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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 27 November 2022:

1. CICERO: An AI agent that negotiates, persuades, and cooperates with people – Meta AI Blog

Games have long been a proving ground for new AI advancements — from Deep Blue’s victory over chess grandmaster Garry Kasparov, to AlphaGo’s mastery of Go, to Pluribus out-bluffing the best humans in poker. But truly useful, versatile agents will need to go beyond just moving pieces on a board. Can we build more effective and flexible agents that can use language to negotiate, persuade, and work with people to achieve strategic goals similar to the way humans do?

Today, we’re announcing a breakthrough toward building AI that has mastered these skills. We’ve built an agent – CICERO – that is the first AI to achieve human-level performance in the popular strategy game Diplomacy*. CICERO demonstrated this by playing on webDiplomacy.net, an online version of the game, where CICERO achieved more than double the average score of the human players and ranked in the top 10 percent of participants who played more than one game.

Diplomacy has been viewed for decades as a near-impossible grand challenge in AI because it requires players to master the art of understanding other people’s motivations and perspectives; make complex plans and adjust strategies; and then use natural language to reach agreements with other people, convince them to form partnerships and alliances, and more. CICERO is so effective at using natural language to negotiate with people in Diplomacy that they often favored working with CICERO over other human participants.

Unlike games like Chess and Go, Diplomacy is a game about people rather than pieces. If an agent can’t recognize that someone is likely bluffing or that another player would see a certain move as aggressive, it will quickly lose the game. Likewise, if it doesn’t talk like a real person — showing empathy, building relationships, and speaking knowledgeably about the game — it won’t find other players willing to work with it.

The key to our achievement was developing new techniques at the intersection of two completely different areas of AI research: strategic reasoning, as used in agents like AlphaGo and Pluribus, and natural language processing, as used in models like GPT-3, BlenderBot 3, LaMDA, and OPT-175B. CICERO can deduce, for example, that later in the game it will need the support of one particular player, and then craft a strategy to win that person’s favor – and even recognize the risks and opportunities that that player sees from their particular point of view…

…Past superhuman agents in adversarial games like chess, Go, and poker were created through self-play reinforcement learning (RL) – having the agents learn optimal policies by playing millions of games against other copies of itself. However, games involving cooperation require modeling what humans will actually do in real life, rather than modeling what they should do if they were perfect copies of the bot. In particular, we want CICERO to make plans that are consistent with its dialogue with other players.

The classic approach to human modeling is supervised learning, where the agent is trained with labeled data such as a database of human players’ actions in past games. However, relying purely on supervised learning to choose actions based on past dialogue results in an agent that is relatively weak and highly exploitable. For example, a player could tell the agent, “I’m glad we agreed that you will move your unit out of Paris!” Since similar messages appear in the training data only when an agreement was reached, the agent might indeed move its unit out of Paris even if doing so is a clear strategic blunder.

To fix this, CICERO runs an iterative planning algorithm that balances dialogue consistency with rationality. The agent first predicts everyone’s policy for the current turn based on the dialogue it has shared with other players, and also predicts what other players think the agent’s policy will be. It then runs a planning algorithm we developed called piKL, which iteratively improves these predictions by trying to choose new policies that have higher expected value given the other players’ predicted policies, while also trying to keep the new predictions close to the original policy predictions. We found that piKL better models human play and leads to better policies for the agent compared to supervised learning alone…

…While CICERO is only capable of playing Diplomacy, the technology behind this achievement is relevant to many real world applications. Controlling natural language generation via planning and RL, could, for example, ease communication barriers between humans and AI-powered agents. For instance, today’s AI assistants excel at simple question-answering tasks, like telling you the weather, but what if they could maintain a long-term conversation with the goal of teaching you a new skill? Alternatively, imagine a video game in which the non player characters (NPCs) could plan and converse like people do — understanding your motivations and adapting the conversation accordingly — to help you on your quest of storming the castle. 

2. Pressure on the Hong Kong Dollar Peg Keeps Building – Richard Cookson

The HKMA has a mandate to keep the currency trading in a range of HK$7.75 to HK$7.85 per US dollar. The current band was set in 2005 and has never been broken. When it gets too close to either end of the band, the HKMA intervenes, either by buying or selling the city’s currency. As the chart below shows, the currency has traded at the extreme weak end of the range for most of the year, pressured by the rising US dollar. That pressure has subsided somewhat recently as interest-rate expectations have eased a bit. But this is only likely to be short-term relief, because the social and economic costs of defending the peg are huge. The Hong Kong dollar peg is like being on the gold standard, and like the gold standard the frailties of such mechanisms are always social and economic.

Because of the peg to the US dollar, Hong Kong has no independent monetary policy; it has had to follow the Federal Reserve and tighten at a time when it should be doing the opposite. If the Chinese economy as a whole has struggled mightily due to its extraordinary “zero-Covid” policies and the mother of all debt-bubble hangovers, Hong Kong’s has done even worse, shrinking 4.5% in the third quarter from a year earlier. The benchmark Hang Seng Index is down by almost half since its high in 2018 even after a recent bounce.

With growth going in the wrong direction and the HKMA having to raise rates, Hong Kong has had to resort to the only option for countries on currency pegs: massive government spending. There is very limited room, though, for any country to ramp up fiscal spending without investors worrying about the accompanying increase in borrowing (debt) and sustainability of the peg. Small wonder, then, that fiscal policy has done little to soften the savage downturn.

Nor is this merely a cyclical problem. Hong Kong’s best days are behind it. China’s political interference has only risen. The working population, especially higher earners in finance, is shrinking. I doubt the weakness is merely cyclical and if it isn’t, Hong Kong’s tax base has been permanently eroded. Which is a problem, for Hong Kong is now a massively leveraged economy. 

That the government has very little debt is not really the point because private sector debt more than makes up for it. Andrew Hunt, an independent economist who has followed Asia closely for decades, points out that foreign debt is almost $500,000 for each person working in Hong Kong. Domestic debt levels have doubled since 2007, according to the World Bank. Property debt has grown especially fast, and despite a drop in prices that shows every sign of gathering momentum, Hong Kong property is still among the world’s most expensive.

It is that huge surge in debt, falling asset prices, and ever cloudier outlook for Hong Kong’s economy which makes defending the peg so much more problematic than during the Asian crisis of the late 1990s. You can see the effects of all this in the HKMA’s Exchange Fund, which, among other things, manages Hong Kong’s foreign-exchange reserves. Its assets have tumbled to $417 billion from $500 billion late last year, according to the HKMA, its largest drop ever. 

3. Estée Lauder: A Success Story – David Senra

[00:12:03] Okay. So I’m going to jump into the book. I will point out to you where I think the parts were Estée fits this methodology. There’s just a ton. Like there’s just a ton to learn from her. She talks about — this is very fascinating because one of the things is like you have to know the history of your industry. And she points out that she can build a business around things that are just not changing.

She points out that beauty is an ancient industry. This is going to — this is kind of an echo of the idea. One of my favorite idea is from Jeff Bezos about this idea, it’s like everybody talks what’s going to change in the next 10 years.

He’s like you should ask the opposite question. What’s not going to change in the next 10 years because those are the things that you can build a business around and then when you invest time and energy, like since they’re going to be around for 10 years, you can actually get like return on that investment.

So in Amazon’s case, he’s like I asked myself in 10 years from now, I knew that my customers would want — today and 10 years from now, they’re going to want a wide selection of products. They’re going to want low prices and fast deliveries. He’s like no customer 10 years from now is going to come to say, “Hey, Jeff, I wish you deliver the packages a little slower.” “Hey, Jeff, I wish you raised your prices.”

So he says I invested a lot of time and energy in those principles. So he says beauty has always commanded attention. In a perfect world, we’d all be judged by the sweetness of our souls. But in our less than perfect world, the woman who looks pretty has a distinct advantage. Beauty secrets have been passed on from mother to daughter through the ages. Primitive women painted their faces with berry juice. Nero’s Roman beauties widened their faces with chalk.

From Cleopatra’s fabled milk bath to the ancient Egyptians pot of black kohl, from the rouge flapper cheeks of the 1920s, you can clearly see she studied the history of her industry. That’s the point of this, to all the way to see Estée Lauder’s soft magic. Women have always enhanced their God-given looks. It has always been so. It will always be so. And so on the very next page, we see another Jeff Bezos idea.

[00:14:00] This idea that missionaries make better products. Beauty for her was a mission. It was not just a product. An interesting point, beauty is the best incentives to self-respect. You have — you may have great inner resource, but they don’t allow — but they don’t show up as confidence when you don’t feel pretty.

People are more apt to believe you and like you when you look fine. And when the world approves, self-respect is just a little easier. The pursuit of beauty is honorable. And she goes on about this for quite a while. This is more on the history of beauty and its universal appeal, which again, these are just — the way to think about this is the foundation on which she built her business or her empire is a better way to put it.

Beauty is a fine invention. The art of inventing beauty, which is what she does, transcends class, intellect, age, profession, geography, virtually every cultural and economic barrier. There isn’t a culture in the world that hasn’t powder, perfumed and prettied its women. Love has been planted, wars won and empires built on beauty. I should know, I’m an authority on all the three. Love, wars and empires have been woven into my personal tapestry for decades. I’ve been selling beauty ever since I could recognize her…

…So her father owned a hardware store. They have a gang of kids. There’s like 10 kids or something like that and they’re all having to work in the family business as well. And so she’s taking lessons that she learns in the hardware store and to apply them to her business. The Estée Lauder business later.

She says my father’s hardware store was my first venture into merchandising. I loved to help him arrange his wears. My special job was creating window displays that would attract customers, how I love to make those windows appealing. She’d work on gift wrapping and by covering a hammer or a set of nails with extravagant bows and papers, which really did seem to delight his customers. And this is something she talks about over ever.

She’s obsessed with packaging to an extreme degree. Wait until I tell you what she does. She spends weeks debating just the color of like the jars that hold her creams in. She’d go to extreme levels of detail. Again, this is not a job. This is a mission, a love affair is one way to think about it for her.

[00:20:04] So she’s packaging — this is the first time she mentions packaging in the book, but she talks about it a lot. So she says packaging requires special thought. You could make a thing wonderful by changing its outward appearance. Little did I think I’d be doing the same thing, multiplied billion fold in not too many years.

There may be a big difference between lipstick and dry goods, between fragrance and doorknobs, see how she’s talking about what she learned in the hardware store and applying it to later on. But just about everything has to be sold aggressively. I honed my techniques as I played with the wears at my father’s store. I wedded my appetite for the merry ring of a cash register. I learned early that being a perfectionist and providing quality was the only way to do business. I knew it. I felt it.

And so now we have Estée talking about the advantage that you have if you actually love what you do because so few people actually do that, go back to what Bill says, if you’re faking it, you’re going to get smoked by somebody that’s not faking it…

…It’s a fantastic maximum. So this is also one of my favorite ideas that I learned when the first time I read the book about a year and a half years ago. She calls it the sales technique of the century. Again, I would say Claude Hopkins had figured this out as well. Albert Lasker, a bunch of advertising people, but this is fantastic. Now the big secret. I would give — she was the first — Estée was the first one to use this technique in the beauty industry. Now you see all of them.

Now the big secret. “I would give the woman a sample of whatever she did not buy as a gift. It might be a few teaspoons of powder in a wax envelope. Perhaps I’d shave off a bit of lipstick and tell her to apply it to her fingers. Perhaps in another envelope, I would give her a bit of glow.” I don’t know what that is. “The point was this, a woman would never leave empty-handed” that’s her point. I did not — this is such a good idea, too. I did not have an advertising budget. She’s going to talk about this later. I did not — maybe she talks about it now. Let me not jump ahead.

I did not have an advertising department. I did not have a copyrighter, but I had a women’s intuition. I just knew even though I had not yet named the technique that a gift with purchase was very appealing. In those days, I would even give a gift without a purchase. The idea was to convince a woman to try the product. Having tried it at her leisure in her own home and seeing how fresh and lovely made her look, she would be faithful forever. Of that, I had not a single doubt. And so you see this. I think this is a well-known idea now…

…[01:08:10] Okay. So I need to choose — at this point in the company’s history, she starts to expand. She’s just in the United States, She’s going to expand to Europe and then she’s going to expand to Canada. I’m going to tell you great ideas or just crazy ideas about both experiences. This is how she does it. She always shot for the top. So she wanted to be — if she’s going to break into a new market, she wanted to be in the very best retailer in that country.

In America, she thought that was Saks; in London, she thinks that’s Harrods. I would start with the finest store in London, which was Harrods. And if I did that, all the other great stores would follow. So she talks to the buyer. Simply not interested was the unmistakable message. This is going to take a few years for her to do this. So okay. No one’s — not even wanting to talk to me.

A little media — so what she’s doing, well if I’m here, a little media attention was called for. I visited the beauty editors of various magazines. This is in London. She talks to the — she’d do the same thing, give them gifts, give advice, make them up, okay? Yes, they’d be happy to write a piece about my products. What store in London would be carrying them. My products are not available in London had to be my reply.

Well, she answered, I’ll write a piece saying that Estée Lauder’s cosmetics will be coming soon. Again, I went to Harrods. Again, the answer was no. There was no space at this time. There was no call for my products. This wasn’t the right time of year, maybe another time, et cetera, et cetera. I stayed in England for a month visiting every beauty editor to make my name known. I was getting write-ups, but no Harrods order. It was looking very bleak.

The next year, I went back to London and Harrods. So now she talks to the same buyer. This is a year later. She was not as quite as hostile, but she says, let me tell you, I have no room here, as I told you before, she said, but perhaps I could take a tiny order and put it in with the general toiletries. It won’t be next to the good cosmetics. That you’ll have to understand, Ms. Lauder. So she gets a tiny order, not in a place she wants. It’s not a victory yet. I visited every one of those beauty editors, again to remind them of me. Another round of makeups, another round of samples.

[01:10:05] Do you think you might write another piece I ask now that we’re in London at Harrods. The articles appeared. Customers also appeared. I was on my way. Women became — remember how it’s kind of like going up from getting the demand from the ground up. Just how she did with Saks, if you were to think about it. Customers also appeared. I was on my way. Women began asking for Estée Lauder. That’s why I just said what I said to you.

The Harrods buyer was reluctant to notice, but she had no choice. In the flush of a good week sales, I summon up the courage to ask if she could give me a more important counter. Oh, no, she said, “Other counter space is definitely not available.” About 6 months later, I made my third trip to London, Well, we seem to have many London women asking for your product. She grudgingly admitted. I think we’ll give you a small spot at a more prestigious counter. And that was how Estée Lauder came to Europe.

4. “Sokaiya”: Japan’s Corporate Racketeers – O-Tone

Defining “Sōkaiya” is as difficult as defining Geishas. They could be fixers for a firm, making bad press go away. Or extortionists, demanding money from a company to keep quiet.  

Originally, “Sōkaiya” were unconnected to organized crime. In literature “Sōkaiya” were first mentioned in the late nineteenth-century. A time when the majority of private enterprises in Japan were organized as unlimited liabilities. Entrepreneurs would frequently solicit assistance of “Sōkaiya” to protect their business and personal fortunes negatively impacted by rumours and scandals. In that respect “Sōkaiya” can be compared to corporate lawyers in the U.S.

During the post war period “Sōkaiya” remained useful for corporate Japan by turning into “general meeting specialists”. After Japan’s high growth era of the 1950’s and 1960’s the society became more politically engaged. Social activism was on the rise, for example criticizing pollution by Japanese companies. With the help of “Sōkaiya”, acting on behalf of the corporation, those protests were muted or silenced.

Chisso Corporation serves as a good example. The company had been polluting a river close to its factory with mercury for years (Minamata pollution). “Sōkaiya” were hired by the corporation at the AGM following the scandal. An aggressive mob shouted down environmental activists and the victims. Much to the liking of management the AGM ended quickly.

It is said that Yakuza started to realize the profit potential of “Sōkaiya” in the mid 1960’s, actively tying up with various “Sōkaiya” groups. The outcome was a hybrid “Yakuza- Sōkaiya”, specialized in racketeering corporate Japan. It is that hybrid that most Western observers refer to when talking about the phenomenon.

Their activities followed a standard procedure. Purchase the minimum number of shares to be eligible to attend a company’s AGM. Before the AGM contact executives threatening to troll them personally or the company in general at the shareholder meeting. Think: real/ imaginary facts about product liability claims, irregularities and payoffs and/ or pointing to personal misconduct, love affairs, etc. If the company had an interest in the AGM proceeding smoothly, they would have to pay off the racketeers by purchasing absurdly expensive subscriptions to useless magazines, paying rent for office plants, etc.

If companies refused, an armada of trolls would stir up the AGM like in aforementioned JAL case. Sometimes, racketeers even started vandalism: Spraying paint, lighting fires, throwing bottles at the chairman’s desk.

5. TIP497: Lessons From Billionaire Howard Marks – Clay Finck

[00:01:50] What is the most important thing in investing? This is the question that Howard Marks would be challenged with when investing for clients in developing a philosophy. Except there is not just one thing when it comes to investing. There is a multitude of different things that are really important, and if we misassess any of them as investors, then we run the risk of having suboptimal outcomes.

[00:02:13] In the end. As Marks states quote, successful investing requires thoughtful attention to many separate aspects, all at the same. Omit anyone and the result is likely to be less than satisfactory. Marks also states that his book isn’t a step-by-step guide for learning how to invest, but rather a book that covers the investment philosophies that he uses in his own process.

[00:02:37] The ideas presented in his book are intended to be timeless in a world that is constantly changing. Ironically, Marks goal isn’t to simplify investing, but rather make it clear just how complex it actually. Marks says that the most important key to his successful investment career has been an effective investment philosophy, developed and honed over time for more than four decades, and implemented consciously by highly skilled individuals who share his culture and values…

…Next I wanted to transition to talk about Marks’s comments on risk. The essence of investing consists of dealing with the future, and because the future isn’t certain at any point, then risk is inescapable.

[00:11:15] Thus, understanding risk and handling risk effectively is essential to being a successful investor. When you’re considering an investment, you shouldn’t just analyze the potential returns, but also the risk as well. Risk obviously isn’t preferred, so if two investments have similar return profiles, but one has more risk, then we’d obviously prefer the investment that has less risk.

[00:11:39] On the same line of thinking, the return of a portfolio doesn’t tell us whether the investment manager did a great job or not. If a fund manager achieved a 10% return, but only held two stocks, applied leverage, or only invested in Microcaps, then a 10% return might not be sufficient for the level of risk that was taken.

[00:11:59] This would mean that the manager actually did a poor job of allocating capital when taking into consideration the risk that was taken. The theory behind risk and return for an investment is that for a riskier investment to be deemed investible, it must offer prospects of higher returns. So those that believe they don’t mind taking on more risk, may think that the secret to receiving higher returns is just to simply increase your risk, and that’s really not the case either.

[00:12:28] If riskier investments reliably produce higher returns, then they wouldn’t actually be riskier. A better way to think about it is that the future is far less certain for a riskier investment, a high flying growth company that is growing at 50 or a hundred percent per year. The bull case says that there is so much upside it will be significantly larger many years down the road.

[00:12:50] That’s what happened to a company like Amazon. They just freely never quit growing. The Bear case for a high flying growth company is that because they are growing and there is a lot of money to be made, this encourages competition to come in and eat at those profits and try and steal market share. So eventually the growth slows and the optimistic prospect doesn’t pan out and the stock price really suffers.

[00:13:13] You know, the example here is a company like Peloton. Now let’s compare the high flying growth company to something like a 10 year US Treasury. The US Treasury is perceived as less risky because it’s extremely likely that you will get your coupon payments that you agree to over the length of that investment.

[00:13:32] The outcomes are very certain. Whereas with the high growth company, there is a wide range of potential outcomes. Either it does really, really well in gross for a long time, or the growth stalls and the stock price goes nowhere or way down or somewhere in the middle. Now when looking at a spectrum of all investments, we could put money in, you have the US Treasury on the very low risk, highly certain area, and then you have the high flying growth company, which is higher risk and you know, wide range of potential outcomes.

[00:14:00] And then you have all these investments in between where you know you have your value stocks, your deep value, and your regular growth stocks. So there’s kind of a spectrum of risk and return and how certain we can be about the future for all these investments. Marks states that when riskier investments are priced fairly, they should have higher expected returns, as well as the possibility of low returns, and in some cases the possibility of losses.

[00:14:26] I think a lot of people have been fooled on taking on more risk in their investments without recognizing the potential for really bad outcomes, such as what we’ve seen with many companies in 2022 in actually defining risk. Marks has the same view as Warren Buffet. While academics view risk purely as volatility, Marks views it as the permanent loss of capital.

[00:14:49] If you’re almost certain that a company is trading below its intrinsic value, then they don’t really care too much about the volatility of the investment, as long as you have a long time horizon and you’re certain that you won’t lose any money if your thesis is correct. Now, risk of loss does not necessarily come from weak fundamentals.

[00:15:07] Even the worst companies can make great investments as we know from studying the early days of Warren Buffet or Benjamin Graham. Another risk with investing is having psychological biases when making the decision to purchase a particular investment. For example, investors tend to believe that exciting stories and stocks that have performed well as of late will continue to be high performers of the future.

[00:15:30] Many times the investments that have had the best recent performance are actually the riskiest stocks or companies to own because of the potential irrational exuberance associated with the company or sector. I think the most difficult thing when it comes to risk is how we quantify it. If you ask 10 people what the risk of a particular stock was, you’d probably get 10 different answers.

[00:15:53] And I think this is a big reason why academia decided to define risk as volatility, and it’s because you can just put an actual number on it. While some investors might say, risk is your chance of losing money over the holding period, that’s practically impossible to quantify. Risk is subjective, hidden, and something we just can’t quantify, which can make investing really difficult.

[00:16:17] Marks says that quote, skillful investors can get a sense for the risk present in a given situation. They make that judgment primarily based on A, the stability and dependability of value, and B, the relationship between price and value. Other things will answer into their thinking, but most will be assumed under these two…

…[00:20:52] Cycles are so important to understand because when we recognize them, we’ll be able to take advantage of them as investors. Eventually, I’m going to be covering Ray Dalio’s work. Dalio’s someone who popularized the idea of the long term debt cycle. Marks has a chapter in his book dedicated to cycles because of the big role cycles play in our overall economy.

[00:21:16] markets don’t move in a straight line up or a straight line down. They move in cycles. Optimism is followed by pessimism. Companies rise and companies fall. People in human emotions are a big driver of cycles. When people are optimistic about the future, they spend more, they save less, they borrow more, and this all stimulates the economy.

[00:21:37] Thus, this can push up the prices of stocks, the price of homes, and the price of other assets. And this leads people to feeling wealthier. You know, it’s this idea of the wealth effect. This can be a reinforcing cycle, which pushes upwards and upwards and upwards and you know, creates bubbles because things can’t be perfect and good forever.

[00:21:56] Eventually the cycle reverses the other way. People become cautious, they start to save more money, spend less, borrow less. This decrease in spending can lead to the economy contracting and potentially even to a flow of bankruptcies as the economy ends up not being as strong as some anticipated. Marks states that cycles will never stop occurring.

[00:22:18] In that every decade or so people will decide that sick locality is over. They think either the good times will roll on without end, or the negative trends can’t be finished at such times. They talk about virtuous cycles or vicious cycles, self feeding developments that’ll go on forever in one direction or another where people will say, this time’s different.

[00:22:40] This bull market’s not going to end for quite a while, or This bear will never end. He also says that quote, ignoring cycles and extrapolating trends is one of the most dangerous things an investor can do. People often act as if companies that are doing well will do well forever, and investments that are outperforming will outperform forever in vice versa.

[00:23:02] Instead, it’s the opposite. That’s more likely to be true. All of this reminds me so much of 2020 and 2020. Stocks went up so fast after the Federal Reserve provided a massive boost to the markets that many people just assume that this could go on for quite some time and it really couldn’t be further from the truth.

6. Past Performance – Joshua Brown

Stocks have been the best asset class in terms of outperforming inflation over the last century. We know this for certain. Over the last seventy years, stocks are undefeated versus inflation, but only over the longest time horizons. Stocks have outperformed inflation 100% of the time over all twenty year periods.

Can this past performance fail to show up in any future twenty year period? Of course it can. Never say never. Will stocks always be the best asset class versus inflation? Maybe not. Maybe bonds end up working better over the next two decades. Maybe cash. Maybe commodities or real estate or gold or CrackCoin or whatever else. We know anything is possible, which is why investing involves risk.

But when something has consistently worked over seven decades, without fail, regardless of all other conditions and variables, perhaps it’s best to take that risk rather than not. Even with the full acceptance of the Past Performance caveat…

…How do stocks beat inflation? Allow me to oversimplify the story for the benefit of people who aren’t looking for a grad school-level dissertation the morning after Thanksgiving…

The stock market is valued on earnings (profits) and these earnings are reported in nominal terms. If Colgate sells you toothpaste for $2 in 2019 and then sells you that same tube of toothpaste three years later in 2022 for $4, the nominal revenue growth they are reporting to shareholders is 100%. Has Colgate’s cost to make, ship, market and sell that toothpaste gone higher? Yes. Is that cost higher by 100% thereby completely offsetting the revenue growth gain? Probably not. So revenue growth leads to earnings growth, even net of higher operating costs in an inflationary environment. This is how inflation actually helps companies grow their earnings up until a certain point where costs rise too much or demand destruction occurs.

7. The Most Important Skill in Finance – Ben Carlson

The most important skill in finance has nothing to do with math.

Creating the best discounted cash flow models in the world won’t help you raise assets from prospective clients. No one really cares about your Microsoft Excel skills if you can’t explain what they’re good for. Spreadsheets aren’t nearly as important as soft skills.

Warren Buffett once said, “The most important skill in finance is salesmanship.”

Everyone is in sales in some capacity. If you want to get married you have to sell yourself to a prospective spouse. If you want to get hired you have to sell yourself to a prospective employer. If you want to sell a product or service you have to convince people that it’s worthwhile. If you want people to buy into your ideas you have to sell them in a way that people understand them.

The best story usually wins outs.

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

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Here are the articles for the week ending 20 November 2022:

1. What to Watch in AI – Mario Gabriele and guests

Is there any profession as quintessentially right-brained as an “artist?” Or one as left-brained as a “programmer?”

What’s been so remarkable to us about the rapid evolution that has characterized the last year, especially in the large language models, is how they’re now powering assistive tools that radically increase productivity, impact, and value across a wide range of professions.  

For artists, we’ve got AI image-generation tools like OpenAI’s DALL-E, Midjourney, and many others. For programmers, we’ve got Microsoft’s GitHub Copilot, which helps software developers write, test, and refine code in many of the most currently popular computer languages.

While some AI skeptics characterize large language models as brute-force prediction machines that won’t ever imbue computers with anything like human intelligence or consciousness, what we see, in mind-blowing practice, is how profoundly these kinds of AI tools are already beginning to enhance human flourishing.

What Copilot does for developers and DALL-E does for visual creatives of all kinds is reduce or eliminate rote, time-consuming, but still crucial aspects of their jobs. Of course, this dynamic is hardly unique to software developers and artists. Large language models are trained on massive quantities of text data, then incorporate what they “learn” to generate statistically probable (contextually sensible) output to user-supplied prompts. So while Github Copilot was trained by ingesting massive quantities of computer code, different versions of Copilot are equally possible for virtually any profession.

A Copilot for attorneys, for example, could help them draft contracts, motions, briefs, and other legal documents based on natural language queries, previous cases, and best practices. It could also suggest relevant precedents, statutes, and citations, or flag potential errors, inconsistencies, or risks in existing documents.

A Copilot for architects could help them design, model, and optimize their buildings and structures based on their specifications, constraints, and objectives. It could also generate interactive visualizations and help scope out the environmental, social, and economic impacts of projects.

Imagine a world where millions of professionals across thousands of industries use domain-specific versions of Copilot to soar faster and higher to new levels of productivity, accuracy, and creativity. A world where professionals across all industries can use general-purpose tools like our portfolio company Adept’s Action Transformer to harness the power of every app, API, or software program ever written via interfaces that allow them to describe the tasks they want to accomplish in plain language.

In dystopian visions of the future, technology in general and AI in particular are often characterized as forces that will lead to an even more polarized world of haves and have-nots, with the bulk of humanity being disenfranchised, marginalized, and immiserated by machines.

In the world we actually see evolving today, new AI tools effectively democratize facility and efficiency in unprecedented ways. In doing so, they’re empowering individual professionals to achieve new productivity levels and society to achieve gains that may exceed those unleashed by the Industrial Revolution. Not only that, but people will also find their jobs more engaging and fulfilling because they’ll have more time to focus on the most creative, strategic, and novel aspects of them.

This future is here. There will be an AI amplifying tool for every major profession within five years. These tools can catalyze human excellence across occupations – right brain, left brain, and any brain.

– Reid Hoffman, cofounder at Greylock, and Saam Motamedi, partner at Greylock…

…It’s been another hot summer in AI. We’ve seen the rise of new research collectives that open-sourced breakthrough AI models developed by large centralized labs at a never before seen pace. While these text-to-image/video models offer viral consumer-grade products that capture our imagination, the most impactful applications of these models are unlikely to be their first-order effect. I believe the place to build is at the intersection of AI and science, specifically in the life sciences. 

Today’s scientific method is firmly rooted in data-driven experimentation. The resolution and scale of the data we can generate to explain biological systems are continually improving while develop AI model architectures capable of modeling human language, natural images, or social network graphs. These architectures can be directly transferred into modeling proteins’ language, cells’ images, or chemical molecule graphs. This uncanny generalization ability is now unlocking breakthroughs in protein structure prediction and drug molecule design. AI is driving a new generation of technology-driven biotech companies (“TechBio”) attacking the trillion-dollar pharmaceutical industry to deliver improved medicines faster and at a lower cost. 

With Air Street Capital, I have invested heavily in companies driving this industry forward. One of the companies I’ve backed is Valence Discovery, which develops generative design methods to create new classes of potent drug molecules previously out of reach due to the requisite design complexity. Valence is pursuing ultra-large generative chemistry initiatives with leading research institutions to push the boundaries of today’s generative AI methods for drug design. 

One founder in this space is Ali Madani, who led an AI for protein engineering moonshot called ProGen at Salesforce Research. There he developed large language models specifically applied to designing brand-new artificial proteins that recapitulated or even outperformed the function of their naturally occurring peers. The group produced the first 3D crystal structure of an AI-generated protein. Proteins are the functional actuators of all life, and the possibilities a technology like this might unlock are vast. 

– Nathan Benaich, General Partner at Air Street Capital…

…Artificial intelligence will transform how we use pharmaceuticals to treat human illness.

When people think of AI and pharma, the application that most often jumps to mind is AI for drug discovery. (For good reason: AI-driven drug discovery holds tremendous potential.)

But there is another compelling machine learning use case that, while less widely covered (and less zealously funded), promises to bring life-changing therapeutics to market faster and more effectively for millions of patients. This is the use of digital twins in clinical trials.

It is well-documented how inefficient and expensive clinical trials are today, with the average new drug requiring over a decade and $2 billion to bring to market. Recruiting trial participants is one major stumbling block in shepherding a drug through clinical trials. A single trial requires recruiting hundreds or thousands of volunteers to populate its experimental and control arms. This has become a significant bottleneck. Eighty percent of clinical trials experience enrollment-related delays, with trial sponsors losing up to $8 million in potential revenue per day that a trial is delayed. Hundreds of clinical trials are terminated each year due to insufficient patient enrollment; indeed, this is the number one reason that clinical trials get terminated.

“Digital twins” offer a transformative solution to this challenge. The basic concept is simple: generative machine learning models can simulate placebo outcomes for patients in clinical trials. This can be done at the individual patient level: a digital twin can be created for each human trial participant in the experimental arm of a trial, simulating how that individual would have performed had they instead been in the control arm.

Crucially, this means that pharmaceutical companies need to recruit significantly fewer human participants because much of the control arm patient population can be replaced by digital twins. This makes clinical trials significantly faster and cheaper, enabling life-changing therapeutics to more quickly come to market and reach millions of patients in need.

San Francisco-based Unlearn is one AI startup at the forefront of this transformative technology. Unlearn is currently working with some of the world’s largest pharma companies, including Merck KGaA, which is deploying the startup’s digital twin technology to accelerate its clinical trials. Earlier this year, the European Medical Agency (Europe’s version of the FDA) officially signed off on Unlearn’s technology for use in clinical trials, major regulatory validation that the technology is ready to be deployed at broad scale.

A few years from now, expect it to be standard practice for pharmaceutical and biotechnology companies to incorporate digital twins as part of their clinical trial protocols to streamline a therapeutic’s path to market.

It’s worth noting that digital twins for clinical trials represent a compelling example of generative AI, though it has nothing to do with buzzy text-to-image models. Producing simulated placebo outcomes for individual patients is an excellent example of how generative machine learning models can have a massive real-world impact – and create billions of dollars of value.

* Disclaimer: The author is a Partner at Radical Ventures, an investor in Unlearn.

– Rob Toews, partner at Radical Ventures 

2. RWH016: The Best Of The Best w/ François Rochon – William Green and François Rochon

[[00:11:52] William Green: So you quit engineering after maybe three years of discovering the joy of real serious investing and went to work for a, an investment firm in Montreal. I have the sense that it was a disillusioning experience and showed you a lot about the disadvantages of institutional money management.

[00:12:12] William Green: Can you talk about what happened, what you saw there that made you think, Yeah, I want to be in this business but I want to work for myself so I can follow the rules that I want to follow instead of doing it in this misguided way?

[00:12:24] François Rochon: Well, I don’t know if it’s misguided. I think most money managers are sincere doing their best. I really do. And so when I worked at that big firm that manage institutional clients, they did the best they could. And they add pressure from the clients to do well on a quarterly basis, or at least on a yearly basis.

[00:12:48] François Rochon: So I just realized in real life, I wouldn’t say I was, lost illusions. I just realized, and in real life, it’s hard to have a long term horizon. Your clients. In those cases, the institutional clients have to share your time horizon for the relationship to work. Because if your clients don’t give you the time horizon, you need to get the rewards from equity investing. It’s a wasted time, to invest that way. So I realized that, most people in the business, you, I have the luxury of having a long term horizon.

[00:13:27] François Rochon: So, when I realized that, I said, Well, if I really want to invest the way, I believe is the best way to invest, I have to start my own firm. And, when I started to gather clients in the early two thousands, I really took the time to explain to all those clients that we needed to have, both of.

[00:13:47] François Rochon: I have a long term horizon and not to focus too much on the short term results and I don’t know exactly when I started to talk about my rule of tree, but pretty early on I thought the importance of that rule and which is basically one year out the stock market will go down. One stock out of three that you’ll purchase will be a disappointment and at least one year outta three you’ll underperform the index.

[00:14:14] François Rochon: And I think when you accept that from the start, you deal better with market fluctuations. The mistakes. You’ll make securities and, you have to accept from the start that have here you are on perform the market. Even if you do a good job and you study the company very well and you made some intelligent long term choices, you can have two or three years in a row that you under perform in. You have to be able to accept that.

[00:14:43] William Green: It seems also that rule of three is a fundamental reminder that you need to be humble as an investor. That a third of the stocks you purchase are likely to do poorly. A third of the time you’re going to underperform the index. And a third of the, a third of the years, the stock market’s going to fall by 10 cent or more.

[00:15:01] William Green: It’s kind of wiring yourself in a way from the start conditioning yourself from the start, have fairly realistic and humble expectations about the roughness of the terrain you’re going to have to navigate.

[00:15:13] François Rochon: Oh, yes. And I think as the years go by, I think, it’s very hard not to be, to stay humble and get even, a little more humble because, it’s a very tough industry. It’s a very tough, when you want to beat the stock market over many years, not just three or four years, but over decades. I think you, you have to be armed with a lot of, and you always, I think is kind of the, catalyst.

[00:15:38] François Rochon: To help you become a better investor because you always want to learn more and understand more. And I think, it turns out that, it’s kind of, a good tool to help in the learning process…

…[00:18:47] François Rochon: And so far, my experience has been since 96 that, there’s been a very strong correlations between the increase of the owners and the companies we own. And, the quotation of the stock market.

[00:19:00] William Green: The correlation is so striking when I look at your shareholder letters that it’s worth actually kind of dwelling on the numbers.

[00:19:06] William Green: Like there was one point in one of the letters where you said, Over 20 years from 1996 to the end of 2015, your company’s intrinsic value increased by 1102%, and the value of their stocks increased by 1141%. So incredibly close, 1102% for the increase in intrinsic value, 1141% for the increase in the value of the stock.

[00:19:33] William Green: So as you point out again and again in the shareholder letters, this is not a coincidence. The correlation is kind of amazing.

[00:19:41] François Rochon: It is amazing. I think the fundamental process that lies behind the, I think the approach of investing, if the value increases, let’s say market, increase the value stocks, but over a year or two or three, anything can happen.

[00:20:02] François Rochon: So that’s why I say it’s kinda a paradox. But if you keep focusing on what’s happening to the companies you own, eventually the stock market will.

[00:20:13] William Green: So one of the things that seems, if I understand this correctly, to be fundamental to your approach is that you are looking for outstanding companies that basically are increasing their intrinsic value faster than the average.

[00:20:27] William Green: So if you expect, you often talk about how stocks historically maybe go up six or 7% a year in the US and maybe there’s a 2% dividend, something like that. So let’s say historically you’d expect an eight or 9% return, what you are looking for is outstanding companies that can grow maybe five percentage points faster than that. is that a fair summary of what seems like a pretty simple approach, but obviously it’s incredibly difficult to pull off?

[00:20:53] François Rochon: It is. What I’m aiming for, I don’t remember exactly, but I think since 96, the increase in the owner’s earning portfolio on average, and if you include a dividend, it’s close to 13% annual.

[00:21:08] François Rochon: So it’s probably a little more than 12% in terms of earnings per share growth, and perhaps less than 1% of dividend because many companies in the portfolio don’t pay dividend. So that treating per percent is probably, like you say, four or 5% better than the, the average of the sub market. Let’s say the s and p fell, which probably have has grown exactly as you say, probably 9% over the last five years.

[00:21:33] François Rochon: That’s why I’m trying to do when I purchase a stock for the portfolio is find a company that I believe if you combine the earnings growth going forward and the dividend yield, you come closer.

[00:21:47] William Green: How do you deal with the pressure not to overpay you for these outstanding companies? Because there’s a section of your annual letter where you talk about your mistakes.

[00:21:57] William Green: In the past, you much to your credit, every report you go through various mistakes and they almost always are errors of omission rather than commission. There are things where you fail to buy them, and it seems to me repeatedly, year after year, the reason why you failed to buy them and missed out on huge returns is cause they were slightly more expensive than you wanted them to be.

[00:22:16] William Green: So how do you get these outstanding companies of prices that you can bear?

[00:22:23] François Rochon: It’s not easy because if I want to be logical here, if I’m going to own a company, let’s say for 10 years, that’s going to grow its earnings by 12, 13, 14% annually to get that reward in of the stock, there can be a slight decrease in the P ratio, but not too much.

[00:22:44] François Rochon: Because let’s say if you quadruple your earnings over 10 years, but the P ratio goes out from, I don’t know, 30 to 20 times, you don’t earn 15% annually on your investment because there was some P contraction at some point in the future. So ideally, you want the P ratio in the future to be similar to what you’re paying.

[00:23:07] François Rochon: So I’m not necessarily looking for a, let’s say a bargain company that trades that way below its intrinsic value. Of course, I like it when I do, but to me, if I can find a great companies and in the future, the peer ratio is similar to when I purchase it, if I’m right on the growth rate, of course it can be a investment.

[00:23:29] François Rochon: The danger is that if you overpay a little bit, you kinda discounted in. Also it go back to to have this margin of safety when you purchase the stock. But like you say, I made the mistake of not purchasing great companies because I wanted that ratio to be lower. The stock. I missed great investment because of that.

[00:23:59] François Rochon: So it’s to find the right balance of, keeping the margin of safety, principle in line and always at the same time always trying to see that perhaps if you pay higher than you’d like to, the growth rate of the company will be high enough that even if there is a little shrinkage of the key ratio at the end of your investment, you’ll still do ok.

[00:24:23] François Rochon: So if you can find a company that can grow by 20% a. and you lose a little bit on the ratio after 10 years, you’ll probably do. So I think many mistakes I did can be, intuit or at research or Starbucks. I fail probably to see that the growth rate would be much higher than 12 or 18%. I don’t remember exactly, but I think in terms of that research, it was probably 17, 18% annually the growth rate since I’ve been watching it for more than two decades now.

[00:24:58] François Rochon: So it’s warranted a much higher ratio than I was ready to pay. So I think that’s one big lesson. When you do find an outstanding company, you have to be able to pay higher PE ratio…

… [01:18:40] William Green: And so yeah, it’s, you can’t really fake the interest, but if you have the interest, if you harness some weird interest like that, it ends up yielding in incredible benefits I think. One thing, François, before I let you go, the, I wanted to ask you about that. I feel like you’ve figured something out that’s really important that a lot of people haven’t figured out, which is, you write a lot in your letters over the years about the importance of unwavering optimism.

[01:19:07] William Green: And I think it’s really, it’s a really interesting insight. here we are in this very difficult period where we’re getting hit with inflation and there’s, the market has been kind of melting down and, there are fears of recession and there’s war in Ukraine and the like. And it seems to me that one of your secret weapons is one that, so John Templeton also had, which is that you’re an unwavering optimist.

[01:19:28] William Green: And I wonder if you could talk about why you are and why you have this kind of confidence in what you call the world of free enterprise.

[01:19:35] François Rochon: Yes, you’re right. I think nothing was ever built on pessimism. I think you never make wise decision with fears. I think optimism is an important ingredient to success. Not the only ingredient, but one important ingredient. I would say if you study human history and you go back many years in the past, I think the only conclusion is that you cannot be not amazed of how much we’ve improved over the last centuries. I mean, just in terms of technology, it’s incredible the changes that we’ve made, and you have to understand what is the fountainhead of those improvements, and it’s the human mind is just inventing things, creating things, finding ways of doing things better, always very slowly and not in a linear fashion.

[01:20:34] François Rochon: Of course, there’s some tough periods and some better periods, but over a long period of time, the improvement has been quite steady and quite impressive. I mean, the standard le of living has probably doubled every 25 years in the last century, which is incredible. And, so people worry about, climate change and they’re right to, to be worried and they worry that, we won’t have any, more oil and, we’ll have to find alternate energy.

[01:21:06] François Rochon: And I think they’re right too. Not necessarily that, we’ll, we won’t have any, oil left, but I think we do have to find better sources of energy. But what will bring those changes, those improvements, either for energy or fixing climate change? Will come from ideas and the human mind. And if you think about it, the all the great progresses of the last century came from idea. Nothing really has changed in our environment, that nature and the human nature. But we find ways to always improve things because we have this drive as human beings of never being satisfied. We will always want to improve our situation.

[01:21:54] François Rochon: And I think this drive is very powerful and gives me the feeling that, things will always. There’ll be, there’ll be tough periods, There’ll be, crisis and catastrophes. I accept that and I’ve been accepting that for 30 years. And, I’ve seen the recessions, I’ve seen, terrorist attacks. I’ve seen, a lot of crisis in many countries. But in the end, I think, the human race always advances forward.

[01:22:24] François Rochon: And, the right approach is to be optimistic and we’ll find solutions to all of our problems. Just, we have to put our minds to it. But I’m confident that the survival gene, this is probably the most, the strongest gene we have. We want to survive, We want to move forward, is a very, great fuel for human investment.

[01:22:46] François Rochon: And, pretty optimistic is going to continue. I would say that in the next, I don’t know if it’s going to be around 50 years, but I’m pretty sure if I’m around our standard of living will increased by percent, then live even better than we’re today. And I’m pretty c that we’ll find solutions to all our big problems, climate changes and inflation.

[01:23:10] William Green: I think part of what I like François, is that your optimism isn’t a naive temperamental impulse, that just infuses everything. It’s built very much on a kind of data driven knowledge of the past. And so remember, for example, reading in one of your letters, you talked about a Tale of two sitters by Charles Dickens, and you said that since its publication in the 1850s, the percentage of people living in extreme poverty in the world has fallen from 87% to less than 10% today.

[01:23:39] William Green: And you mentioned that the average standard of living has increased by a factor of more than 25 times since the book was published in 1859. So you look at that and you think, this isn’t naive. This has happened, this is our history, and think of all the terrible things that we’ve been through in that last 160 years since that book came out.

[01:23:56] William Green: And likewise, there’s an extraordinary table that I think you originally drew up during the 2008, 2009 financial crisis and then published again or updated in March, 2020 at the initial height of the Covid Pandemic where you listed 14, I think, major corrections over the last, I think 60 or so years, followed by these massive rebounds.

[01:24:19] William Green: And it was very striking to me. Again, it’s a data driven reason for optimism. you listed, for example, in I think 1973 to 74, the market fell something like 48% and then was followed by 106% gain over the next five years or so. And this process seems to have happened again and again. Can you talk about that sense of just that the sun also rises, right?

[01:24:43] William Green: That, here we are going through a difficult period and yet when you look back historically again and again, the sun also rises.

[01:24:52] François Rochon: Yes. It’s the lesson that the, if you study a human ministry, that’s the lesson that, remember Im Lincoln said 150 years ago, so this two shall pass away. And then Grants said that, this phrases summarize the whole human history things pass, crisis passed. And in the end, the human race continues to always improve things and move forward. And I would say same thing with companies like we talked at the beginning of the interview, companies grow their earning six, 7% yearly and give a 2% dividend on average. So that’s a eight or 9% return for stock. So of course when they go down 30, 40, 50%, there’s every reason to believe that within five or six or seven years, they’ll make new records. Just because earnings continue to increase increasing earnings at

[01:25:48] François Rochon: 7% annually, double that whole earning in the US every 10 years. So it makes sense that every 10 years, the s and p 500 or the industrial average doubles in value because earnings have double over the last 10 years. And there’ll be a recession of course, and earnings will go without recession, but they’ll rebound and, eventually they’ll make new records.

[01:26:13] François Rochon: So I think that’s very reassuring to understand that because you know that they’ll be tough times, but if you patient, you’ll be reward.

[01:26:22] William Green: It’s beautiful cause it means you have to understand these fundamental forces that are at play here, Like the power of intrinsic value, growing the power of productivity, increasing the power of human ingenuity to solve problems.

[01:26:35] William Green: But once you kind of understand that you don’t really need to be that naive to be optimistic. I suspect.

[01:26:42] François Rochon: No, I don’t think I’m naive, but just realistic. That’s just the nature of our human society. And there’s some very bad things I couldn’t agree with more. I mean, everything you read about tragedies and terrible things that happen all over the world.

[01:26:58] François Rochon: But there’s also great things, great accomplishment, great things that civilization have built over the years. And you have to look at that either also. Both are important. And, in the end, I think the overall balance is that, more good have come out of the human ministry than that. 

3. Proof of Work – Nick Maggiulli

When you see a lot of people making a lot of money that wouldn’t normally be making a lot of money, that’s a sign that something’s off. When you have 29 year-olds worth $26 billion naming sports stadiums, look out. When individuals are going from unemployment to retirement in a few months, proceed with caution. Ultimately, when too many people are getting too lucky too often, that’s your wakeup call. That’s your hint that the good times won’t last forever. Why?

Because the world trends towards equilibrium. The world trends towards proof of work. It’s rare for fortunes to be created so effortlessly. Therefore, if you see easy money being made, it’s one of the strongest signals that something’s not right. Of course, some people will hit the lottery or be born into wealth. They are the lucky ones. But, most of us aren’t. Most of us have to work for it. We have to show the proof.

This explains why 70% of wealthy families lose their fortunes by the second generation and 90% lose it by the third generation. They didn’t have the proof. These future generations didn’t know how to build or preserve wealth like their ancestors did, so they squandered it.

The same thing happens during moments of financial excess. Those who got rich overnight don’t understand how their wealth was actually generated (i.e. a bubble). So they keep doing the same things that got them rich in the first place, in an effort to further increase their fortunes. But, once the bubble pops, the behavior that got them rich leads to their ruin. As they create, so they destroy. It’s a double-edged sword all the way down.

But the bigger problem underlying every get-rich-quick scheme is the belief that there’s an easier way to get rich. That there’s some sort of shortcut. But, there isn’t. There are no secrets when it comes to building wealth. If there were, then we would all be rich already. Think about it. If it takes 32 years for the typical self-made millionaire to gain their wealth, why would you expect to do it in just one? It makes no sense.

4. A Few Good Stories – Morgan Housel

Virtually everything was in short supply during World War II. The U.S. Army produced over 100 million uniforms to supply the Allies, which left little fabric left over for civilian clothes. It got worse in 1943 when the Army mandated that the synthetic material typically used in bathing suits had to be reserved for making military parachutes.

Clothing companies got creative by designing bathing suits with less and less fabric. One French designer named Louis Réard took it to the extreme, designing a bathing suit with as little fabric as he could get away with.

Réard introduced the new bathing suit in 1946. When deciding what to call it, he read in a newspaper about nuclear bomb tests that were taking place on a thin strip of rocks in the Pacific and were catching the public’s attention.

A thin strip catching people’s attention? That’s exactly what Réard was trying to do, too. So he named his swimsuit after the atoll where the nuclear tests were taking place – Bikini…

…Martin Luther King’s famous speech at the Lincoln Memorial on August 28th, 1963, did not go down as planned. King’s advisor and speechwriter, Clarence Jones, drafted a full speech for King to deliver, based on, he recalled, a “summary of ideas we had talked about.”

The first few minutes of King’s speech follow the script. Video shows him constantly looking down at his notes, reading verbatim. “Go back to Georgia, go back to Louisiana, go back to the slums and ghettos of our northern cities, knowing that somehow this situation can and will be changed.” Just then, around halfway through the speech, gospel singer Mahalia Jackson – who was standing to King’s left, maybe 10 feet away – shouts out, “Tell ‘em about the dream Martin! Tell ‘em about the dream!”

Jones recalls: “[King] looks over at her in real time, then he takes the text of the written speech and he slides it to the left side of the lectern. He grabs the lectern and looks out on more than 250,000 people.”

There’s then a six-second pause before King looks up at the sky and says:

I have a dream. It is a dream deeply rooted in the American dream.

I have a dream that one day this nation will rise up and live out the true meaning of its creed: “We hold these truths to be self-evident, that all men are created equal.”

I have a dream that my four little children will one day live in a nation where they will not be judged by the color of their skin but by the content of their character.

I have a dream today!

The rest was history.

Jones says: “That portion of the speech, which is most celebrated in this country and around the world, is not the speech that he planned to give.” The best story – not the most prepared, or the most thought out, or the most analytical – wins.

5. FTX’s Balance Sheet Was Bad – Matt Levine

What. And yet bad as all of this is, it can’t prepare you for the balance sheet itself, published by FT Alphaville, which is less a balance sheet and more a list of some tickers interspersed with hasty apologies. If you blithely add up the “liquid,” “less liquid” and “illiquid” assets, at their “deliverable” value as of Thursday, and subtract the liabilities, you do get a positive net equity of about $700 million. (Roughly $9.6 billion of assets versus $8.9 billion of liabilities.) But then there is the “Hidden, poorly internally labeled ‘fiat@’ account,” with a balance of negative $8 billion. I don’t actually think that you’re supposed to subtract that number from net equity — though I do not know how this balance sheet is supposed to work! — but it doesn’t matter. If you try to calculate the equity of a balance sheet with an entry for HIDDEN POORLY INTERNALLY LABELED ACCOUNT, Microsoft Clippy will appear before you in the flesh, bloodshot and staggering, with a knife in his little paper-clip hand, saying “just what do you think you’re doing Dave?” You cannot apply ordinary arithmetic to numbers in a cell labeled “HIDDEN POORLY INTERNALLY LABELED ACCOUNT.” The result of adding or subtracting those numbers with ordinary numbers is not a number; it is prison…

…For a minute, ignore this nightmare balance sheet, and think about what FTX’s balance sheet should be. Conceptually, customers give you money — apparently about $16 billion in dollars, crypto, etc. — and then you hang on to the money and owe it back to them. In the simplest world, you keep the customers’ money in exactly the form they give it to you: Someone deposits $100, you keep $100 for him; someone deposits one Bitcoin, you keep one Bitcoin for her. For reasons we have discussed — some legitimate! — FTX doesn’t quite work that way, and you could imagine some more complicated balance sheet where a lot of the money and crypto that came in from some customers was loaned to others. But broadly speaking your balance sheet is still going to look roughly like:

Liabilities: Money customers gave you, which you owe to them;

Assets: Stuff you bought with that money.

And then the basic question is, how bad is the mismatch. Like, $16 billion of dollar liabilities and $16 billion of liquid dollar-denominated assets? Sure, great. $16 billion of dollar liabilities and $16 billion worth of Bitcoin assets? Not ideal, incredibly risky, but in some broad sense understandable. $16 billion of dollar liabilities and assets consisting entirely of some magic beans that you bought in the market for $16 billion? Very bad. $16 billion of dollar liabilities and assets consisting mostly of some magic beans that you invented yourself and acquired for zero dollars? WHAT? Never mind the valuation of the beans; where did the money go? What happened to the $16 billion? Spending $5 billion of customer money on Serum would have been horrible, but FTX didn’t do that, and couldn’t have, because there wasn’t $5 billion of Serum available to buy. FTX shot its customer money into some still-unexplained reaches of the astral plane and was like “well we do have $5 billion of this Serum token we made up, that’s something?” No it isn’t!

One simple point here is that FTX’s Serum holdings — $2.2 billion last week, $5.4 billion before that — could not have been sold for anything like $2.2 billion. FTX’s Serum holdings were vastly larger than the entire circulating supply of Serum. If FTX had attempted to sell them into the market over the course of a week or month or year, it would have swamped the market and crashed the price. Perhaps it could have gotten a few hundred million dollars for them. But I think a realistic valuation of that huge stash of Serum would be closer to zero. That is not a comment on Serum; it’s a comment on the size of the stash.

But I do want to comment on Serum, because Serum is not some weird token that FTX cornered for some reason; Serum is a token that FTX made up. To use a loose but reasonable analogy, Serum (the protocol) is sort of FTX’s decentralized exchange subsidiary, and SRM (the token) is sort of the stock in that subsidiary. A little of the stock trades publicly, but it is mostly held by FTX, its corporate parent, as it were. The public market price of the small free float might give a reasonable estimate of the value of the subsidiary. But in the real world, the value of the subsidiary is incredibly tightly linked to the value of FTX’s overall business. If everyone is like “ah yes FTX is a good exchange operator and a leader in safe crypto trading,” then its decentralized exchange protocol has a good chance of being popular and profitable. If everyone is like “ah yes FTX is a careless fraud,” then Serum is going to have a hard time. 3  At the point that FTX is shopping its Serum stake to seek a rescue financing due to HIDDEN POORLY INTERNALLY LABELED ACCOUNT, its huge stash of Serum is toast! Just toast!…

…I am not saying that all of FTX’s assets were made up. That desperation balance sheet lists dollar and yen accounts, stablecoins, unaffiliated cryptocurrencies, equities, venture investments, etc., all things that were not created or controlled by FTX. 5 And that desperation balance sheet reflects FTX’s position after $5 billion of customer outflows last weekend; presumably FTX burned through its more liquid normal stuff (Bitcoin, dollars, etc.) to meet those withdrawals, so what was left was the weirdo cats and dogs. 6 Still it is striking that the balance sheet that FTX circulated to potential rescuers consisted mostly of stuff it made up. Its balance sheet consisted mostly of stuff it made up! Stuff it made up! You can’t do that! That’s not how balance sheets work! That’s not how anything works!

Oh, fine: It is how crypto works. This might all sound familiar not just because we talked about FTT last week, but because we talked about the collapse of TerraUSD and Luna earlier this year. Terra was a blockchain system run by Do Kwon, and it raised billions of dollars by selling dollar-denominated tokens — TerraUSD — that were supposed to keep their value because they were backed by a variable amount of another token — Luna — that Kwon had also invented. For a while people thought the Terra ecosystem was promising, so the Luna token was worth a lot, so Terra could go around saying its TerraUSD tokens were extremely safe, because the billions of dollars of TerraUSD “debt” were backed by more billions of dollars’ worth of Luna. And then one day people changed their minds, and the price of Luna — which was just a bet on Terra’s future — collapsed, so TerraUSD was unbacked, and the whole thing collapsed. The FTX situation is not the same, but it rhymes. The role of TerraUSD — the “debt” — is played here by FTX’s customer balances; the role of Luna — the backing token — is played by FTT and SRM. In both cases, confidence in the business collapsed, and it turned out that the debt was actually backed by nothing.

6. How fear robs investors of opportunities and returns – Chin Hui Leong

When it comes to investing, many picture themselves making rational, well thought-out decisions. However, in reality, this same group is prone to reacting poorly to stock market moves. This disconnect is down to the way we process information, says Daniel Kahneman, who is considered to be one of the fathers of behavioural finance. 

In his book “Thinking, Fast and Slow”, Kahneman describes two general modes of thinking: System 1 (reflexive) and System 2 (reflective).  Where System 1 is built for intuitive, snap decisions, System 2 is primed for untangling complex problems which require time. Under this framework, most investors consider themselves as System 2 thinkers, tapping on the analytical side of their brain to process data, deliberate over the pros and cons, and come up with a rational investment decision. Yet, in practice, System 1 often overwhelms System 2 before the latter has a chance to act. 

It’s not a matter of choice. According to Kahneman, most of the time, we function based on System 1. Our reflexive mode is useful for daily routines and recognising familiar situations, and it does a good job in prompting the appropriate reaction. In addition, because System 1 is adept at processing similarities, it will alert us when there is a deviation from the norm. For instance, if you step onto the road and there’s a car speeding towards you, you will sense danger and move out of the way. Here, System 1 kicks in automatically without deliberation, saving your skin. 

Therein lies a wrinkle. What’s good for avoiding danger is not always helpful when it comes to investing.  In particular, watching the stock market fall day by day, month after month, is enough to send investors’ System 1 into overdrive, overwhelm their System 2 mode, and cause them to panic sell.  The result is what we see today: few takers despite the lower stock valuations…

…In his book “Your Money and Your Brain”, Zweig says that predictions of the future often fall prey to relying too heavily on the short-term past to forecast the long-term future. If we apply this behaviour to the current context, it would be akin to taking all of today’s worst problems and projecting these worries indefinitely into the future.   

Faced with nothing but gloom, it’s no wonder fearful investors are sitting out.  Under the circumstances, it is helpful to remember that the stock market has undergone worse situations before. Tellingly, not all predictions of doom turned out to be true…

…In 2014, a former Harvard economist withdrew almost US$1 million of his own money, speculating that cash will lose almost all its value due to the US Federal Reserve’s zero-interest rate policy. Yet, in today’s rising interest rate environment, the US dollar has gained ground over almost every major currency. That’s not the only prediction that didn’t pan out. Two years earlier, around 2012, a high-profile investment advisor suggested that investors should dump most of their US stocks in favour of gold. With the benefit of hindsight, we can now say that it was a terrible idea.

Over the past decade, the value of the S&P 500 index, which represents 500 of the largest US companies, has almost tripled, during the time when the value of gold fell by 3%. 

7. The Fingerprints of History – Michael Batnick

There are a handful of times in my life where the first encounter with somebody stayed with me forever. One of those moments was in 2014 (15?) when I met Scott Krisiloff.

At the time, Scott was running an asset management company, but the thing that hit me had nothing to do with his day job. He told Josh and I that he was in the process of reading every issue that Time Magazine had ever published, starting in 1923. I couldn’t believe it…

…Scott read ~4,000 issues covering 77 years, ultimately stopping in 2000 once his first child was born… Not only did Scott take years of his life to go through all of this, but he documented it for us to enjoy…

…I’m fired up to stand on Scott’s shoulders and read every single one of these monthly recaps. I’ll leave you with 10 things he learned from this incredible experience.

1) Compared to the scale of history, a human lifespan is relatively brief.  In the early days of TIME, the editors of the magazine began obituaries with the phrase “As it must to all men, Death came, last week to…” It was a reminder that eventually we all return to the same place no matter how rich, famous or powerful.  We all know that life is short, but watching the cycle of birth and death for entire generations drives home just how short life really is.  Over 77 years I watched multiple generations live life’s cycle.  I also got to watch the major events that shaped society during those life spans.  I noticed that major events happen relatively infrequently, are set in motion over very long periods of time and are driven by forces larger than any individual.  A human lifespan is incredibly brief when measured against that scale.

2) Focus on the things that matter.  We are all here for a short amount of time, so it’s critical to use that time wisely.  Wealth, fame and power won’t lead to immortality.  Societal memory is short and even those who make it to “the top” are eventually forgotten.  This happens even faster than you might think.  If you seek validation, personal achievement isn’t the place to find it.  Invest in family, friends and self understanding.  These are the things that will be most valuable on your journey through life…

…5) Just when you think you understand everything, everything will change.  When I was reading TIME I often imagined myself as someone who was born around 1900 and began a career in 1923.  By the 1970s I reached a point where it felt as if I had seen it all.  I had 50 years of career “experience” and cycles were repeating.  Then the 1980s happened.  Economic dynamics changed and turned everything I thought I knew on its head.  I learned from this experience that there are structural breaks in the way that the world works and more forces in play than anyone has the capacity to understand…

…10) We all share a small world. In TIME’s Person of the Century issue it also noted that “Einstein taught the greatest humility of all: that we are but a speck in an unfathomably large universe. The more we gain insight into its mysterious forces, cosmic and atomic, the more reason we have to be humble. And the more we harness the huge power of these forces, the more such humility becomes an imperative.”  This was the most important takeaway from observing the passage of time over the course of three quarters of a century.  We don’t fully understand why or how we are here but we share our short time on this planet with billions of other souls who are each trying to make sense of the same world in their own way.  The need for compassion, empathy and humility is so much greater than the need for competition and conquest.

I first set out to read every issue of TIME with this spirit of conquest, but the experience changed me.  I learned that these goals can be personally and societally destructive and that victory won’t give you the wealth you seek.  As a result I will spend the rest of my life treasuring every moment that I have here with the people that I love.  And I will spend my working hours building and supporting strong institutions that promote human understanding.  

I imagine that anyone who lives a long life might draw similar conclusions about what is and isn’t important, and I feel that it is a gift to have been given this perspective at a relatively young age. Ultimately, by reading every issue of TIME I learned the value of time, which is, by far, our most precious commodity.

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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 Microsoft. Holdings are subject to change at any time.

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

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

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

Here are the articles for the week ending 13 November 2022:

1. Graham & Dodd Annual Breakfast 2022 – Investment Management Insights

During one of Todd Combs and Warren Buffett’s famed Saturday afternoon living room chats, the two posed the following question as a means of valuation: if you take a business, what is your level of confidence in predicting what it looks like in five years?

Buying a whole business requires varied degrees of scrutiny into factors which cannot be evaluated using financial modeling formulas, such as: level of capital required, management style and efficacy.

Combs recalled the first question Charlie Munger ever asked him was what percentage of S&P 500 businesses would be a “better business” in five years. Combs believed that it was less than 5% of S&P businesses, whereas Munger stated that it was less than 2%. You can have a great business, but it doesn’t mean it will be better in five years. The rate of change in the world is significant, which makes this exercise difficult, but this is something that Charlie, Warren and Todd think about. When Combs started at Berkshire, they had a 7/10 confidence on the businesses outlook for the next five years. The nature of the world is that things are constantly changing, and Todd says they are right on maybe 1/10 predictions. 

Michael asked if there are traditional measures that Combs/Berkshire look at to indicate good business performance? And how does Combs/Berkshire assess that quantitatively? Combs explained how one question is constantly asked, usually daily, and that is if the moat is wider or narrower on any of their businesses.

98% of what Buffett and Combs discuss is qualitative. If something is 30x earnings you can calculate what it will have to do to get to run rate earnings. The worst business grows and needs infinite capital with declining returns. The best business grows exponentially with no capital…

…Combs goes to Buffett’s house on many Saturdays to talk, and here’s a litmus test they frequently use. Warren asks “How many names in the S&P are going to be 15x earnings in the next 12 months? How many are going to earn more in five years (using a 90% confidence interval), and how many will compound at 7% (using a 50% confidence interval)?” In this exercise, you are solving for cyclicality, compounding, and initial price. Combs said that this rubric was used to find Apple, since at the time the same 3-5 names kept coming up…

… Every time Combs meets with a company, there are two questions he always asks management: (1) How long do you spend talking to investors, and (2) what would you be doing if you were not publicly traded? The median response is 25% of the time is spent talking to investors. In response to the second question management usually lists a number of things that make a lot of sense, and Combs then proceeds to ask why they don’t do that, and they say because they feel handcuffed. When management is focused on the quarterly performance, and they don’t have the proper time horizon, they are not empowered to do the right thing. As a fiduciary you are setting yourself up for failure if you don’t have the right time horizon.

2. TIP492: The Best Investor You’ve Never Heard Of – Clay Finck

[00:00:25] Then at the end of the episode, I talked a bit about the lessons we can learn from Nick Sleep in identifying a great business, buying it at a reasonable price, and holding it for a very long time. From there, I started reading into Nick Sleep’s letters and I wanted to put together an episode talking about his overall investment approach, how Buffett and Munger influenced him and his incredible investment track record through his fund, the Nomad Investment partner.

[00:00:50] He achieved a stellar total return of 921% versus 117% for the world Index during the fund’s tenure of 13 years from 2001 to 2014. I also touch on his home run investments in Berkshire Hathaway, Costco, in Amazon. His Amazon investment in his personal portfolio got so large in his portfolio that he actually decided to sell half of it and allocate it to a fourth company, a sauce, which I’ll be diving into at the end of this episode…

…[00:24:43] These companies like Costco and Amazon that he owned, they were doing just as well in the bad economic times as they were in the good While overall. I’ll be diving into the scaled economics model here in a little bit, but I want to focus on the financial crisis now. While overall retail sales were down 10%, Amazon’s biggest day leading up to Christmas was 16% higher in 2008 than in 2007.

[00:25:09] Even though many of the companies they owned were down 50% in 2008, the businesses themselves still continued to surge ahead. He said that Amazon was priced as if it wouldn’t grow in the future, despite them seeing some of the best growth prospects they could ever imagine for a company. By mid 2009, Amazon’s revenues were up over 60% over the past couple of years.

[00:25:33] Yet the stock was all doom and gloom. The business did so well. It was almost as if a credit crisis made Amazon’s business even stronger than it would’ve been otherwise. Here’s how Sleep rounded out his 2008 letter quote. The commentary in the press is uniformly gloomy, and this is serving to depress share price.

[00:25:54] What we know is that prices are lower than a few years ago in corporate behavior is improv. We mean no disrespect to those unfortunate enough to lose their jobs or caught up in other people’s. Too busy to think mistakes and scandals. But from the perspective of an investor, there is less to worry about today than there was a few years ago.

[00:26:15] Indeed, I doubt that worrying is the solution to anything. Particularly we are reminded of Winston Churchill’s story of a man on his death bed. I have had a lot of trouble in my life saying the dying. Most of which never happened. It may not feel like it, but for a long term investor, this is the best of times, not the worst.

[00:26:36] It is in this environment that people sell their GTOs for 750 pounds. Take heart and look to the horizon. End quote. Now this reference to the GTO is referring to a story he told about a motor car that sold for just ridiculously cheap…

…[00:27:58] At this time of utter chaos, since the end of 2008, Berkshire today is up 344%. Costco is up 825% and Amazon is up 4008%. I repeat 4008%. Now, I expected the recovery of the Nomad Fund to be pretty good relative to the index in the year to come in 2009, but I did not expect it to be this good. To round out 2009, the Nomad Fund was up 71% while the World Index was up 30% from 2009 through 2013, Nomad returned investors 404%…

…All right, so let’s get started with Costco. It was at the end of 2002 when he first started discussing his position in Costco and his letters. This was a 3.1% position in the fund at the time.

[00:33:05] He recognized early on that Costco was a great business and he still owns it today. Since the beginning of 2002, Costco shares are up tenfold. To give a quick recap of their business model, Costco is a warehouse retailer that charged a $45 membership fee at the time to allow members to shop in their store.

[00:33:26] A key differentiator for Costco relative to other retailers was that they implemented an everyday low pricing strategy and they never marked up their products more than 15% from what they bought them. While Walmart at the time had markups of around 20%, and the industry standard was really around 30%.

[00:33:45] So Costco customers know that Costco is giving them a great price on their products, and there isn’t really any marketing schemes to offer temporary discounts on their products. You know, every time you go into Costco and make a purchase, You’re getting a great price, at least relative to what they pay to their suppliers.

[00:34:04] Now, what I like to look for and find in a business is what Jim Collins popularize, which is called the flywheel effect. The Costco model definitely had a flywheel effect as well. The low prices would lure customers in, which means that Costco receives more profits as a result of the greater number of customer.

[00:34:23] Costco would then use those profits to go out and open more stores wherever they found the best opportunities to do so. Since Costco then had more stores, they had more bargaining power over their suppliers, which in turn would incentivize even more customers to join and purchase that membership, and so on and so forth.

[00:34:42] This was the Costco business model, The standard markup strategy they used continued to push the cost savings onto the customer. Build that trust with them to keep coming back year after year, after year to do more and more shopping. Now, Sleep refers to the Costco and the Amazon business model actually as the shared economics model.

[00:35:03] Both of these companies are super cost efficient, so they can offer super low prices. So as the business grows, their prices are able to go lower and lower, which begets more growth. So as the business grows, their moat grows and the quality of the company and the amount of time the company is able to withstand extends as they grow, as they build more customers and build more stores.

[00:35:27] So customers actually benefit from the growth of the company. For a company like say Nike, that has a high margin business, the same really can’t be said as each year they are paying a high margin for Nike’s products, and Nike’s really relying on that brand with loyalty. But for Costco, you’re getting better prices each year.

[00:35:48] As the company grows in, the economies of scale are shared with the customers. At the time, Sleep estimated that Costco could fund itself to grow at around 14% per year. From that point, he said that this level of growth was much more sustainable than the companies that the retailed crowd was chasing at the time.

[00:36:07] With growth of 30% or more for many of the companies, he estimated that Costco could reach a thousand stores in the. And 200 stores in the uk. While at the time they had 284 in the US and 14 in the uk. So a ton of room for long term growth. According to his assessment of the market, Costco’s stock peaked in 2000 at around $55 per share.

[00:36:31] And Nomad purchased at $30 per share according to his 2002 shareholder letter, and they ended up purchasing more over the years. Of course, he stated that he believed a reasonable valuation for Costco was north of $50 per share at the end of 2002. And in his letter he stated, Costco is as perfect a growth stock as we have analyzed and is available in the stock market at close to half price.

[00:36:57] In 2004, Costco was trading at a earnings multiple of 24, while the PE ratio today is around 35, 36, so we have a 50% higher. Today, if I had to guess why? Part of it is likely due to the market’s appreciation of the quality of the business Costco has, and the other part is probably because the overall market is just priced higher today than in 2004.

[00:37:23] A lot more people know about Costco now than they did then too. So he also explained how Costco is so difficult to compete with because they’re just so giving to the customer. Wall Street, you know, oftentimes urges companies to give back to the shareholders rather than the customers through things like share repurchases through dividends.

[00:37:44] This is exactly what most shareholders want, including Wall Street. But Costco gives a lot of their earnings potential actually, to their customers, and this in turn leads to a stronger business that is more likely to sustain far, far into the future. It’s truly a business that focuses on the long-term.

[00:38:03] Which aligns right with Sleep’s investment philosophy. When purchasing a great business, Sleep oftentimes would interview management of a company, and he just saw that the management team was so serious about never marking up their products more than 15%. You know, there might be a time where they can make a killing on some specific product, they get at a huge discount.

[00:38:22] But management was like, “No, we’re going to pass on these savings to the customer.” So they just did it over and over and over. And the model has definitely. One idea that Sleep wrote about was related to business quality and moats. If you’re holding a business for the long term, it is extremely important that the company has a strong moat.

[00:38:40] The difficulty really lies in assessing the strength of a company’s m.o. because it’s not necessarily a number you can just point to on a balance sheet or on an income statement. It’s more of a qualitative metric that’s up to the eye of the beholder. Sleep talked about the idea of the robustness ratio, which analyzes how much a company saves their customers relative to how much money the company actually makes.

[00:39:05] In theory, a business that saves customers a ton of money and makes very little money relative to how much they save their customers, you know, that’ll be very hard to disrupt, at least relative to a business that has high profits relative to what they save their customer. This concept definitely applies to Costco because with the way their business is set up, it actually discourages competition because of how much investment it would take to make the same amount of money that Costco does.

[00:39:33] On top of that, you’re already competing with a really strong brand that Costco is built for their customers. Sleep estimated that for every $1 in profit Costco, Customers were saving $5. Now, he actually came up with this idea of the robustness ratio from Warren Buffett when he described Geico. Buffett stated in his 2005 annual letter that Geico was saving their customers roughly $1 billion in earning $1 billion in pretax profits as well.

[00:40:02] So in Buffett’s eyes, it was clear that Geico had a moat. Because of the enormous cost savings they passed down to their customers relative to the profit they receiv. Sleep took that idea and applied it to Costco, claiming they had a moat as well, in that the quality of the moat could actually be quantified through the robustness ratio.

[00:40:21] You know, just using one metric to get an idea of how strong it was. He makes it clear that the robustness ratio isn’t the end all, be all of a mote. It’s just one indicator to get a rough idea.

3. FTX Had a Death Spiral – Matt Levine

The worst case is something like:

1. You have 100 Customer As who are long Bitcoin on margin: They each have 1 Bitcoin in their accounts and owe you $10,000.
2. You have 100 Customer Bs who are short Bitcoin on margin: They each have $20,000 in their account and owe you 0.5 Bitcoin.
3. You have loaned 50 of the Customer As’ Bitcoins to the Customer Bs, and $1 million of the Customer Bs’ dollars to the Customer As. You keep the other 50 Bitcoins and $1 million as collateral.
4. Your accounts show that you owe clients 100 Bitcoins and $2 million, and that they owe you back 50 Bitcoins and $1 million, and you have 50 Bitcoins and $1 million on hand, so everything balances.
5. You have one Customer C who says “hi I would like to borrow 50 Bitcoins and $1 million, I will secure that loan with 150,000 FTT, each of which is worth $20.”
6. You say “sure, sounds good,” and hand over all your collateral.
7. Now you have 150,000 of FTT, worth $3 million, as collateral (and no Bitcoins or dollars).
8. Your accounts show that you owe clients 100 Bitcoins and $2 million and 150,000 FTT, and they owe you back 100 Bitcoins and $2 million, and you have 150,000 FTT of collateral, so everything balances.

But then if the value of FTT drops to zero, you have nothing. You have no Bitcoins to give to the customers to whom you owe Bitcoins, no dollars to give to the customers to whom you owe dollars. You just have to call up Customer C and say “hey we need all those dollars and Bitcoins back.” But Customer C will not want to give you back all those valuable dollars and Bitcoins in exchange for now-worthless FTT. Also the fact that Customer C had all that FTT in the first place is not a great sign. It is an FTT whale, and FTT is now worthless. Has it been borrowing elsewhere against FTT? Are all those debts coming due?

Now let’s add a few more FTX-specific elements. One is that FTX is an exchange for levered traders, offering products like perpetual futures and leveraged tokens that build in margin lending. So whereas the basic model of Coinbase is “they buy Bitcoin for you and put it in an envelope,” the basic model of FTX has to be “they lend you money to buy crypto and then make use of your crypto to get the money.” In financial terms, they have to rehypothecate your collateral; you can’t expect them to just keep it in an envelope if they’re lending you the money to buy it.

The other is that FTX is closely associated with a hedge fund called Alameda Research. Sam Bankman-Fried founded Alameda to do crypto arbitrage and market-making trades, and then he founded FTX to basically have a better exchange for Alameda to trade on. Alameda has lots of FTT, and last week Coindesk reported on its balance sheet; the gist of that report was “wow its balance sheet is mostly FTT”:

The financials make concrete what industry-watchers already suspect: Alameda is big. As of June 30, the company’s assets amounted to $14.6 billion. Its single biggest asset: $3.66 billion of “unlocked FTT.” The third-largest entry on the assets side of the accounting ledger? A $2.16 billion pile of “FTT collateral.”

There are more FTX tokens among its $8 billion of liabilities: $292 million of “locked FTT.” (The liabilities are dominated by $7.4 billion of loans.)

That is not in itself a reason for a run on FTX! It might be a reason for the price of FTT to go down, if you think that Alameda has too much of it and might need to sell it.

The reason for a run on FTX is that you think that Alameda is, in my terminology, Customer C. The reason for a run on FTX is if you think that FTX loaned Alameda a bunch of customer assets and got back FTT in exchange. If that’s the case, then a crash in the price of FTT will destabilize FTX. If you’re worried about that, you should take your money out of FTX before the crash. If everyone is worried about that, they will all take their money out of FTX. But FTX doesn’t have their money; it has FTT, and a loan to Alameda. If they all take their money out, that’s a bank run.

And all of this is self-fulfilling: If you are worried about FTX’s business, then the price of FTT should go down. If the price of FTT goes down, then FTX’s business is riskier, because it has less collateral. If, say, the operator of the biggest crypto exchange gently raises one eyebrow and says “FTT, eh?” that can be enough to topple FTX. FTT goes down, leaving FTX undercapitalized, leading to customer withdrawals, leading to ruin.

Anyway it is still early and confusing but that seems to be the story of FTX. Coindesk reported on Alameda’s FTT exposure, and then Changpeng “CZ” Zhao, the founder of Binance Holdings Ltd., the largest crypto exchange, raised eyebrows by tweeting that Binance would sell its FTT holdings “due to recent revelations.” People worried that this would tank the price of FTT and put pressure on FTX, so they started withdrawing money from FTX. FTX didn’t have the money, and Bankman-Fried started calling around asking for a loan or a bailout. Eventually he called CZ himself, and they announced a non-binding letter of intent for Binance to acquire FTX and make customers whole. Bankman-Fried’s fortune basically vanished, as did his “ emperor aura.” Venture capital investors in FTX — which last raised money at a $32 billion valuation — are probably getting zeroed, the price of FTT collapsed, and now regulators are investigating.

4. Is Alameda Research Insolvent? – Dirty Bubble Media

On November 2nd, a report from Coindesk shared some critical financial details from Alameda Research, the crypto hedge fund controlled by crypto mogul Sam Bankman-Fried (“SBF”). Coindesk reported that they had obtained a copy of the hedge fund’s Q2 balance sheet. According to their reporting, the company’s balance sheet is comprised of:

• Total assets: $14.6 billion. This is comprised of $5.8 billion FTT token, $1.2 billion Solana token (SOL), $3.37 billion in unidentified “crypto held,” $2 billion in “investments in equity securities.” This leaves roughly $2.2 billion in assets. According to our sources, hundreds of millions of dollars of the remaining assets are comprised by Alameda’s holdings of the Serum (SRM), Oxygen (OXY), MAPS, and FIDA tokens, all of which are from other SBF projects. According to this balance sheet, Alameda only had $134 million in cash on hand in June 2022.
• Total liabilities: $8 billion, of which $7.4 billion is “loans,” with another $292 million worth of FTT token owed. The remainder is unidentified by the Coindesk article.

This purported leak of Alameda’s financials demonstrates that the firm’s largest asset is its holdings of “FTX Token (FTT),” issued by none other than SBF’s FTX Exchange. The FTT token on Alameda’s balance sheet is roughly 1/3 of their total assets and equal to 88% of Alameda’s net equity. In other words, the firm’s largest asset is a crypto token issued by SBF’s other company, with a very significant portion of their assets in tokens issued by other related parties.

It’s almost as if SBF found a way to hack the financial system, printing billions of dollars out of thin air against which he was able to borrow massive sums from unknown counterparties. Almost as if he discovered a financial perpetual motion machine…

…Readers of this site will recall that the now-defunct Celsius Network, a multi-billion dollar crypto lending firm (Ponzi scam) with very close ties to SBF, was destroyed in part by its token, CEL. Celsius Network was built around the CEL token, under the brilliant idea that it could be used to spin up billions of dollars in free assets. The structure of a flywheel scheme is quite simple:

1. Create a token: Tokens are literally just bits of code on a blockchain. Program that sucker up and get rolling. Make sure you retain the majority of those tokens on your balance sheet for maximum flywheeling.
2. Pump the token’s price: Retain a “market maker.” Buy tokens using your customer’s assets. Wash trade it to infinity. Do whatever it takes to drive that price sky-high! And since you kept most of the tokens for yourself, there’s that many fewer tokens out there to pump.
3. Mark those babies to market: That’s right! Now you reap your rewards; at least, on paper. Now you can show billions of dollars in “assets” on your balance sheet.
4. Show off your success: Now’s the time to cash in. Hook some savvy investors (suckers), like pension funds, into massively overpaying for your equity or into making you big loans collateralized by your token.
5. Keep that flywheel spinning: Now you have real dollars. Buy yourself something nice, like stadium naming rights, politicians, or failed crypto companies. But don’t forget: If the flywheel stops spinning, you’re gonna have a bad time.

Of course, nothing is really this simple. It turns out that the flywheel scheme is just another bit of unsustainable financial engineering, for a couple of reasons. First, as your drive the price of your token higher, it begins to cost more to keep the price up; the people that own the token are increasingly incentivized to sell out, forcing you to buy more tokens at higher prices. Eventually, you either run out of money, own all of the tokens in existence, or stop buying. Which you can’t do, because if you stop it all comes crashing down.

More critically, it turns out that marking massive quantities of totally illiquid assets to market only generates wealth on paper. Celsius, despite holding hundreds of millions in CEL above liabilities, cannot liquidate any significant portion of those tokens without crashing the price of the token to zero. Such is the danger of controlling over 90% of the total tokens in circulation when nobody wants to own them in the first place!..

…According to Coindesk’s report, Alameda owned $5.8 billion FTT tokens in June of 2022. According to market aggregator CoinGecko, this is equivalent to 180% of the total circulating supply of the tokens:…

…A scan of the blockchain confirms that FTT ownership is highly concentrated, with 93% of the total tokens held by only 10 addresses:…

…All this to say that Alameda will never be able to cash in a significant portion of FTT to pay back its debts. There are few buyers, and the largest buyer appears to be the very company Alameda is most closely tied to. The reality of this situation is that the vast majority of the value Alameda accrues to FTT token is unrealizable, and the fair market value of their FTT in the event of large sales would rapidly approach $0.

5. Kirsten Green – Investing in Consumer Change – Patrick O’Shaughnessy and Kirsten Green

Patrick: [00:10:18] When you think about the list of pre-research hypotheses that you had, which one was the most wrong?

Kirsten: [00:10:25] There’s so much conversation about climate change and about the need for changing our ways that everybody would be interested in participating in that, particularly the younger generation, the younger generation. I mean I have kids telling me I should — “That’s recyclable, mom, that shouldn’t go in the trash,” or “Can you please buy an electric car instead of that gas car?” When we went and looked at this data at a really detailed level, the person that was most concerned about behaving in a way that aligned with environmental causes was a middle-aged, busy adult in a lower income bracket, so surprising. To me, I was like, they have got too many other pressures to be thinking about this. And it’s — a lot of times, many of those practices are still on the more expensive angle. So I was just really curious that, that audience was in tune to it in a certain way. The other thing, like specifically, is crypto and all this conversation that was — kind of ruled the day in ’21, we sort of had this fantasy or this perception that this was a young generation really kind of fueling that fire. That also is much more of a middle-aged person.

Patrick: [00:11:37] That’s bizarre.

Kirsten: [00:11:38] A much more of a less — it has all the other attributes of somebody who’s an early adopter or who’s techy. And that was really interesting, too. And there’s a list of others, but we’re going to publish a report.

Patrick: [00:11:49] We’ll save it. We’re going to show everything today. I’m really interested by the 12 personas and sort of who historically of those personas has driven a lot of the spending in the consumer space. Obviously, we’re going to get to investing here soon. For the most part, even if it’s interactive ads or something on one of the social platforms, you’re looking for revenue from these persona groups in the consumer business. I would love you to just riff on who is it that drives the spending? And is that changing at all?

Kirsten: [00:12:15] So we looked at this body of work to say some of the qualitative things we’ve been talking about and then to put an overlay around what are the size of these different archetypes and what is the spending power of these archetypes, and then what does it cost to be – exist, so what’s nondiscretionary and what’s discretionary to really understand, again, where was their purchasing power, adoption power. The other thing when we try to translate this stuff over into the investing in the business side is to think about where are we on the continuum of those groups evolving. So today, they might sit in one bubble representing one set of spending power. But in 5 years, they’re going to get advanced on the spectrum in some ways, maybe in some behavioral ways and some financial ways. And we’re early-stage venture investors. We’re trying to thread that needle between — what we’re really looking for is something that’s going to be on everyone’s mind a couple of years from now, 5 years, 10 years from now. It’s going to have broad adoption and people are going to be like, “Oh, yes, I can’t remember when we didn’t have that.” That’s a 10-year continuum, but it has enough relevancy that it can be relevant to adopt it today by some critical mass to create scale. And so you’ve got to understand where the demand is flowing when we think about where the spending power is today, where it’s going to be tomorrow and where the push for change is, that’s less surprising to people probably on the continuum. You are looking at someone who’s just out of college today but being much more relevant in a lot of these ways when there are parties, let’s say, to the person that’s mid-life and going through a lot of changes. Like those are really transformative years. And so that has always been the case. That’s why everybody always focuses on 18 to 45, and you get to 45, when you’re suddenly like, “Am I relevant or not anymore?” I mean the reality is there’s a ton of money, a ton of money in the baby boomer on the upside. And it’s a shifting profile on what’s discretionary and nondiscretionary. And there’s a big need there, but there’s also less behavior change. So it’s a complicated picture but it’s an interesting lens to put over, obviously, all your investing…

…Patrick: [00:47:06] You’ve invested in product categories that are far apart from each other in the consumer space, but all have tended to have very strong brands, at least in hindsight. I thought it’d be interesting to spend a few minutes talking about your take on brand, given how many amazing brands you’ve been associated with and helped grow and probably those that you’ve seen not work as well. And I know you’re coming out with a big, really interesting report that we’re looking forward to at the end of this year on a huge study that you’ve done on all these consumers and different brands around the world. So we won’t steal the thunder from that report. But I’d love if you could introduce it maybe at the highest level, sort of the framework that you think might emerge from that. And then we’ll talk about some case studies rather than talk about the specific framework and then look forward to what you publish later on this year.

Kirsten: [00:47:50] We have, over time, like teased out a view on that, but we really felt like we needed to take a step back, think about all of the lessons that we’ve learned, all of the observations that we’ve made, all of the reading that we’ve done around brands and say, what really makes a good brand? What is a framework that we might be able to use to help the companies that we’re working with, understand whether they’re on a path to set the stage and foundation for building a great brand? And so through those efforts, we came up with 6 core tenets that we felt really underpinned brand. And again, this is like from a mosaic of inputs. And then we went about kicking tires and testing on that from every angle. So we started with our own hypotheses and our own research. We went and had interviews with people who are experts in the industry. So people that are leaders of some of the most well-known recognizable brands and brands that we revere, we went and had conversations with people who are behind the scenes, brand whispers, if you will, working at agencies and have been doing this for decades across dozens or hundreds of brands, and we interviewed them along the criteria. We then went to consumers, and we went to over 14,000 people over the course of the study to explore their impressions of these 6 criteria and their impressions of brands.

And we started with a list of 100 brands, and we tried to get a real cross spectrum of things that would be obviously on the list and things that might not obviously be on the list. But really, they were focused on businesses at scale that are more or less known because we wanted to also talk to customers and noncustomers to really get a feeling for like does it vary between customers and noncustomers, can you actually build a brand and make a statement without having had a customer-first relationship. So we compared all of that information and ultimately got conviction around a framework, awaiting for a framework and scored these brands and build what we think is a pretty comprehensive list of traits and rankings and explored the rankings from all different angles in addition to those on the matrix, like, for instance, how big their businesses are, how fast their businesses have grown, et cetera. And it was really interesting and really fun. And I think it started to poke more questions and more explorations, which ultimately is like a pretty big body of work and conversation on this topic.

Patrick: [00:50:13] If you could sum it up in like a simple idea that wouldn’t betray the whole formula, how would you sum it up?

Kirsten: [00:50:20] A good brand delivers on its promise. A good brand has a clear directive around what relationship it wants to have with the consumers and the community at large, and it delivers on that in a consistent way across multiple or all touch points.

6. Ramon Pacheco Pardo, Shrimp to Whale: South Korea from the Forgotten War to K-Pop – Kalani Scarrott and Ramon Pacheco Pardo

Kalani Scarrott (07:17): Yeah. And I’ll ask this at the beginning just in case it might lead us down some rabbit holes, but your favorite period or even moment in South Korean history?

Ramon Pacheco Pardo (07:24): Yeah, that’s a great question. I mean, I really like a study in the 1980s, ’90s, the transition to democracy period because it was a people’s led process. And I find that very interesting how you saw different groups coming together. you have the student and workers movement that have been pressing for democracy for decades, but that’s the start of a strong feminist movement in Korea that also joins this fight for democracy among other things. but also normal white collar workers, office workers that traditionally have been less politicized in Korea. And obviously this group was smaller when Korea was poor, that also you in the fight for democracy. So you had all these different groups coming together. So I think that’s the one I enjoyed the most studying and researching and writing about.

Kalani Scarrott (08:15): Yeah. And in the book, you made a great illustration on the growth after the war, cause I think off the top of my head, the IMF even called South Korea basket case. So the growth from after the war. And you gave this great illustration just from someone being born in 1920 through to them turning 50. So could you highlight the changes they saw and what that looked like?

Ramon Pacheco Pardo (08:34): Yeah, it is interesting you, you pick up on the, on that, because quite a few readers have mentioned that, right? Including many Koreans who went through that process and said, Oh, that was me, right back in the day. So yes, that section I mean, I go back to someone who, who may have been born when Korea was under Japanese colonial rule who may have been sent to a Japanese mine as a slave worker, basically. Or who was a woman who may have been a sex slave or comfort women, right? Sent to one of the stations that Japan had during the Second World War. So a real suffering. We’re talking here, being a slave, basically of another country, right? And then how this person, during the Korean War, or after the Korean War, of course, during the Korean War, they would have suffer family losses after the Korean War having really poor.

(09:24): And that’s exactly when the World Bank was saying, Look, Korea is not, South Korea is not going to grow. It has no future, basically. And that person would have had to work extremely hard, obviously for his or her own sake to begin with, but also for the good of the country, for the country to, we can develop. And by the 1970s this person would live in a flat, probably in some cases, for the first time ever, they would be able to live in a flat they would have a TV, a fridge, things that in other countries were taken for granted. Of course you know, Europe, Australia, Canada, the US, but certainly not in Korea at the time. they would be able to scrap some holidays from time to time, probably to Jeju island of course in the south of South Korea.

(10:10): And they would have a completely different life from the moment when they were born. I draw this picture so to speak, in the book because if we compare with other countries that were already developed, where the development process took hundreds of years, really, we’re not even talking about decades. this wasn’t necessarily the case in other countries when the case of Korea, this was this compressed development in a period of 30, 40 years going for being colonized and extreme poverty to having a fairly middle class life, fairly stable job. And as I said, being able to go on holiday, something that certainly hadn’t been taken for granted by Koreans in, in history. Really.

Kalani Scarrott (10:52): Yeah. And it’s the insane growth and how quickly it’s all happened. That’s maybe what’s fascinating to me, cause I’ll pull this from your book “in 1953, South Korea was poorer than Subha Sub-Saharan Africa than the poorest region in the world.” And again, little to no natural resources. So some thought there might be better futures on the African continent, but what has South Korea done differently or maybe done better than other countries that have allowed it to succeed then? Yeah,

Ramon Pacheco Pardo (11:15): It’s interesting cause the comparison with Sub-Saharan Africa wasn’t mine, actually. It came from official documents that I read from different institutions, right? In a sense they were trying to say that back then there were different parts of the world that were really poor, right? And, and, and one of them was Korea the Korean peninsula in South Korea. And I think South Korea was able to do is actually three things. One of them, he was able to focus on the basics. So something that even before the 1960s, even after the Korean War, there was this focus on, on having universal education both girls and boys, actually, not only boys. That’s happening in some other countries Vaccination, for example. So, kids basically wouldn’t pass away, right? From, from tuberculosis or other diseases.

(12:08): And also focusing on the development of infrastructure. So trying to build housing, trying to build roads, railroads as well. So trying to build the basic infrastructure that any country would need if they want you to export. And that would be the second key point in the case of Korea, that other countries, if you look for example, at Latin America, they were focusing on this import substitution policy whereby they just wanted to get rid of foreign goods right, and produce domestic goods. But the case of credits was supplemented by exporting, right? By making goods that would be exported to the rest of the world. Of course, South Korea was not the first country to think about this. Mexicans have done it in the past, but South Korea really emphasizes in 1950s. So from the 1960s onwards and especially related to these, the emphasis on moving up the value added chain, because other developing countries, I wouldn’t say they were happy to only focus on textiles, shoes, et cetera, et cetera, but maybe had the long term thinking just say, Okay, how do we move to the next stage?

(13:12): Right? things like iron, for example, chemicals sorry, steel, chemicals later on shipping, semiconductors, et cetera, et cetera. So there was this focus on export about the long term component. And I think the third aspect is the strong network that the government had with the Chaebols that dominated the current economy, the big conglomerates these had downsides, of course there was corruption and, and some felt that the government was telling them basically what to do, at least until the 1980s. but they had upsides as well, which was you had these very big companies that were able to receive the capital from the state, but then they were able to become internationally competitive. And if they had been a small medium size enterprises, it might be me, have been very difficult to scale up sufficiently to be able to, to export so that, that matter as well in the case of Korea and to whether with the two of them, of course, the, the, the first aspect that I mentioned, you had this long-term planning to have a healthy population, educated population, and then they were, they were the workforce for this Chaebol that we’re working together with the government.

Kalani Scarrott (14:22): Yeah, there’s a million different threads I could pull on there, but I’ll start with the Chaebols. So could you explain, just for someone who’s never heard of the term, what they are, and then maybe why were they able to flourish and what’s their function, I guess, in the greater economy of South Korea?

Ramon Pacheco Pardo (14:35): Yeah, absolutely. There are these big conglomerates that span many different sectors. So they can span 30, 40, 50, 60 different sectors. Now, this gives them a couple of advantages. one of them is a variable to attract more capital because of their size, right? most of them are too big to fail, even though the, in Asian financial crisis, maybe this wasn’t the case if we look at some of them, but for many, we thought they were too big to fail. So obviously they receive a state support as, as well. And, and second characteristic, because they were in so many different sectors. If you look at the Chaebols such as Samsung, we know them because of the semiconductors and mobile phones. So if you go to Korea, for example, they also doing insurance. They’re involved in the housing sector, so involved in all types of sectors.

(15:26): And, and of course the advantage of this is that if one of the sectors is not working quite well, but some others are working better, right? this means that the Chaebol can survive, right? It’s not focused on a single sector. They’re very diversified. and if one of them is not working well, they can cut their losses and focus on other ones, right? And, example of Samsung that they just mentioned, for example, for a while, Samsung tried to get into the car making sector. This actually didn’t work right? But, but it’s very strong in many other sectors. So the, the company didn’t disappear, it was able to continue, right? So this allows for a long term planning that it wouldn’t be able, if you only focus on one sector or, or you only had one company essentially in two or three sectors only…

…Kalani Scarrott (18:43): And yeah, for South Korea overall going forward, how bullish and excited or positive are you about their future? Because you mentioned they’ve moved up the value-added chain. So what is now what in the past might have been steel, shipbuilding now is semiconductors, internet of things, because Korea’s done very well, over 50 million population, economy’s fourth largest in Asia, and 10th in the world by GDP. So yeah, where do they go from here?

Ramon Pacheco Pardo (19:05): Yes. I mean, that’s really good question. Cause there is a big discussion in, in Korea. I mean, it’s not new, but you can trace it back at least to the 1980s about to what extent Korea can continue to thrive, especially in consideration like this next to China, right? And, China is also moving up the value added chain. This has been a very big fear in Korea. As I said, it’s not new, It has been there for 40 years, but Korea has been able to continue to innovate to an extent that hasn’t been absorbed, so to speak by China. there was also fear in the past that he wouldn’t be able to compete with Japan. So again, that it would be a squeeze between high tech, Japan, low wage China. But now if we look at Korea, it competes at the global level, not only with Japan, in, in some sector, in some sectors, of course Japan and other countries, US, Europe, other countries are more technological advanced.

(19:53): But in some others, if you look at semiconductors, well Korea’s have there, along with Taiwan, for example. if you look at the green shipping which is I think the next big growth engine for Korea it leads at the global level, not in shipping first of all, but in the more environmentally friendly ships that increasingly we have to use for transportation, right? At the global level. if you look at robotics Korea’s getting up there, together with Japan, which is probably the most advanced country in this, in this sector, right? And now you see for example, after the pandemic, the biotech sector, right? So, so Korea, for the first time ever really developing an indigenous vaccine, it wasn’t able to export it. But who knows in the future it might be something that is able to do, to do as well.

(20:37): So I think innovation really is, is where Korea can thrive. I think it’s well known there is a population decline. Of course, some people see this as a challenge. but then I think there is a debate there because it can be a challenge if there are less workers, but we focus on the economy. Something interesting that you see in Koreas that focus on these less labor intensive sectors, cause it doesn’t have enough workers, right? And more focused on these high tech, capital intensive sectors. Plus, for example something very interesting, whenever I visit the increasing presence of robots actually before it was in factories only, but now you go to the airport or you go to a restaurant and you see robots because they simply don’t have enough workers, right? So robots, for example, they will take your dishes, you know, once they’re dirty instead of a waiter doing this because they don’t have enough, right?

(21:25): So after each of the robot, then they have to take it somewhere so it can be picked up, right? So I think that’s where I see the future of Korea going. The innovation, right? And innovation also on how to drive economic growth within the workforce. Because I, I don’t think even if the birth rate goes up is, is not going to reach the replacement rate doesn’t happen any developed country actually. And that’s not going to happen in Korea. And I don’t see Korea opening up too much migration that’s not really on the cards in my view. We may be surprised, but I don’t think it’s on the cards. So, so we’re going to see this innovation in terms of how to drive growth in an environment, which you actually have less workers as well.

7. How Binance CEO and aides plotted to dodge regulators in U.S. and UK – Tom Wilson and Angus Berwick

As 2022 dawned, Changpeng Zhao was riding high. In less than five years, the founder and chief executive of Binance had turned his young company into the world’s largest crypto exchange, accounting for more than half the trading in the trillion-dollar market.

True, global authorities were scrutinising crypto exchanges ever-more closely. But the Chinese-born billionaire, known to staff and fans by his initials, CZ, had that covered. He told customers in a blog post in January that Binance “embraces regulations” and “has always worked collaboratively with regulators all over the world.”

Behind the scenes, however, trouble loomed.

For at least a year before that post, the U.S. Justice Department had been pursuing a money laundering investigation into Binance, seeking extensive records on Binance’s policies and the conduct of Zhao and other top executives, Reuters reported on Sept. 1. Binance called such requests a “standard process” and said it works with agencies worldwide to address their questions.

Now, new reporting by Reuters reveals fresh details about Binance’s strategy for keeping regulators at arm’s length and continuing disarray in its compliance programme. The reporting includes interviews with around 30 former employees, advisers and business partners and a review of thousands of company messages, emails and documents dated between 2017 and early 2022.

It shows that in 2018, Zhao approved a plan by lieutenants to “insulate” Binance from scrutiny by U.S. authorities by setting up a new American exchange. The new exchange would draw regulators’ attention away from the main platform by serving as a “regulatory inquiry clearing house,” according to the proposal. Executives went on to set the plan in motion, company messages show.

In public, Zhao said the new U.S. exchange – called Binance.US – was a “fully independent entity.” In reality, Zhao controlled Binance.US, directing its management from abroad, according to regulatory filings from 2020, company messages and interviews with former team members. An adviser, in a message to Binance executives, described the U.S. exchange as a “de facto subsidiary.

This year, Binance.US’s compliance operation has been in turmoil. Almost half the U.S. compliance team quit by mid-2022 after a new U.S. boss was appointed by Zhao, according to four people who worked at Binance.US. The staff left, these people said, because the new chief pushed them to register users so swiftly that they couldn’t conduct proper money laundering checks.

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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 06 November 2022:

1. Nuclear energy: past, present and future – Julia DeWahl

Nuclear energy’s reputation has been dealt several major blows by the nuclear disasters of Three Mile Island (1979), Chernobyl (1986), and Fukushima (2011). Overblown response and media coverage to each of these events led to a vast misunderstanding of what happened at these events, and how damaging they actually were.

The accident at Three Mile Island in 1979, for example, killed a total of zero (0) people. The incident released negligible amounts of radioactivity — the estimated dose of radioactivity experienced in the local area is equivalent to ⅙ of the amount you’d get with a chest x-ray, and far below the level of background radiation typically experienced in a year.

However, the dramatic evacuation response, permanent shutdown of the reactor, and lack of clarification or attempts to accurately report what actually happened means many Americans still believe Three Mile Island to be a true “disaster” and reason to ban nuclear power plants. It didn’t help that Jane Fonda’s film China Syndrome, depicting a horrific nuclear meltdown, had debuted 12 days earlier.

Two other accidents, Chernobyl in 1986 and Fukushima in 2011, are similarly misunderstood, and Fukushima in particular, blown quite out of proportion. Chernobyl was operating without today’s safety standards. The plant didn’t have a containment dome, which would have helped to prevent the escape of radioactivity. Even more shocking is what caused the accident: the operating team was running an “experiment” that involved switching off automatic safety mechanisms and simulating an emergency. They did this without training or planning. The initial steam explosion killed 3, while 28 firefighters died from acute radiation syndrome (ARS). 15 died from thyroid cancer in the first 25 years after the accident.

The nuclear plant Fukushima Daichi suffered a meltdown from the flooding induced by the tsunami, however only 0 or 1 people died from the accident, with far more damage and loss of life caused by the overblown evacuation response to the accident. The earthquake that caused the tsunami that led to the Fukushima meltdown was the largest in its recorded history, leading to over 15,000 deaths and a massive toll on the built environment of Japan, including many industrial areas.

Despite these accidents, when compared to other industries, nuclear energy is very safe…

…Nuclear waste’s biggest problem is the prevailing belief that it is dangerous. Unlike other energy industries, nuclear takes full responsibility for its waste, also known as spent fuel, keeping it contained and secure so it doesn’t impact the environment. Nuclear fuel, as well as its waste, is also tiny in volume. All of the nuclear waste in the US could fit on a football field, stacked less than 10 yards high.

In addition, spent fuel can be recycled and used again as fuel in reactors. Regulation that stemmed from anti-nuclear weapons activism currently prevents the recycling of nuclear fuel in the United States, however the Department of Energy is supporting new reactor demonstrations that use recycled fuel, a positive sign that we may see things change here.

Finally, spent fuel has a perfect safety record — it has never killed or injured anyone and is safely contained on site at power plants. Air pollution from burning fossil fuels, for example, kills a million people prematurely each year worldwide.⁴ Solar panels produce 300x more toxic waste per unit of energy than nuclear, without any requirement to safely store this waste. Solar panels are therefore starting to end up in landfills, risking leaching toxic chemicals into groundwater…

…Nuclear is far safer than fossil fuels, particularly coal, and on par with renewables in terms of deaths per GW of power produced. Coal emits particulate matter that shortens lives, and deaths from fossil fuel accidents, e.g. natural gas pipeline explosions, far outnumber those of nuclear (as well as wind and solar, both also very safe). There have been no deaths in the US from commercial nuclear power, and relatively few abroad, especially when compared to other energy sources.

Nuclear energy can be produced in a very small footprint; a typical plant requires only about a square mile. In contrast, to produce the same amount of energy, wind requires 260–360x the amount of land, and solar requires 45–75x the amount of land.⁶ With such a small footprint, nuclear energy leaves a lot more land open for other purposes, including conservation.

2. TIP488: Current Market Conditions w/ Richard Duncan– Trey Lockerbie and Richard Duncan

Trey Lockerbie (00:25:23):

Yeah. That yield curve control in Japan, it seems like inevitable, and a lot of other parts of the world. In your most recent book, we were talking about it in our last episode in March, it was episode 424 for those who want to go back and check that out, you wrote that if the Fed were a corporation, it would be the most profitable corporation in the world, even leading Apple by $30 billion, give or take. And we discussed how the Fed actually makes money. The Fed basically creates money, buys bonds or mortgage backed securities and earns the interest with relatively low overhead. It’s around $8 billion or so, mostly paying probably economists. And in September, the Fed’s net income has, for the first time ever, turned negative. So can you describe exactly what’s going on here and the change with the Fed?

Richard Duncan (00:26:14):

Okay. Well, this takes some explanation. Let me begin by saying that when we spoke in February, the data for last year was not yet available. So when I said the Fed, if it had been a corporation, it would be the most profitable in the world, that was for 2020 data. That year, in 2020, the Fed’s profits were $87 billion. And the Fed is required to hand over all of its profits to the government. So that year, the Fed’s profits reduced the US budget deficit by $87 billion. Last year, the data now is available for 2021, the profits were much higher than they were the year before. Last year, the Fed’s profits were $107 billion that it handed over to the US Treasury Department, reducing the budget deficit last year by $107 billion.

(00:27:01):

So how this works, as you mentioned, the Fed creates money essentially at no cost to itself, and it buys bonds in order to pump money into the financial markets. Since those bonds pay interest to the Fed, the Fed has a lot of interest income. And since it created the money that it used to buy those bonds for free, it has very little interest expense thus far. And so with a lot of interest income and little interest expense, that’s where all the profits come from. Now, what has changed is when the Fed creates money, it does this by, it buys a bond, for example, from a bank, and it pays for that bond by making a deposit into that bank’s account at the Federal Reserve. All the banks have a bank account at the Fed. And so when the Fed buys a bond from J.P. Morgan, for example, it’s simply deposits money into J.P. Morgan’s bank account, money that it has created. It is not money that existed before. And that expands the amount of money in J.P. Morgan’s bank account at the Fed. In other words, it expands J.P. Morgan’s bank reserves.

(00:28:10):

Now, what’s happening is bank reserves, because the Fed has created so much money through quantitative easing, starting in 2008, the Fed has created something like… Well, at the end of 2007, the Fed’s total assets were, let’s say, $1 trillion, a little less than a trillion dollars. At the peak, a few months ago, they had increased to $9 trillion. So between 2008 and now, the Fed’s assets had increased by $8 trillion, meaning the Fed had created eight trillion new dollars, and money that it pumped into the financial system, into the banking system, causing bank reserves to expand. Now, there is massive excess supply of bank reserves. People become very confused about what bank reserves are, and it is really a bit difficult to get your mind around it. But on the other hand, it’s not as complicated as you think.

(00:29:03):

Bank reserves, they’re just money. The money gets transferred around the banking system now electronically. And it becomes very confusing when you think about these digits moving around the banking system and from the banks to loans, and the banks might buy bonds or might make investments in stocks. It all becomes very confusing. But if you think of these bank reserves as just dollar bills and follow where the dollar bills are going, or think of them even, to make it more dramatic, think of this as pennies. Just imagine these mountains of pennies that the Fed is creating and just watch where the pennies move. It’s the same. Bank reserves are the same as dollars, or pennies, or anything you want to look at it. When the Fed creates bank reserves, those bank reserves are not going to go away until the Fed destroys them with quantitative tightening.

(00:29:56):

So for example, the Fed may buy a billion dollars of bonds from J.P. Morgan and deposit a billion dollars into J.P. Morgan’s bank reserves. Now, J.P. Morgan can do anything with those bank reserves that it wants. Those reserves are money. So it could lend that billion dollars to Trey Lockerbie. But Trey Lockerbie is not going to keep the billion dollars worth of pennies in his backyard. That would be ridiculous. He’s going to deposit them in his bank, Goldman Sachs, for instance, perhaps. And then so the bank reserves move to Goldman Sachs. They don’t disappear. They’re not going to disappear no matter how much the banks lend or no matter what they do with those bank reserves. They could buy a building with it. They could buy pork bellies. The banks, just because the reserves move around, they don’t disappear, and they’re never going to disappear until the Fed destroys them through quantitative tightening, which the Fed is now doing.

(00:30:48):

Now, so in the past, making a long story even longer, in the past, the way the Fed controlled interest rates, the federal funds rate, there didn’t used to be massive excess reserves. Banks were required to hold a certain portion of their deposits at the Fed, in their bank accounts at the Fed, as reserves to make sure that if suddenly their customers came knocking on the door asking for their deposits back then the banks would have enough reserves to pay the customers their deposit back so there wouldn’t be bank runs. Back in the 19th century sometime the legally required reserve ratio was as high as 20%. The banks were required to keep reserves of 20% at one point. Over time, this required reserve ratio fell and dropped and dropped and dropped. But so you get the idea. These bank reserves were legally mandated, and the banks didn’t keep excess reserves if they didn’t have to. And so reserves were always scarce, and the Fed was able to manage the federal funds rate by making relatively small adjustments in reserve balances.

(00:31:55):

So for example, if it wanted interest rates to go down, then it would buy some bonds from the banking system. And when it buys bonds, it would inject new reserves into the banking system. So that would increase the amount of bank reserves, and that would make bank reserves more plentiful. And so the cost of borrowing reserves would drop. And conversely, if it wanted interest rates to move higher, the Fed would sell some of the bonds that it already owed to a bank, and the bank would have to pay the Fed by transferring its bank reserves to the Fed. And that would make the reserves in the system more scarce, and that would make the federal funds rate move up.

(00:32:33):

So by banking relatively small changes in its open market purchases and sales, in other words, by just selling a relatively small amount of bonds or buying a relatively small amount of bonds, it could change the supply and demand dynamic in the market for federal funds, affecting the federal funds rate. And that’s how the Fed moved up and down the federal funds rate, by small adjustments in making bank reserves more plentiful or more scarce. But after 2008, that doesn’t work anymore because the overall level of bank reserves in the system are not scarce anymore. They’re super abundant. The Fed has effectively created eight trillion extra dollars that are floating around in the financial system. So now the banks have massive excess reserves, any way you look at it. And the only way to get rid of the excess reserves would be for the Fed to entirely reverse all of the money creation that it’s done over the last 14 years, and that’s not going to happen.

(00:33:31):

So the Fed has had to create a new way to control the federal funds rate, and now the way they control the federal funds rate is entirely different than the way they controlled it in the past. Now they control it by paying interest on bank reserves. So before the Fed started hiking interest rates in March, the federal funds rate was about 25 basis points. And so the Fed paid the banks 25 basis points on their bank reserves so that the banks wouldn’t lend money at less than 25 basis points. Why would the banks lend money to anybody else at less than 25 basis points when they can earn 25 basis points interest from the Fed? Well, now every time the federal funds rate moves up, the Fed makes it move up by paying a higher interest rate on bank reserves. So now that the federal funds rate is at a range between three and three and a quarter percent, the Fed’s currently paying 3.1% on all the bank reserves held by the banks, and, therefore, that’s why the banks won’t lend any money at less than 3.1%.

(00:34:33):

That’s how the Fed is moving up the interest rates. If the Fed didn’t pay interest on these bank reserves, then there’s so many reserves, the banks, there’s excess supply of reserves, so that would put downward pressure on interest rates and the Fed would be unable to push interest rates higher. It would be unable to tighten monetary policy to fight inflation. But by this new policy that they introduced in 2008 of paying interest on bank reserves for the first time ever… Before 2008, it was not legal for them to do this. This is how they make the interest rates go up now. So if they increase the federal fund rate by a further 75 basis points in November, then they’ll start paying something like 3.8% on bank reserves and so on and so forth.

(00:35:18):

So suddenly, the whole dynamic has changed. Before, until very recently when the federal fund rate was very close to zero, the Fed didn’t have to pay any interest on bank reserves or on the money that it created, and so all of its interest income was pure profit. But now it still has the same amount of interest income, but the problem is it’s now paying a lot of interest on bank reserves. And so paying 3% interest on all of these bank reserves suddenly means that the Fed has a very high level of interest expense. And apparently, as you mentioned in September, if their net profit turned negative in September, it is because their interest expense, 3% on bank reserves, is greater than their interest income on all of the bonds that they own. And so it’s possible now that it seems likely that for this full year they’ll probably still have a profit, but for next year they will probably make a loss.

(00:36:12):

But of course, you’ve got to keep in mind that the Fed doesn’t have a lot of capital, and it doesn’t have a lot of capital because it gives all of its profits to the government every year. As I think I mentioned earlier, since the Fed was created, it has given the government $1.8 trillion. And just since 2008, most of that has come since 2008 when they started quantitative easing. The Fed has given the government $1 trillion since 2008. If it were a normal bank, all of that would have been in their capital account. But now they don’t have very much capital because they have to give all their profits to the government. So they’re going to make a loss. If they have a loss, they’ll have negative capital. But I don’t think that’s a particularly pertinent issue.

Trey Lockerbie (00:36:53):

It’s not, because I guess my question around that, to your point, was who is the lender to the Fed, right? As far as they run a deficit now, how are they covering that deficit?

Richard Duncan (00:37:05):

So the Fed, of course, can create as much money as it needs, and in the future it will revert to a position where it once again has more interest income than interest expense, assuming that one day interest rates go back down. I think for much of the money the Fed has extended through its quantitative easing programs is guaranteed by the government. So the government debt, instead of being lowered by government profits as it has been practically every year since 1913, the government debt going forward for the next couple of years will probably be higher as a result of the Fed’s losses.

Trey Lockerbie (00:37:45):

Is IOER, the interest on excess reserves, basically the technical term for what you were describing there?

Richard Duncan (00:37:52):

So things become even more complicated because, yes, it is, but in addition to bank reserves, bank reserves are on the Fed’s… They’re liabilities. But suddenly there’s a new big item on the Fed’s liability side that didn’t exist very long ago, and that is reverse repurchase agreements. And rather than that, so banks have bank accounts at the Fed, and that’s where they keep their bank reserves. Suddenly, over the last couple of decades, money market mutual funds have become a big new thing, relatively speaking, over the last couple of decades. And these money market mutual funds also need some place to make a profit. They’ve got, I think, last I looked, nearly $5 trillion of assets. And so this forced the Fed to allow them essentially to all have bank accounts at the Fed also in the form of reverse repurchase agreements. It’s essentially the same thing as bank reserves, except reverse repurchase agreements are where the money market mutual funds can park their money, and they will also be paid 3% interest right now since that’s where the federal funds rate is. And that will prevent them from lending to anyone at less than 3%.

(00:39:04):

So the Fed now has to pay interest on not only bank reserves but on what are effectively the reserves of the money market mutual funds. It has to pay interest on both of these. Bank reserves are around $3 trillion, and money market mutual funds have about $2.2 trillion at the Fed. So, that’s something like $5.2 trillion that the Fed is now paying interest on, and that is why their interest expenses shot up, and that’s why their profits have dropped from over 100 billion last year to probably a negative number next year. Now, this is a real issue that I think there is a solution to. There is no reason for the Fed to be paying interest on bank reserves because the banks didn’t do anything to earn those reserves. They didn’t make loans, they didn’t speculate in pork bellies, they didn’t nothing whatsoever to earn those reserves.

(00:39:56):

The Fed’s action created those reserves by creating money and depositing that money into the bank’s reserve accounts. That money is a pure function of the Fed policy, nothing whatsoever to do with what the banks have done. And so all of the profits the banks are earning on this 3% interest payment from the Fed, it’s pure windfall profits which they do not deserve. And therefore, there’s a way to resolve this, right? Over time, I mentioned in the 19th century, the legal required reserve ratio was 20% at some points in some banks, in some cities. But over time in the US, the Fed continued to reduce the required reserve ratio year after year after year after year. And the more it reduced the required reserve ratio that made the money multiplier expand. This may be a bit technical, but through the process of fractional reserve banking, the money multiplier is one divided by the required reserve ratio. And what that means is if the required reserve ratio is 10%, one divided by 10% is 10 times, and that’s the money multiplier.

(00:41:05):

What that means is for every new deposit that enters the banking system, they can effectively create 10 times that much money through lending and relending and relending that deposit. But over time, the Fed reduced the required reserve ratio again and again and again until it was really in the low single digits. And then in 2020, they reduced it to zero. So there’s no longer any required reserve ratio whatsoever for the United States, meaning that the money multiplier is infinity. The only constraint on how much the banks can create now in money is their reality that if they lend too much, the people they lend to won’t be able to afford to pay the interest on the money that they’ve borrowed.

(00:41:45):

So the solution to this problem of the Fed having to pay such high interest rates is the Fed should just simply reimpose a required reserve ratio on the banks that is high enough to absorb all of their reserves until there are no more excess reserves left. So right now, the required reserves are calculated by the amount of reserves the banks have as a percentage of the banks’ deposits. The required reserve ratio is how much reserves the banks have as a percent of their bank deposits. In the past, they were required to keep a reserve against their deposits. Right now, their amount of reserves relative to their amount of deposits is about 16%. Right now, the required reserve ratio is 0%, and the Fed is having to pay 3% interest on all of these reserves.

(00:42:33):

So what the government should do is increase the required reserve ratio from 0% to 16%, absorbing all of these excess reserves so that we would once again be back in the situation where we were before 2008, where reserves were scarce and the Fed was able to control the federal fund rate by making relatively small changes in its bond purchases and bond sales, so we could revert to the old system of having a required reserve ratio. Then, since the banks would be required to keep 16% of all of their deposits as reserves, then it wouldn’t be necessary for the Fed to pay interest on the reserves anymore because the banks would be required to keep these reserves. There would be no need to pay them for them. And in that case, the Fed would become immensely profitable again.

(00:43:21):

So this is what the government should do is reimpose very significantly higher required reserve ratio to absorb all of these excess reserves. That would immediately restore the Fed’s profitability, and it would ensure that all of the Fed’s profits go to the government, which is, in other words, go to the US taxpayers rather than ending up as windfall profits to the banks who’ve done nothing whatsoever to earn them.

3. What to Do When You Know What Stocks Will Do Next – Jason Zweig

Imagine you could know tomorrow’s news today. Would that make you a better investor?

On Oct. 13, the Labor Department announced the consumer-price index rose 8.2% in September from the same month a year earlier, dashing hopes that inflation would drop.

What if you had known, on Oct. 12, exactly what would be in the next morning’s inflation report? You’d have bet stocks would tank, with a skittish market certain to panic on the news. You’d never have guessed what happened next.

After nosediving 2% when the market opened that morning, stocks turned around almost instantly, shooting up to close nearly 3% higher, one of the biggest intraday swings on record. In fact, U.S. stocks have risen roughly 9% since their low on the morning of Oct. 13.

Maybe people decided the bad news wasn’t bad enough to make the Federal Reserve raise interest rates even more than the 0.75 percentage point already considered inevitable at its November meeting. Maybe they felt the bad news was less bad than their worst fears.

Who knows? What we can know is that even possessing tomorrow’s news today wouldn’t assure you of being able to make a profitable trade. That’s why it’s so important to stick to a long-term plan rather than chasing the latest illusion of certainty.

One of Wall Street’s favorite sayings is that investors hate uncertainty. What they should hate, instead, is certainty.

4. Modern Meditations: Ann Miura-Ko – Mario Gabriele and Ann Miura-Ko

2. Which current or historical figure has most impacted your thinking? 

That’s easy: David Swensen. He led Yale’s endowment for 36 years and was a mentor of mine. Not only did he influence my professional life, but he impacted how I think about things. 

First of all, he was such an original thinker. When he arrived at Yale, as this young guy from Wall Street, no one saw endowments as anything more than a pool of money. David invented portfolio management and invested in illiquid and risky asset classes like venture capital which are higher beta but led to transformational returns over many decades. Those insights and many others changed how institutions oversee their money. Many of today’s endowments and foundations operate according to the Swensen philosophy. 

Beyond his incredible professional accomplishments, I was even more influenced by the person he was. 

David was a remarkable mentor to people from different backgrounds. He cared about diversity long before it was popular to care. David was always mentoring women and minorities because he believed it was the right thing to do and because he derived great joy from it. This started in his office with the people who worked with him and extended to the managers of funds he entrusted the endowment to. 

Finally, David demonstrated it was possible to be professionally successful and a dedicated parent. A friend told one such story at his memorial. David coached his son’s Little League team for years and with incredible gusto. One day there was a Wall Street Journal article on David and the Yale endowment. A parent showed this article to a young seven-year-old teammate. The kid burst into tears and said, “Does this mean Coach Dave got another job?”…

…8. What contemporary practice will our descendants judge us for most? 

We’ve forgotten how to criticize our institutions from a place of love. So much of the discourse today is defined by disgust or hatred. We see something broken and want to annihilate it instead of trying to fix it. Not only do I think that’s a shame, but it also doesn’t feel effective. Would you ever listen to feedback from someone that hated you? 

I read a biography of Abraham Lincoln recently. Lincoln thought it was important for schools to teach a love for America’s institutions. I think that’s missing today. We must impart that love to our children – to re-learn admiration for imperfect things and even people. Then, we can engage with them from a place of discovery and optimism.

9. What risk are we radically underestimating as a species? 

Cyber warfare. It’s not well understood, and possible solutions are incredibly under-resourced. 

I saw this threat develop during my Ph.D. Between 2003 and 2010, bad actors went from vandalizing websites to nation-state-level warfare. I still don’t think America has adapted more than a decade later. From a budgetary and infrastructural standpoint, we don’t have what we need, which puts us in incredible danger. It’s an area of risk the general public doesn’t consider because it is so invisible. 

The primary challenge in this space is talent. We simply aren’t training enough people. 

5. No Grand Strategy: The Complete Financial History of Berkshire Hathaway – Frederik Gieschen

Consider its unlikely origins. Buffett, brilliant as he was, got himself into the driver’s seat out of spite. Cigar butt investments, as Berkshire was, are there to be picked up, smoked, and discarded. Buffett intended to exit the stock through a tender offer before Seabury Stanton, Berkshire’s CEO, tried to short-change him by 12 ½ cents. In that moment, the otherwise calculating and rational Buffett made an emotional decision.

Instead of moving on to the next stock, he stuck around. He committed. I find it utterly relatable that he took it personally, that he got triggered into taking control of a basket case of a company. He was going to show people how to build a great business. It’s a testament to his abilities and what Adam described as “patient opportunism” that Berkshire turned out the way it did.

“Building Berkshire was an exercise in patience combined with opportunism and a reminder that opportunity cost matters. There was no grand strategy.”

It also reflected the initial conditions in which Buffett and Munger operated, including having the “good fortune to observe what worked and what didn’t” at the previous generation of conglomerates. “These lessons were then applied to their canvas at Berkshire to create a masterpiece.”

“Warren Buffett and Charlie Munger were born at the right time to fill their sails, and that of their conglomerate, with incredible tailwinds. They were lucky to begin solidifying Berkshire’s economic position when market inefficiencies were much more prevalent.”

There was no grand plan and small mistakes turned out to be the stepping stones on the way to great success.

“Mistakes in capital allocation, such as the losses experienced in Florida and Texas in Berkshire’s Insurance Group, do happen. The key is making sure bad investments don’t put the larger enterprise at risk, learning lessons from those mistakes, and communicating candidly with shareholders about them.”

However, Berkshire under Buffett was never truly in peril. Buffett carefully created structures that ensured survival. There’s a lesson in that, too.

“[Buffett] wrote that Berkshire probably could have increased the 23.8% compounded annual return it had achieved by borrowing more money, but he was uncomfortable with even a 1% chance of failure. Even at 99:1 odds, he and Munger would not have been comfortable with the risks.”

“Charlie and I have never been in a big hurry: We enjoy the process far more than the proceeds—though we have learned to live with those also.”

6. Weekly Special – An Overview of RNA Technologies – BioCompounding

RNA technologies made headlines in 2021 when the first mRNA-based COVID-19 vaccine was approved in December 2020.

However, RNA therapy is not a new technology. RNA modalities have been under development for several decades and by Jan 2020, the U.S Food and Drug Administration (FDA) had approved a total of eleven RNA drugs, and that has increased to sixteen approved RNA therapeutics by March 2022. In addition, there are approximately another 29 RNA therapies in clinical trials as of March 2022.

The first use case of RNA as therapeutics was demonstrated in the late 1970s, Zamecnik & Stephenson demonstrated the potential of RNA antisense oligonucleotide (ASO) therapy.  The duo showed that the synthesized ASOs were able to inhibit Rous sarcoma virus replication, by inhibiting viral protein translation. This was followed by the use of mRNAs for protein expression, RNAi for translation inhibition, and further developments in other formats…

…Most RNA therapies can be sorted into one of three broad categories (See image below for visuals):

1) those that target nucleic acids (either DNA or RNA), which can be further divided into two distinct types of therapies: a. Single-stranded antisense oligonucleotides (ASOs) and; b. Double-stranded molecules that operate through a cellular pathway known as RNA interference (RNAi)

2) those that target proteins (aptamers), and

3) those that encode proteins (mRNA).

Also, hybrid approaches that combine several RNA-based mechanisms into a single package are emerging…

…Some of the key challenges that had to be addressed to make RNAs therapeutically viable as a treatment modality are as follows:

1) nucleic acids are negatively charged and do not passively cross the hydrophobic lipid barrier of the cell.

2) exogenous RNAs are degraded rapidly by RNases once they are injected into the host.

3) some exogenous RNAs cause an immune response that hampers the translation of the target protein or causes the development of a toxic cell environment

4) The short half-life of RNA.

Luckily, scientists over the past couple of decades have substantially overcome these barriers with the use of many unique delivery methods, such as nanoparticles that protect the RNA and enable cell-specific delivery of the therapeutic agent.

On the half life front, scientist initially improved the stability and half-life through a RNA modification called pseudouridine, whish replaces uridine. It is demonstrated that pseudouridine can enhance RNA stability also decrease anti-RNA immune response. As further improvements in half-life are required scientists are innovating to further improve the half-life of RNA therapeutics specifically mRNA therapeutics, read more here.

7. Hyperinflation in the Roman Empire and its Influence on the Collapse of Rome – Mark

Lasting for more than 100 years and classified as the world’s longest-lasting empire, the Roman Empire was a political, economic, and technological powerhouse. According to legend, the famous Empire was founded in 753 BC by the two twin sons, Romulus and Remus, of Mars (the god of war). The Roman Empire persisted for well over a thousand years, although it had its ups and downs.

The Pax Romana (which translates to “Roman Peace”) was a period spanning two centuries, starting from 27 B.C.E all the way to 180 C.E. The Pax Romana was essentially the Roman version of the American “Era of Good Feelings.” The two-hundred-year epoch in Roman history was a period of relative peace, minimal war, technological progression, and economic prosperity, under the governance of famous Roman emperors like Augustus (63 B.C.E. — 14 C.E.), and the stoic Marcus Aurelius (121 C.E. — 180 C.E.)

However, despite the Pax Romana era of prosperity and peace in the Roman empire, the following centuries leading up to the collapse of the Roman Empire would be plagued with disaster. One aspect we will be exploring and analyzing in this article is the role of hyperinflation in Rome and how it exacerbated the collapse of the Roman Empire.

Rome’s economic struggles began with problems of its regional currency, the Roman Denarius. The silver Denarius was implemented and produced as the national currency of Rome starting as early as 211 B.C.E., minted all the way until the middle of the third century C.E. until it was replaced by the Antoninianus, a temporary currency instated by Roman Emperor Caracalla (188 C.E. — 217 C.E.) to help curb the hyperinflation of the silver Denarius.

Around the size of a nickel, the Roman Denarius was approximately worth a day’s wages for a craftsman in Rome. The coins were initially minted with 4.5 grams of pure silver (this is considered high purity.) Initially, the value of the Denarius was not based on consumers’ confidence in the Roman government or some gold reserves located who knows where. The currency was backed by itself — meaning that the value of the Denarius was based on the value of the silver used to mint that coin.

Because of a finite supply of silver and precious metals entering the Empire, Roman economic activity was limited to the number of denarii in circulation. Because there was a small circulation of denarii in the beginning decades of its conception, the Denarius could not successfully be used as a medium of exchange or currency, because there just wasn’t enough of the currency to go around. This problem was an especially hard pill for the Roman Emperors to swallow, as they could not finance their “pet projects” (wars, newly constructed amphitheaters, circuses, etc.) with the small circulation of denarii in the Empire.

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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 30 October 2022:

1. The state of the energy transition – Bill Gates

The world still needs to reduce annual greenhouse gas emissions from 51 billion tons to zero, but global emissions continue to increase every year. If you follow the annual IPCC reports, you’ve watched as the scenarios for limiting the global temperature rise to 1.5 or even 2 degrees Celsius become increasingly remote. And some of the clean technologies we need are still very far from becoming practical, cost-effective solutions we can deploy at scale.

In the past decade, we finally got going. Over the next three, we need to go much further, much faster. I still believe we can avoid a climate disaster—if we devote the next generation to mobilizing the largest crisis response in human history.

To understand what it will take to get to zero, we need to start by asking where the 51 billion tons of emissions come from. Unfortunately, the answer is everything and everywhere.

Everything: Virtually every human activity produces greenhouse gas emissions. People automatically think of electricity, where there’s a path to zero because wind and solar are now cheaper than fossil fuels. But electricity accounts for only 26 percent of global emissions. Similarly, lithium-ion batteries have made it possible to see a net-zero future for car travel. But cars account for less than half of the transportation sector’s 16 percent of emissions. Lithium-ion batteries don’t do much about the emissions from long-distance travel in airplanes, cargo ships, and heavy-duty trucks.

Agriculture and buildings account for 21 and 7 percent of emissions, respectively. The sector with the most emissions, 30 percent of the total, is manufacturing—making the things that modern life depends on, like cement, plastic, and steel. There are currently no cement plants in the world, and exactly one steel plant, that don’t produce CO2.

So, if you are reading this over lunch on a plastic device in your climate-controlled concrete-and-steel office building that you took a bus to get to, you begin to see how more or less every aspect of our lives contributes to the problem.

Everywhere: More than 70 countries have committed to reaching net zero, including big polluters like the United States and the European Union. Even if the US and Europe get there, however, we won’t have solved the problem. Three-quarters of the global population lives in emerging economies like Brazil, China, India, and South Africa, and although historically they played a very small role in causing climate change, they are now responsible for two-thirds of total greenhouse-gas emissions. China by itself emits more than one quarter. So solutions can’t be dependent on unique conditions in a single country or region. They have to work in all countries, or the temperature will continue to rise.

Thinking globally instead of nationally reveals why we can’t solve climate change simply by using less energy. Low- and middle-income countries are building aggressively to achieve the standard of living their people aspire to—and they should be. Many countries in Europe and North America filled the atmosphere with carbon to achieve prosperity, and it is both unrealistic and unfair to expect everyone else to forgo a more comfortable life because that carbon turned out to change the climate…

…Humanity has never had all these raw materials in front of us before: the investment, the policy, the pipeline of innovations, the overall public awareness that climate change is a priority. In recent polling, more people around the world see climate as a major threat than any other issue. And more individuals than ever are taking productive steps to reduce their own carbon footprints, which when viewed collectively sends a powerful signal to business and government leaders that more must be done. But even with all these tools and momentum, we still have to fashion them into a comprehensive solution.

That means three things: more research, development, and demonstration; developing a fair, workable process for scaling up; and helping people adapt to the climate change that is going to happen no matter what we do now.

Research, development, and demonstration: There are still many critical clean technologies that aren’t anywhere near cheap enough to compete. We need sustainable liquid fuels for long-haul transportation; affordable ways to capture CO2 directly from the atmosphere; additional sources of renewable energy to keep up with global demand that will double or triple as we electrify more and more processes. And to fill these gaps, we need to keep doing what we’ve done well since 2015: we need to ratchet up investment in clean-energy innovation even more.

Develop a fair, workable process for scaling up: We cannot pretend an energy transition won’t be disruptive. Although new industries and jobs will appear, some old ones will disappear. New infrastructure will affect the communities where it’s built. In the past, low-income communities and communities of color have suffered disproportionately from decisions about where big infrastructure projects should go, and we cannot let that happen this time. Public policies need to ensure a just transition so that we never pit a livable planet in opposition to people’s livelihoods. Those who could experience disruption need a voice in the process.

At the same time, there must be a transition. Last year, voters in Maine blocked the construction of transmission lines needed to bring low-carbon electricity to the Northeast. Some of those transmission lines were slated to cut through farms and forests, but nevertheless we need to be able to make responsible tradeoffs in fair and transparent ways so we can go faster. The unimaginable disruptions caused by a 4-degree rise in temperature will outweigh the downsides of most clean energy solutions—and a strong community engagement process will result in better design and siting of projects.

Help people adapt: The climate has already changed dramatically, and it will continue to do so. To minimize the damage these changes cause, we also need to invest in helping people adapt to a warmer climate, rising sea levels, and less predictable weather. That means investing in crop science so that farmers can plant seeds that are more tolerant of heat, an area our foundation has been working in for years. It also means figuring out technologies like desalination to guarantee that communities will have access to clean water, and upgrading port facilities around the world to make them resilient to floods and storms. The world must use the same strategies that have incentivized innovation in mitigation technologies to start getting serious about adaptation, too. We’re expanding our approach at Breakthrough Energy to reflect this perspective.

2. Cumulative vs. Cyclical Knowledge – Morgan Housel

In some fields our knowledge is seamlessly passed down across generations. In others, it’s fleeting. To paraphrase investor Jim Grant: Knowledge in some fields is cumulative. In other fields it’s cyclical (at best).

There are occasional periods when society learns that debt can be dangerous, greed backfires, and more money won’t solve all your problems. But it quickly forgets and moves on. Again and again. Generation after generation.

I think there are a few reasons this happens, and what it means we have to accept.

Some fields have quantifiable truths, while others are guided by vague beliefs and individual circumstances. Physicist Richard Feynman said, “Imagine how much harder physics would be if electrons had feelings.” Well, people do. So any topic guided by behavior – money, philosophy, relationships, etc. – can’t be solved with a formula like physics and math.

Neil deGrasse Tyson says, “The good thing about science is that it’s true whether or not you believe in it.” You can disagree and say science is the practice of continuous exploration and changing your mind, but in general he’s right. Germ theory is true and we know it’s true. But what about the proper level of savings and spending to live a good life? Or how much risk to take? Or the right investing strategy given today’s economy? Those kinds of questions do not lend themselves to scientific answers. They’re subjective, nuanced, and impacted by how the economy changes over time. So often there simply isn’t relevant information to pass down to the next generations. Even when firm financial rules exist, some truths have to be experienced firsthand to be understood.

Cyclical knowledge, and the inability to fully learn from others’ past experiences, means you have to accept a level of volatility and fragility not found in other fields. I can imagine a world in 50 years where things like cancer and heart disease are either non-existent or effectively controlled. I cannot ever imagine a world where economic volatility is tamed and people stop making financial decisions they eventually regret – no matter how much history of past mistakes we have to study.  

3. Madhavan Ramanujam – How to Price Products – Patrick O’Shaughnessy and Madhavan Ramanujam

Patrick: [00:02:48] So Madhavan, I’ve loved reading your book years ago and then again in preparation for our conversation today for one major reason. And we’ll talk a lot about that reason in a few minutes here, and we’ll go over the place and all the things you’ve studied in business. But the one thing that you sort of blew my mind on with your book is the importance of pricing, which is something that so many entrepreneurs out their struggle with, and the order in which pricing should come in a product conversation. I think almost everyone puts that at the end. I have an idea, let’s talk to customers, let’s design something, let’s build something, and then let’s figure out what to charge for it. I’d love you to provide your alternative perspective on that order of operations and why you arrived at a radically different way of building products.

Madhavan: [00:03:32] I think probably framing the problem at hand for many years, I was working as a pricing consultant, especially in Silicon Valley. And I really witnessed how everyone was so obsessed on creating amazing new innovations but hardly paid attention to how to monetize successfully or to even have a willingness to pay in the market. We used to even get calls saying, “Hey, I built a new product. We’ve been working on it for the last 2 years, and we need a price. And by the way, we needed it last week.” And you couple all these reactions with the failure rate that you actually see in innovation, it’s remarkably high.

And when I took a step back and I kind of looked at it, I think the classic phrase that comes to mind is that these companies were, I would say, simply spraying and praying and hoping that they can monetize and they can build products that people will eventually buy. But the core issue here is they were hoping because they truly didn’t know. They built the products, slapped down a price and threw it in the market, and hoped for the best. I mean, this had to change. And this is why I wrote Monetizing Innovation. What we call a winning approach is to think pricing early and to really test for, whether there’s a product market pricing fit before you go too far in the journey.

And the reason for this is inverting that mindset is critical because when you’re building something as an entrepreneur, as a company, you actually don’t have a choice whether you’ll have a pricing conversation with a customer. The only thing in your control is when you will have it. And we are advocating having that much earlier so that you can design the product around what customers need, what they value, and what they’re willing to pay for, in a sense, know that you will monetize as opposed to hope that you would.

Patrick: [00:05:08] Maybe you can bring this to life and make it tangible for us with an example because it’s hard for me to imagine having a price conversation before I have a product to show somebody. It seems like the impulse is build something even if it’s like a vaporware, demo, or something, and be able to walk in the office and say, “This is what we do” and then maybe have a pricing conversation. But I think you think pricing conversation should be even before the design and building phase. So how does one of these conversations unfold if there’s nothing to show in the first place?

Madhavan: [00:05:35] Yes. Probably I’ll take an example of a story, and we talk about this in the first chapter of the book. It’s a story from Porsche. In their early ’90s, they were actually — they’re thinking of an innovative idea. They said, “Okay, should we build an SUV?” But an SUV for a Porsche, that just seemed off. What they did was interesting. They went to the market. There’s nothing drawn in terms of a blueprint, sketch, or even a product. But they just went in and tried to identify whether there is a need for a Porsche SUV. And more importantly, would someone pay for it, very high level. Pleasant surprise, they actually found that people said, “Yes, Porsche SUV could make sense, and I would pay for it.” I mean, people who had probably moved on from Porsche because they had a family, et cetera, but they wanted to come back to the Porsche umbrella. What happened next was super fascinating. What they did is they came up with blueprints, sketches and kept having this conversation with customers trying to identify what do they need, what do they value in an SUV, and are they willing to pay for it. They even did what we call as car clinics, where they would build a prototype, full-scale prototype, where they would actually bring in people and let them ride the car around. And not a single unit has been, let’s say, manufactured or productized yet, but it’s still a prototype.

And then after that experience, they would have this kind of willingness to pay conversations. Things like, for instance, a big cupholder, probably which goes against the grain of most engineers, doesn’t look very aesthetically appealing, is in the car because people said they need it, they value it, and they’re willing to pay for it. I mean, a 6-speed manual transmission, no one needed that in an SUV. That was out of the window. So everything that went into the car was actually battle-tested with customers to see if they need it, they value. And more importantly, are they willing to pay for it? This is a very different way of innovation as compared to like the age-old approach has been always build a product, perfect it, our customers don’t know what they want, let’s slap on a price and throw it in the market and hope for the best. Very different. But if you look at the output of this exercise, also couldn’t have been more different than traditional innovation processes. I mean, this SUV was launched with the name of Cayenne, which we all know today accounts for more than half of Porsche’s profit and is built in hundreds and thousands of units, one of the roaring successes in automotive history.

I think the key here is to have that conversation with your customers early. We are not saying you just have it once. It’s a bit of you have it over a period of time and sustaining. Like if you built a prototype and you pitch the value and you pitch the benefits, and if someone actually says they won’t pay for it, chances are they’re not going to pay for it when you build a nicer-looking version, and that’s the point. So having the testing and learning much earlier. And if someone says, no, they won’t pay for it, the most important question is to ask why. And you start hearing all of these things to design your products around what drives customers’ needs, what do they value and what are they ultimately willing to pay for. The folks at First Round wrote a blog article, in which they summarized the entire thesis of the book Monetizing Innovation in four succinct words. They said price before product, period.

Patrick: [00:08:36] What I like about that example is Porsche is not showing up saying, “We’ll build anything you want, what do you want?” They do have an SUV in mind. They’re willing to build single prototypes to test reaction. You’re not walking with a white sheet of paper, like there’s some opinion that they have. But they’re still testing that willingness to pay very, very early on. And I want to make sure we highlight what is distinct about willingness to pay versus just positive feedback because I think lots of things, features, and products or whatever, people might react positively to. But that’s not the same as their willingness to pay. So I want to make sure I understand the difference. And then I’ll ask what it looks like to have a great willingness to pay conversation, like how you actually structurally execute that strategy?

Madhavan: [00:09:18] Most of the companies, at least in the tech space, would tell you they try to achieve a product market fit. And while that is good, it is not sufficient. For instance, if someone comes and ask, do you like the headset that you’re wearing for this conversation? I like it. Do you like it at $200? The whole conversation is different. So if you didn’t put pricing as part of your product market fit validation, often you are hearing what you want to hear. The idea is to get to a product market pricing fit and try to truly understand if, at the end of the day, someone will pay for the innovation as in do they truly value it.

Because I think it also comes down to like how do we define price. When we talk price, most people think of a dollar figure. That’s just a price point. I think we need to educate people to think about price as a measure. For instance, liter is a measure of volume, price is a measure of value. And when you think of it this way, price really stands for do people want your product and how badly you want it. And in a way, the easiest way to remember this, in Latin, there’s only one word for price and value. It’s called pretium. And I think they figured this out long back. It’s reflections of the same coin.

4. Looking at Japan with FT Unhedged – Matthew C. Klein, Rob Armstrong, and Ethan Wu

Unhedged: As most of the world’s major economies have struggled with waves of pandemic-driven inflation and rapid policy tightening designed to address that inflation, Japan has stood apart. In August, Japanese consumer price inflation rose to 3% y/y. That’s a 30-year high, but officials in the U.S. or Europe can only dream of such a low figure. The Bank of Japan, correspondingly, swims against the global tide, keeping monetary policy loose. The result has been a dizzying fall in the yen:

It is the combination of an economic environment distinct from the rest of the world and a weak currency that drew Unhedged’s attention back to Japan. Surely relatively gentle policy, a currency supportive of exports, and some pent-up post-pandemic demand in Japan and Asia should create investment opportunities in a Japanese market that has been unpopular with global investors in recent years?

Matt Klein: The thing that really stands out to me is that the 1980s bubble and 1990s bust left a massive permanent mark on the Japanese economy. Corporations went from being massive borrowers that relied on external finance to cover their capital budgets (and some of their operating expenses) to being huge net lenders. Since 1995, debt repayments, cash accumulation, and purchases of other financial assets have added up to more than ¥600tn. The costs of this financial conservatism have been falling business investment and rising precarity for workers.

Shinzo Abe’s economic program was a response to this problem. The hope was that a mixture of carrots (a weaker yen, lower taxes on profitable companies, more pro-business regulations, infrastructure investment) and sticks (inflation, governance reforms, higher taxes on unprofitable companies) would get companies to start spending their cash piles. It didn’t really work, but the upshot is that Japanese companies have ended up with absurdly strong balance sheets…

…Unhedged: We have heard for a long time that strong Japanese balance sheets would be put to work creating shareholder value. Maybe now is the moment?

Matt: In theory, there is enormous potential for Japanese companies to boost shareholder returns by rejiggering their balance sheets. Dividend yields have ticked up since Abe began pushing for higher shareholder payouts a decade ago, but they are still low. Buybacks may be anathema to executives scarred by the 1990s, but there is no obvious reason why companies operating in a world of zero interest rates should be so conservative with their cash, which is worth about 13 times operating income.

Unhedged: Japanese companies’ balance sheet strength may make them look — in theory — like a haven in the rising-rate storm. So far, though, the Tokyo market remains unloved by international investors. That is understandable: a consequence of the weakening yen is that, measured in global currencies, the Tokyo stock index has performed terribly. From the start of the pandemic in February 2020, the Topix is up 20% in yen terms, but down 7% in dollars, badly trailing US and global indices…

…Matt Brett manages the Baillie Gifford Japan Trust, which has returned 300 per cent investing in Japanese equities (in pounds) over the past 10 years. He says that recently Japanese growth stocks, in which the Trust specialises, have followed US techs down, with the difference that “the Japanese growth stocks never went up”. Growth companies are trading at 1.3 times sales, he reckons, a “tiny premium” to the Topix at 1.1. Meanwhile, the yield on the stocks in the trust is 2.4 per cent. “As stock pickers, we are quite excited,” he says.

5. The end of Apple’s affair with China – The Economist

The mushrooming of factories in southern India marks a new chapter for the world’s biggest technology company. Apple’s extraordinarily successful past two decades—revenue up 70-fold, share price up 600-fold, a market value of $2.4trn—is partly the result of a big bet on China. Apple banked on China-based factories, which now churn out more than 90% of its products, and wooed Chinese consumers, who in some years contributed up to a quarter of its revenue. Yet economic and geopolitical shifts are forcing the company to begin a hurried decoupling. Its turn away from China marks a big shift for Apple, and is emblematic of an even bigger one for the world economy.

Apple’s packaging proclaims “Designed by Apple in California”, but its gadgets are assembled along a supply chain that stretches from Amazonas to Zhejiang. At the centre is China, where 150 of Apple’s biggest suppliers operate production facilities. Tim Cook, who was Apple’s head of operations before he became chief executive in 2011, pioneered the firm’s approach to contract manufacturing. A regular visitor to China, Mr Cook has maintained good relations with the Chinese government, obeying its requirements to remove apps and to hold Chinese users’ data locally, where it is available to the authorities.

Now a change is under way. Big tech is showing strains. On October 25th Alphabet and Microsoft presented disappointing quarterly results. Meta, which lost another fifth of its value after reporting the second straight quarter of declining sales, is a shadow of its former self. Apple’s latest earnings, due out after The Economist went to press on October 27th, may be dented by creaky Chinese supply chains and softening demand from Chinese consumers. So Mr Cook, who has not been seen in China since 2019, is wooing new partners. In May he entertained Vietnam’s prime minister, Pham Minh Chinh, at Apple’s futuristic headquarters. Next year Apple is expected to open its first physical store in India (whose prime minister, Narendra Modi, is a fan of gold iPhones).

The two countries are the main beneficiaries of Apple’s strategic shift. In 2017 Apple listed 18 large suppliers in India and Vietnam; last year it had 37. In September, to much local fanfare, Apple started making its new iPhone 14 in India, where it had previously made only older models. The previous month it was reported that Apple would soon start making its MacBook laptops in Vietnam. Some of Apple’s newer gadgets show the way things are going. Almost half its AirPod earphones are made in Vietnam and by 2025 two-thirds will be, forecasts JPMorgan Chase. The bank reckons that, whereas today less than 5% of Apple’s products are made outside China, by 2025 the figure will be 25% (see chart 1).

As Apple’s production system is shifting, its suppliers are diversifying away from China, too. One crude measure of this is the share of long-term assets that Taiwanese tech-hardware and electronics firms have located in China. In 2017 the average figure was 43%. Last year that had fallen to 31%, according to our estimates using company and Bloomberg data.

The most urgent reason for the scramble is the need to spread operational risk. Two decades ago the garment industry beefed up its operations outside China after the sars epidemic paralysed supply chains. “sars made it very clear to everyone operating in China that you needed a ‘China+1’ strategy,” observes Dominic Scriven of Dragon Capital, an investment firm in Vietnam. Covid taught tech firms the same lesson. Lockdowns in Shanghai in the spring temporarily shut a factory run by Quanta, a Taiwanese firm, believed to be making most of Apple’s MacBooks. Avoiding this kind of chaos is the “primary driving force” for Apple’s supply-chain moves, says Gokul Hariharan of JPMorgan Chase.

Another motive is containing costs. Average wages in China have doubled in the past decade. By 2020 a Chinese manufacturing worker typically earned $530 a month, about twice as much as one in India or Vietnam, according to a survey by jetro, a Japanese industry body. India’s ropey infrastructure, with bad roads and an unreliable electrical grid, held the country back. But it has improved, and the Indian government has sweetened the deal with subsidies. Vietnam offers tax rebates and holidays, too, as well as free-trade deals, including one recently signed with the eu. Bureaucracy around visas and customs remains a pain. But the work ethic is similar to that in China: “Confucius still gets them out of bed in the morning,” says one foreign executive in Vietnam.

6. Thinking About the Next Warren Buffett – Frederik Gieschen

Shareholder: “Do you ever get tired of being Warren Buffett? If you could come back again, would you want to be Warren Buffett?”

Buffett: “You see a lot of the publicity here for a couple of days around the time of the meeting. But life goes on in a very normal way. And I have fun every day of my life. Because, you know, I get to do what I want to do. And I get to do it with people I like and admire and trust. And it doesn’t get any better than that.”

The more I read about Buffett, the more overwhelmed I feel. The scale of his success and the sheer volume of material by and about him seems like too much to tackle. It creates a temptation to boil down the many layers and lessons into one convenient number: the track record.

Then I remind myself of this quote in which Buffett described the essence of his and Munger’s jobs:

“We have to identify and keep good managers interested after we’ve figured out who they are. The second thing we do is allocate capital. And aside from that, we play bridge.”

Notice the balance. Capital and people. Reading and relationships. Buffett is well aware that financial capital is not the only asset that compounds. His entire life he has been compounding social capital: relationships, trust, reputation.

You can’t tap dance to work if you don’t like who you’ll meet at the office. You can’t lead an enterprise with 372,000 employees based on “decentralization almost to the point of abdication” if you can’t completely trust your managers.

We have to resist the temptation to view him through just one lens. It creates a caricature. It’s not helpful. It’s worth asking: How many layers are there to Buffett’s success?

• Followed his passion.
• Great investor with an enviable long-term track record. 
• Built a company in his image.
• Keeps painting his own canvas every day. 
• Reached the top of the Forbes rich list and became an admired icon of the business world (rather than a reviled symbol of the system). 
• Shareholders got wealthy alongside him.
• Created a unique and possibly lasting culture.
• Used his platform to educate generations of investors and business leaders.
• And then there’s the Giving Pledge. Buffett turned into more than a philanthropist: he became a catalyst for others to take action.

In The Big Short, Michael Lewis described how Michael Burry studied Buffett and found that the more he learned, “the less he thought Buffett could be copied.” Rather, the lesson from Buffett’s life was that “to succeed in a spectacular fashion you had to be spectacularly unusual.”

“If you are going to be a great investor, you have to fit the style to who you are. At one point I recognized that Warren Buffett, though he had every advantage in learning from Ben Graham, did not copy Ben Graham, but rather set out on his own path, and ran money his way, by his own rules.” Michael Burry

Munger has said as much, explaining that Buffett, “the former protégé,” surpassing Ben Graham was “a natural outcome.”

“It’s what Newton said. He said, ‘If I’ve seen a little farther than other men, it’s by standing on the shoulder of giants.’”

Speaking of giants, during the 2019 annual meeting Munger was in a chattier mood. He shared one of my favorite little stories:

Munger: “Young lawyers frequently come to me and say, ‘How can I quit practicing law and become a billionaire instead?’ I say, well, it reminds me of a story they tell about Mozart.

A young man came to him, and he said, ‘I want to compose symphonies. I want to talk to you about that.’ Mozart said, ‘How old are you?’ ‘Twenty-two.’

And Mozart said, ‘You’re too young to do symphonies.’ And the guy says, ‘But you were writing symphonies when you were ten years old.’

He says, ‘Yes, but I wasn’t running around asking other people how to do it.’”

7. TIP485: Market Updates, Ray Dalio Retiring, Elon Buying Twitter and Elemental Power – Trey Lockerbie and Josh Wolfe

Trey Lockerbie (00:31:39):

I feel like people would have a hard time just wrapping their head around sitting across from Stan Druckenmiller who’s saying, “Hey, I want to give you money.” I would be like, “I want to give you money, Stan.” And I imagine that’s because you guys are doing such interesting cutting edge things and you’re fishing in all these areas that are maybe unexplored.

(00:31:55):

And one of them I’m really particularly interested in, which is chronobiology because I don’t know, you seem like the kind of guy who’s interested in longevity perhaps, or on the cutting edge and seeing all these things that might help in a lot of different ways. Maybe talk to us about what chronobiology is and maybe what is most exciting about it for you.

Josh Wolfe (00:32:14):

Maybe on the one hand I’m not old enough to be obsessed with the longevity thing. Maybe I still harness the illusion of the young that I’m going to live a very long time and I have some views about that, but I’m actually not focused on this in the context of longevity and trying to live forever. It’s more about understanding the biology of timing, the timing of mechanisms inside of ourselves and between ourselves and a truth that your Purkinje cells, which are in your brain are 25 years old and are not renewed. The cells inside of your cell or your gut are renewed in some cases every day or several days.

(00:32:45):

And so, if you were to say your gestational age versus your biological age, different parts of you are different ages. There isn’t a you, like this table that we’re sitting at is one age, but you and I, even though we might have been born at a certain year are made up of different parts and those different parts actually have different ages in the same way that you could look at a river or stream and say that, “Well, of course there’s a river or stream, but its individual components are constantly changing.” And it’s also why you might have cancer mutations in some parts of the body, because you have more rapid rejuvenation or reproduction of cells and in other cases you have very low rates of cancer, because you don’t have higher probability of mutations.

(00:33:18):

So I’m very interested in the cell signaling between organelles inside of a cell, between cells, within an organ, between organs themselves, between our bodies and circadian rhythms. If you take something like cholesterol medicine, they figured out that you want to take cholesterol medicine in a specific time of day, which tends to be night, because your liver shuts down the production of LDL and it’s a optimal time to take a cholesterol lowering medicine, so that’s something that’s not either obvious to many people or well known.

(00:33:46):

When you look at between humans, you see synchronicity between women who get their period that are clearly hormone signaling amongst each other at the same time they end up in the same cycle if they’re roommates in college and after. And so there’s just very interesting hidden biology in the timing mechanisms inside of cells, inside of our bodies, between our bodies and that means that there’s mysteries to unlock and ultimately drugs to produce.

(00:34:11):

And whether those drugs or mechanisms or technologies are for the specific time of day you should be taking specific drugs and your biology might actually be different than mine. There are people that we know are morning people and people that are more night owls. Some of that is genetic, some of that is biological and environmental or epigenetic, the way that the environment acts on the expression of your genes, but it’s an area that is just not well understood. And anytime there’s an area that’s not well understood, to me it’s a whistle to pay attention, because there’s an opportunity to discover something profound…

…Trey Lockerbie (00:37:38):

Elemental power. So, you’ve been outspoken about the need to rebrand nuclear energy to elemental power, but shifting towards a future heavily relying on it. Energy has been a major headline in 2022. Do you think the events that have unfolded this year have set the stage for a more elemental future?

Josh Wolfe (00:37:57):

On elemental energy, yes, I think that the events of the world have at least sparked people in a few ways, some of which are overt and observable and some of which are speculative. You’ve already seen in Germany, which unfortunately has made decisions, I would speculate, and this sounds conspiratorial and crazy, but the only thing that Putin had to do for the past decade was foment the Green party, foment them to rise up against Merkel and convince the populous that the important thing to do in the name of climate was to shut down nuclear power.

(00:38:26):

The effect of doing that was not to decrease our reliance on low carbon energy. I mean, nuclear produces zero carbon. It’s just the cleanest, largest, most reliable source of base load power for a population. Most of the people that are against nuclear, as I’ve rebranded it elemental, I’ll get to in a moment, they’re really against growth, they’re really against progress, they’re really against capitalism. They’re really against systems of power and in some cases democracy.

(00:38:50):

There really is an ideological wrapper around people that are against that. And the elements of the mantra for clean and green, if it’s not a de-growth position, are mostly focused on solar and wind and biofuels and things that feel like they’re natural. Now, solar, of course, is inorganic semiconductors, and they’re not necessarily super clean. Wind requires huge amounts of cement and technology and infrastructure, but there’s this poetic and romantic illusion about using these elements.

(00:39:16):

And so, that’s actually what inspired me to say, “Wait a second, people love solar. They love the sun. Sun makes us happy. It’s in children’s books and it’s on stickers at Greenpeace protests. People love the wind. There’s lots of that and that seems good and clean, and we want to keep our air fresh. People love water and hydro, that’s also good. I mean, it’s not great that we make dams and affect aquaculture, but people like the sun, they like the wind and they like water, they should like rocks. Rocks are great. Who doesn’t like rocks?

(00:39:41):

Well, hey, there’s this rock called uranium and you don’t really have to do all that much to it, but if you tweak it a little bit, just like you tweak the other stuff, you can get it to produce heat and that’s pretty cool. Okay, well, if you get heat coming out of this thing just like a geothermal, which people also love on the environmental end, that’s just literally heat from the earth that is able to boil water and produce steam and turn a turbine with that steam and produce electricity by spinning the magnets. Well, that’s really what nuclear power is.”

(00:40:05):

So, I realize that people are against nuclear because they conflate it, unfortunately, going back to the mid late 70s with nuclear war. Nobody wants nuclear war and nuclear war is terrible. So, now you’ve got this thing that’s associated, you don’t have hydro war, you don’t have solar war, you don’t have wind war, but you have nuclear war. Nuclear war is bad, so nuclear is bad.

(00:40:22):

And yeah, 1979, the China Syndrome movie where you had this environmental disaster and radiation leak from nuclear, you had also 1979 with Three Mile Island where there actually was a burst valve that wasn’t actually a radiation leak, nobody died, there were no injuries. It was actually proof positive of engineering systems that work. But then you had Chornobyl, which was a certifiable disaster. I would posit that there isn’t much Russian technology that is competitive on global stages that anybody would buy except for possibly an AK47 or a MiG fighter jet, because those actually have to compete on the global stage.

(00:40:54):

And then you had Fukushima where a company that we founded ended up playing a pivotal role in the cleanup, a company called Kurion named after Madame Curie who discovered radiation spelled with a K, that was developing technology, both material science that could grab radioactive elements like cesium and strontium and technetium and uranium and plutonium, and then robots that could actually enter a disaster site and remove that and they ended up being the only US company picked for that cleanup back in the Fukushima disaster, which happened because of an earthquake and a tsunami and then a radioactive meltdown. So, I was very proud of founding that company and capitalizing it and the work that they did, which was just quite miraculous.

(00:41:29):

So, I’ve always been interested in nuclear for about a decade, and I got interested really because of a book. I wish that there was something more sophisticated, but I read a book called Bottomless Well by two brilliant people, Mark Mills and Peter Huber. Peter since passed, but he was a polymath and brilliant legal mind, and Mark is a technology pundit and advisor to many and they wrote this great book. Bill Gates gave a testimonial blurb for it, and it was called The Bottomless Well and it was really about the availability of energy that’s all around us at a time when people were talking about peak oil and gas and so forth.

(00:41:56):

But the key thing was a paragraph in one of the chapters that caught me and the paragraph talked about our directional progress. And I always had this concept that I called the directional hour of progress, applying to all kinds of different technology industries, from lighting to automotive to semiconductors, where you can see where we start and how we progress and we’re never going back the other way. And so in this case, I’m listening to or reading this book, and I’m following the logic as they talk about going from carbohydrates, growing fields or trees and burning them as we did centuries ago, to hydrocarbons cracking the molecules of oil and natural gas and dead dinosaurs to release heat exothermically. And then the trend towards nuclear, which was uranium and the undeniable era of progress was more and more energy density per unit of raw material.

(00:42:38):

And so, that to me was a feeling of inevitability and so I got very interested in nuclear. I got very interested in every part of the fuel cycle from uranium miners who were mostly hucksters and fraudsters in New Mexico, Nevada. We said no to that. Modular reactors, small scale reactors that were too expensive and had too much regulatory risk. And I like to ask this two word question, which is what sucks in any industry and the thing that sucked was what do you do with the waste? And we went around and tried to find a company to invest in and we couldn’t and we ended up starting one from scratch.

(00:43:03):

So that was 10 years ago, we ended up selling that years later after success. We had about 160 million of revenue, 40 million of EBITDA. We sold for 10 times EBITDA with a mere, from us, million and a half invested in that company and returned about 105 million to our LPs and it was a great story. And as Bill Conway who put us in business from Carlyle said, “It’s got the benefit of being true.” So, nuclear did us well.

(00:43:24):

And it was interesting also, because we talked about being interested in defense and some of these sort of sectors that may benefit from a reality of the world, which is that there are these negative black swans that occur. And so, this was a company that benefited a positive black swan, a low probability, high magnitude event consequence from the Fukushima event, which for Japan was a negative black swan. And so, it’s just always interesting to think about how you can do something that not only makes investors a lot of money, but is morally good, because we helped to remove 99% of the radioactive material from that disaster site and feel really good about that. It’s made history.

(00:43:52):

I’ve been a proponent since then of nuclear, particularly as it has been noticeably, audibly, visibly absent from any of the proposals put forth by Al Gore, Greta, anybody that is saying we need to help the climate, we need to cut carbon. How can you not look at the abundance of the 440 plus global plants and their safety record and their low carbon footprint and say this is part of the answer. The amount of land that you need for wind or solar in contrast to one nuclear power plant, the density of the ability for a gigawatt power plant to provide for millions of people, it’s just incomparable.

(00:44:25):

And unfortunately, there was this zeitgeist that had captured people and it wasn’t part of the religious doctrine. It wasn’t at the podium when people were speaking. And so, I realized that the thing that this really needed was a rebrand and as I thought about wind and solar and hydro, I said, “Well, this is just a rock, so why don’t we call it elemental power?” And elemental power can’t include all these other things that the environmentalists love, but any true environmentalists should be pro-nuclear, but they just can’t bring themselves to say that word. It’s sacrilegious. And so, let’s give them a new word and the word is elemental power.

Trey Lockerbie (00:44:55):

There’s this new modular nuclear technology that’s coming up. Is that something that you are positioned in at all or you have interest in, or is it more about just raising awareness?

Josh Wolfe (00:45:05):

My rant here on elemental power has no economic interest. We made our money on cleaning up stuff and nuclear waste. It’s a hard industry. It’s not easy and I’d like to encourage a lot of people go into it. Eventually we’ll raise the talent base, we’ll lower the cost of capital, we’ll raise awareness and attention, and maybe we enter at some other point.

(00:45:21):

But as investors, I put it in the too hard category. Modular reactors are great, but it’s going to take a lot of money, a long time, and a lot of regulatory headache, so we’re not invested in modular reactors, we’re not invested in any of the large nuclear power players, we’re not invested in uranium players. There’s really no exposure today other than advocacy that I think it’s the morally right thing to do as a society…

…Trey Lockerbie (00:57:02):

All right, so before I let you go, there’s one more thing I want to talk about, because last time you and I got together, we discussed your aspiration to see human scent digitized. How have we been progressing on that front and what could a machine that could smell, maybe it’s the Tesla Optimus robot, let’s say, be of benefit.

Josh Wolfe (00:57:23):

Well, very skeptical of this Tesla Optimus robot. Obviously if you look at Boston Dynamics robots from five or 10 years ago, they were doing feats that just blow the mind. But yeah, so I don’t see that being really relevant technology and it felt like it was a gimmicky monorail man-like showcase from the Simpsons.

(00:57:39):

Yeah, digital smell. It’s something that one of the Nobel Prize winners that we backed Richard Axel in a company called Kallyope, which is focused on the gut brain access, a biotech company, maybe eight or 10 years ago said, “Forget about it. Don’t try. Like lots of people have tried, this is never going to work.”

(00:57:52):

And I’ve been looking for over a decade for both the hardware and the software and kissed a lot of frogs and we finally found someone. Beginning about six months ago, negotiated with a very large tech company where this technology’s being spun out of, it’ll be announced in about a month and we catalyzed the transaction and capitalized it with $60 million, some incredible co-investors, two giant tech companies, one giant global foundation, a few billionaire famous hedge fund folks that are coming as co-investors.

(00:58:19):

And notably, when I was negotiating this, I lost my sense of smell. I evaded Covid for two and a half years and I ended up getting it and my two symptoms were one, loss of smell and two was the anxiety about when my smell would come back, but that was about just under three weeks, so that was really poetic justice, I guess.

(00:58:34):

There’s three things that this company will do. One is, to me, the holy grail, and it’ll be the longest, but Shazam for smell, the ability to hold up your phone or some other small device to effectively capture in the same way you do today image, which is really two dimensional or three dimensional with RGB. And you can do time lapse and you can do slow mo and you can do 4K and you can put all kinds of filters and whatnot in that capture. The Sound, which is really two dimensional frequency, amplitude, wavelength and you can capture spatial or stereo or mono.

(00:59:02):

Smell is at least 40 dimensions and could be several hundred depending on what the molecules are. It’s complex. It’s not a single sound or a linear set of notes, it could be mixed in potpourri, so you have to be able to sort signal, but a smell is volatile organic compounds, they are quite literal chemicals that are floating in the air that bind to your old factory bulb. Ours is more sensitive than some, but less sensitive than others. We know that dogs can detect covid and cancer and Parkinson’s and early signals of epilepsy before someone has a seizure and machines will have the sense of smell.

Trey Lockerbie (00:59:34):

Now, is that the use case, what you just mentioned of for the medical device?

Josh Wolfe (00:59:39):

Yes, so one is Shazam for smell, for humans to be able to record smell, so your childhood bedroom, the nostalgia of a grandparent’s home, the smell of your loved one’s hair, the smell of a wine, a meal, a vacation, beach, forest, wooded path, your home, whatever it is. The second is detecting human health from breath, so that will be in fact why one of the large global foundations cares to be able to help diagnose people early.

(01:00:00):

And then the third is industrial and defense applications, so the ability to detect chemicals, and that could be industrial chemicals, it could be fire, it could be electrical fires inside of large server rooms. It could be taggants that are used on people of interest for defense applications. So yeah, it’s an exciting future and we relish the idea that we get to invest in people who are inventing the future.

Trey Lockerbie (01:00:22):

Now, can you foresee a world where the computer is recognizing the smell in those compounds, those volatile compounds, and then could recreate them in some physical space?

Josh Wolfe (01:00:33):

I can definitely foresee the world that it’ll take longer, but the first thing that Kodak did was figure out recording and then screen companies later on figured out playback, but recording will be first and we’ll be digitizing that with a signal and then playback will come after.

(01:00:45):

And I see no reason why it doesn’t obey the laws of physics to be able to do that. It just needs to reduce our human ignorance and come up with the knowledge and ultimately the technologies that embody that knowledge to be able to produce it, so we will have it. I couldn’t tell you when, but recording will come first.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. Of all the companies mentioned, we currently have a vested interest in Alphabet, Apple, Meta Platforms, and Microsoft. Holdings are subject to change at any time.