borne little fruit and encouraged both graft and American sanctions, people familiar with the matter said. While some continue to push for incentives of as much as 1 trillion yuan ($145 billion), other policymakers have lost their taste for an investment-led approach that’s not yielded the results anticipated, the people said.

Instead, they’re seeking alternative ways to assist homegrown chipmakers, such as lowering the cost of semiconductor materials, the people said, asking not to be identified revealing sensitive negotiations.

That would mark a shift in Beijing’s approach toward an industry regarded as crucial to challenging American dominance and safeguarding Chinese economic and military competitiveness. It underscores how the country’s economic ructions are taxing Beijing’s resources and hobbling its chip ambitions — one of President Xi Jinping’s top priorities. That could have ramifications for spending in other critical areas, from the environment to defense…

…But the discussions now underway are in stark contrast to Beijing’s prior efforts of pouring colossal resources into the chip industry, including setting up the National Integrated Circuit Industry Investment Fund in 2014.

That vehicle lies at the heart of Xi’s unhappiness with Beijing’s prior philosophy. Known within the industry as the Big Fund, it drew about $45 billion in capital and backed scores of companies, including China’s chipmaking champions Semiconductor Manufacturing International Corp. and Yangtze Memory Technologies Co.

Xi’s administration grew frustrated that tens of billions of dollars funneled into the industry over the past decade haven’t produced breakthroughs that allow China to compete with the US on a more equal footing. In fact, SMIC and Yangtze, arguably the two most advanced Chinese semiconductor players, were crippled by US sanctions.

3. Mirror, Mirror on the Wall, Who Knew That Stocks Would Fall? – Jason Zweig

Countless hunches and gut feelings flicker through our consciousness over the course of a year. We naturally remember the ones that turn out to be right. The multitude of other hunches that turn out to be wrong go into our mental garbage can.

Looking back at yourself a year ago, what you know now has indelibly altered your perception of what you knew then.

This pattern, which psychologists call hindsight bias, makes us feel that we foresaw the future all along, what happened was inevitable and anybody who didn’t see it coming is a dope. It’s close to irresistible—and it’s an illusion.

That’s why I recommend an annual exercise I call the Hindsight Bias Buster.

Almost exactly a year ago, in the email newsletter I write for The Wall Street Journal, I asked subscribers to forecast, as of Dec. 31, 2022: 

• the closing value of the Dow Jones Industrial Average;
• the total return of the S&P 500;
• the yield on the 10-year U.S. Treasury note;
• the annual rate of inflation;
• the price of bitcoin;
• the price of gold;
• the price of crude oil;
• and the best-performing major financial asset.

Earlier this month, I asked subscribers to recall their predictions from one year ago—or what they would have forecast.

Readers attempting to reconstruct their past projections said, on average, that they would have called for the Dow to close out 2022 at 34269 and that the S&P 500 would fall 1%. (The day before I sent out this year’s survey, the Dow had closed at 33947, and the S&P 500 was down 14.8% for the year to date.)

Readers estimated, on average, that they would have predicted bond yields to hit 3% and bitcoin to hit about $30,850. (The 10-year Treasury yielded 3.6% the day before, up from 1.4% at the time of my original survey. Bitcoin was at $16,970—down from just under $46,900 a year earlier.)

In real time, at the end of 2021, readers predicted that the Dow would finish 2022 at 36853, on average, and that the S&P 500 would gain 6%—much higher than they now recall. They forecast that interest rates would hit 2% and expected the price of bitcoin to top $53,900. Only a single reader predicted that energy, which is up almost 60% so far in 2022, would be the top performer…

…“Wow, wow,” said Mr. Jones when I read him his original responses.

“Obviously my assessment of the stock market at the time was largely influenced by what it had been doing up to that point,” he said. “And now I’m fitting my past projections to the current set of data! It’s so interesting to see how my thinking is influenced by what has happened since then.”

The meaning of the present is almost always hidden until it becomes the past—at which point you can’t reconstruct your earlier state of ignorance.

That makes it all too easy to fool yourself into thinking you knew what would happen all along—which, in turn, can delude you into thinking now that you know what will happen next.

4. What the Fed Gets Wrong – Barry Ritholtz

There seems to be a lot of confusion going on today with respect to inflation, interest rates, and ongoing Federal Reserve policy. A framework for exploring this has many parts: What the Fed (obviously) knows, how it express those views through police like FOMC rates, ZIRP, QE, QT, etc.

There remains the question of what the Fed is actually wrong about…

…What are the major errors that are currently driving Fed policy?

• Tardy: We all understand that Central Bank policy operates on a lag. History suggests that the Fed’s recognition of key market and economic indicators also is on an excessive lag. The result is Fed is always late to the party.

Consider: In the 2010s, the Fed remained on emergency footing from 2008, when they took rates to 0 (zero) until December 2015 (this created lots of distortions).  Then again in the 2020s, they remained on emergency footing post-Covid, despite broad evidence of economic recovery.

The Fed was late to act on rising inflation, waiting a full year from the time CPI ran through their 2% target to raise rates (See chart at top). Today, it appears they are repeating that same error, late to recognize inflation peaked in June and goods’ prices have fallen dramatically.

• Services Inflation: What is the impact of the fastest increase in rates in history? High Fed Funds Rates are causing high mortgage rates which is in turn pricing many people out of buying residential real estate. The net result: Potential buyers become renters, which drives apartment prices higher. Owners Equivalent Rent is the largest portion of the CPI Services sector.

The perverse outcome is the Fed is making the CPI model show both higher and stickier inflation.

• The Wealth Effect: Jay Powell seems to be targeting assets prices, despite equities not being part of the dual mandate.

The reason for this is that the Fed has institutionally been “all in” on the Wealth Effect theory. The thinking here is that a rising stock market makes Americans feel wealthier, leading to more spending and higher inflation.

There are many problems with this claim, but let’s just give you the biggest two: Most Americans do not own equities; many of those who do have modest holdings in IRAs and 401ks that they won’t touch for years. Its hardly driving spending for 70-80% of consumers.

The second is simply confusing correlation with causation. The same underlying factors that drive higher stock prices – rising GDP, employment and wages – also drive consumer spending and inflation. Hence the Fed believes a rising stock market is what leads to inflation. If you stop to think about for even a moment, you will see they are utterly wrong about this.

5. China has started to sweet talk private sector again but actions speak louder than words – Wang Xiangwei

Over the past few years, China’s business tycoons have been a bundle of nerves. The country’s once soaring private sector have fallen down hard in the wake of unprecedented regulatory crackdowns on Big Techs and amid calls for common prosperity. Businesses ranging from e-commerce to education to real estate have seen their stock prices pummeled and their operations under increasing scrutiny. Their already gloomy prospects have been further dimmed by China’s three-year-old draconian Covid controls which have seriously disrupted production and supply chains. Above all, political uncertainty and concerns for their own personal wellbeing have made them jumpier.

As a result, many of China’s business elites slipped away and sought temporary shelter in foreign countries. An interesting pattern has emerged as to where they have their self-imposed unusually long “holidays” or “study tours”…

..No doubt, all of them are keeping a close watch on signals from the Chinese government on which way the wind is blowing in the wake of the Chinese Communist Party’s 20th congress in October when President Xi Jinping secured his third term as the party leader and packed the new leadership lineup with his allies with surprising ease…

…What is unexpected, however, is that the official readout signaled a remarkable change of tone towards the embattled private sector.

Compared to last year’s statement which focused on regulating wealth and preventing “barbaric” growth of capital when it came to private sector, the tone of this year’s statement is surprisingly friendly.

The readout urged strong support for private economy and private enterprises both in terms of policies and media publicity. It said that legal and institutional arrangements must be made to ensure the equal treatment of private firms and state-owned enterprises. Property rights of private firms and interests of entrepreneurs must be protected according to law, and officials at all levels should help private firms to solve their problems and do more practical work for their benefits.

More importantly, it said that greater efforts should be made to develop digital economy and support “platform enterprises” which usually refer to Big Techs such as Alibaba and Tencent Holdings, enabling them to “fully display their capabilities” in leading development, job creation and international competition…

…The change of tone is a good start but to regain the confidence of private sector, the Chinese leaders have much more to do.

Over the past decade, the government has consistently and publicly vowed to uphold the policy of working unswervingly to support and develop both the public sector and the non-public sector and giving them equal treatment.

The truth of the matter is that China’s overall private sector have taken one beating after another.

China’s regulatory clampdown on irrational growth in tech sector and its common prosperity campaign may have good intentions but the way those policies were implemented have spooked investors and raised fears about China’s future direction at home and abroad.

The consensus view is that China has shot itself in the foot by cracking down on its biggest tech companies. Despite repeated official clarifications, the common prosperity campaign has been widely interpreted as “robbing the rich to help the poor”.

The leaders may have signaled a change of tune towards private sector but the local authorities have not received the message. Over the past few days, this writer has heard complaints of mistreatment from several private businessmen and fund managers who have direct investments in the country.

One businessman who recently came to Hong Kong on way to a third country said that his businesses in multiple cities have received visits from the tax collectors who demanded them to pay back tax breaks and other subsidies the local authorities have previously given. The reason? The local authorities have run out of money because funding was diverted to mass testing and building makeshift hospitals over the past three years. The zero-Covid policy may have been dropped but their coffers have turned empty. The tax collectors were said to be polite but very firm that if the businesses did not pay promptly, they would soon launch very detailed tax audits.

This telling anecdote is just one of many challenges with which the private businessmen are grappling on a daily basis.

Broadly, to regain the confidence of private sector, Beijing must take concrete actions to honor its commitment to provide law-based protection to the property rights of private firms and interests of entrepreneurs. So far, there has been a lot of talk but little action..

6. Justifying Optimism – Morgan Housel

The constant human desire to one-up past successes, and the generational knowledge transfer, is a pure example of compounding in action.

Skateboarder Tony Hawk landed a 900 – two and a half spins – at the 1999 X Games. It was the biggest achievement the sport had ever seen, the equivalent of the four-minute mile.

It catapulted Hawk into legend status. His video game came out a year later and sold 30 million copies. Six Flags named a rollercoaster after him.

But here’s the craziest part of this story: fifteen years later, an eight-year-old landed a 900.

Hawk was also the first person to land a 720 (two spins) – a feat later accomplished by a second-grader.

A lot of sports work like that…

…Does the same hold true for technology, science, and business? Of course. A first-year med student today likely has more medical knowledge than an experienced senior doctor did 50 years ago. The average eight-year-old today knows things about technology that a computer science professor 30 years ago would find bewildering.

Innovation and advancement tend to compound. One person raises the bar over the previous limit, and that becomes the baseline for a new generation to aim for and build upon.

Part of that is a simple generational knowledge transfer. It’s pure compounding: People spend years or decades discovering a new truth, then the next generation begins their careers with those new truths.

Another part is driven by the need to one-up the current leader of a field. Charlie Munger says, “The world is not driven by greed; it’s driven by envy.” You see someone accomplish a new feat and think, “I should be able to do that too – and even better.”…

…As crazy as the world is, the core drivers of economic growth are still in place.

In his book The Birth of Plenty, investor William Bernstein writes that four things are necessary for long-term economic growth:

• Secure property rights.
• A scientific view of the world.
• Widely available and open sources of funding.
• Rapid communication and cheap transport of goods.

There is a long global history backing this up: When just one of those four is missing, progress stops. And as long as all four are in place, progress tends to take care of itself because of my first two points – stress-induced problem-solving and the compounding of knowledge.

As wild as things are – between Covid and political nonsense and inflation and market crashes – all four points are still in place. (The cost of transporting goods surged in 2021, but is already back to pre-Covid levels.)

7. 2022 Was One of the Worst Years Ever For Markets – Ben Carlson

This past year’s 18.1% loss was the 7th worst loss since the 1920s.

The bond market also had one of its worst years in history.

It was easily the worst year ever for the Bloomberg Aggregate Bond Market Index, which dates back to 1976.

In the 40+ years of calendar year returns there were only four down years before 2022:

• 1994 -2.9%
• 2013 -2.0%
• 2021 -1.5%
• 1999 -0.8%

The total return of -13% in 2022 was far and away the worst loss ever for this total bond market index.

There has only been one double-digit calendar year loss for 10 year U.S. treasuries since the 1920s. That was an 11.1% loss in 2009. Now we have two.

The benchmark U.S. government bond was down more than 15% in 2022, making it the worse year ever for bonds.

Add it all up and a 60/40 portfolio of U.S. stocks and bonds was down more than 16% in 2022. With both stocks and bonds down big this ended up being the third worst year ever for a diversified portfolio…

…I try to look at losses like this as sunk costs. They already happened. You can’t go back and change things now.

All that matters is what happens from here, not what happened in the past.

The beatings could continue until morale improves. There’s nothing that says markets will all of the sudden get better just because it’s a new year.

If you’re the type of person that likes to look for a silver lining in these things, there is some good news for investors going forward. The losses from 2022 have added yield to your portfolio…

…Expected returns are now higher.

I don’t have the ability to predict the timing or magnitude of those higher expected returns but there is now a much bigger cushion for investors than there has been in years as far as yields are concerned.

The other good news is every time we’ve ever had bad times in the past they turned out to be wonderful opportunities for long-term investors.

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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 Tencent. 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 18 December 2022:

1. Why Competitive Advantages Die – Morgan Housel

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BA: Right.

That’s a good point.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here are the articles for the week ending 11 December 2022:

1. Ideas That Changed My Life – Morgan Housel

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

3. AI Homework – Ben Thompson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

4. Why Finance is Hard to Decentralize – Byrne Hobart

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

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

5. Venture Capital Red Flag Checklist – Bill Gurley

1. “LETTING THE GOOD TIMES ROLL” 

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

…4. AVERSION TO AUDITS

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

…7. ODD CORPORATE LOCATION

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

…9. OVERLAPPING CORPORATE INTERESTS

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

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

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

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

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

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

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

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

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

So just how miserable are Americans right now? 

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

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

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

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

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

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

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

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

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

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

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

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

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 04 December 2022:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Joe: Could we see $200 oil this year?

Pierre: Yes, I think so. Yes.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Liberty RPF:

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

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

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

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

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

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

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

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

…Liberty RPF:

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

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

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

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

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

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

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

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

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

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