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What We’re Reading (Week Ending 7 June 2020)

The best articles we’ve read in recent times on a wide range of topics, including investing, business, and the world in general.

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 7 June 2020:

1. Complexity Bias: Why We Prefer Complicated to Simple – Farnam Street

Meanwhile, we may also see complexity where only chaos exists. This tendency manifests in many forms, such as conspiracy theories, superstition, folklore, and logical fallacies. The distinction between complexity and chaos is not a semantic one. When we imagine that something chaotic is in fact complex, we are seeing it as having an order and more predictability than is warranted. In fact, there is no real order, and prediction is incredibly difficult at best.

Complexity bias is interesting because the majority of cognitive biases occur in order to save mental energy. For example, confirmation bias enables us to avoid the effort associated with updating our beliefs. We stick to our existing opinions and ignore information that contradicts them. Availability bias is a means of avoiding the effort of considering everything we know about a topic. It may seem like the opposite is true, but complexity bias is, in fact, another cognitive shortcut. By opting for impenetrable solutions, we sidestep the need to understand. Of the fight-or-flight responses, complexity bias is the flight response. It is a means of turning away from a problem or concept and labeling it as too confusing. If you think something is harder than it is, you surrender your responsibility to understand it.

2. Ben Thompson – Platforms, Ecosystems, and Aggregators – [Invest Like the Best, EP.176] – Patrick O’Shaughnessy & Ben Thompson

Why? Because the content they seek out is evergreen. It’s always available. I can go watch Orange is the New Black, one of the original shows and it’s valuable to me today. So the marginal value of Netflix is increasing as their customer base increases as opposed to a lot of services where the more customers there are, it degrades in quality and becomes even harder to acquire them and then they have to spend marketing costs to acquire them.

And that’s just where companies fall apart. So many companies based their sort of projections and calculations on the cost of acquiring a customer at the beginning. The problem is at the beginning you’re serving your ideal customer, the one that really wants your product, and so they’re going to look over the problems with your product, et cetera, et cetera. They’re going to be easy to acquire and usually your marginal customer gets more and more difficult to acquire. You have to spend more money, and what happens is Facebook and Google actually end up taking all your profit over time.

3. An Unlikely Hero for 1906, 1929…and Today – Jason Zweig

“I might never have gone into the banking business,” he later recalled, if he hadn’t gotten into a shouting match with the head of a local bank about its reluctance to make small loans to individual borrowers. In 1904, Giannini founded a bank of his own in San Francisco, called Bank of Italy, to do just that.

Then, on April 18, 1906, an earthquake struck the Bay Area, killing more than 3,000 people and setting the city ablaze.

Realizing the fires were heading toward his bank, Giannini heaved $80,000 of gold and cash into two horse-drawn produce wagons. He buried the money under crates of oranges to hide it from looters rampaging through the streets. For weeks afterward, he recalled later, the bank’s money smelled like oranges.

By the next day, the Bank of Italy had burned to the ground. But Giannini rode in from his home in San Mateo, where he had stashed the money. With San Francisco still smoldering, he set up a desk on the wharf and plunked a sack of gold on it, under a cardboard sign on a stick that read BANK OF ITALY: OPEN FOR BUSINESS.

Giannini lent to almost everyone with a legitimate need, on one condition: They had to raise half of what they needed elsewhere. That forced them to enlist their friends and family in the recovery of their business or the rebuilding of their home.

Then Giannini would lend the other half, often accepting little more than people’s character as their collateral. After all, he’d just gotten others to assume half the bank’s risk. What’s more, much of the hoarded cash the borrowers raised from their friends and family ended up as Bank of Italy deposits—or was invested in shares of its stock.

4. Permanent Assumptions – Morgan Housel

Some things are always changing and can’t be known. There can also be a handful of things you have unshakable faith in – your permanent assumptions.

Realizing it’s not inconsistent to have no view about the future path of some things but unwavering views about the path of others is how you stay humble without giving up. And the good news when the world is a dark cloud of uncertainty is that those permanent assumptions tend to be what matter most over time.

5. The Day Coronavirus Nearly Broke the Financial Markets – Justin Baer

Mr. Rao, who was working remotely that Monday, walked down the 20 steps to his home office at 4:30 a.m. to discover the debt markets were already in disarray. He started calling the senior Wall Street executives he knew at many of the big banks.

Executives told him that Sunday’s emergency Fed rate cut had swung a swath of interest-rate swap contracts in banks’ favor. Companies had locked in superlow interest rates on future debt sales over the past year. But when rates fell even further, the companies suddenly owed additional collateral.

On that Monday, banks had to account for all that new collateral as assets on their books.

So when Mr. Rao called senior executives for an explanation on why they wouldn’t trade, they had the same refrain: There was no room to buy bonds and other assets and still remain in compliance with tougher guidelines imposed by regulators after the previous financial crisis. In other words, capital rules intended to make the financial system safer were, at least in this instance, draining liquidity from the markets.

One senior bank executive leveled with him: “We can’t bid on anything that adds to the balance sheet right now.”

At the same time, the surge in stock-market volatility, along with falling prices on mortgage bonds, had forced margin calls on many investment funds. The additional collateral they owed banks was also booked as assets, adding billions more.

The slump in mortgage bonds was so vast it crushed a group of investors that had borrowed from banks to juice their returns: real-estate investment funds.

The Fed’s bond-buying program, unveiled that Sunday, had earmarked some $200 billion for mortgage-bond purchases. But by Monday bond managers discovered the Fed purchases, while well-intentioned, weren’t nearly enough.

“On that first day, the Fed got completely run over by the market,” said Dan Ivascyn, who manages one of the world’s biggest bond funds and serves as investment chief at Pacific Investment Management Co. “That’s where REITs and other leveraged-mortgage products started getting into serious trouble.”

6. How Pandemics End – Gina Kolata

When will the Covid-19 pandemic end? And how?

According to historians, pandemics typically have two types of endings: the medical, which occurs when the incidence and death rates plummet, and the social, when the epidemic of fear about the disease wanes.

“When people ask, ‘When will this end?,’ they are asking about the social ending,” said Dr. Jeremy Greene, a historian of medicine at Johns Hopkins.

In other words, an end can occur not because a disease has been vanquished but because people grow tired of panic mode and learn to live with a disease. Allan Brandt, a Harvard historian, said something similar was happening with Covid-19: “As we have seen in the debate about opening the economy, many questions about the so-called end are determined not by medical and public health data but by sociopolitical processes.”

Endings “are very, very messy,” said Dora Vargha, a historian at the University of Exeter. “Looking back, we have a weak narrative. For whom does the epidemic end, and who gets to say?”

7. Massive Up and Down Moves in Stocks in the Same Year Are More Common Than You Think – Ben Carlson

Here are some reminders I like to consider when thinking through big moves like this:

I cannot predict the direction of the stock market over the short-term.
I cannot predict the magnitude of stock market moves.
I cannot predict when market moves are going to start or stop.
The stock market doesn’t always make sense nor does it have to.
The stock market has the ability to make everyone look foolish at times.

Things looked bleak in March. Now things look not so bad considering the S&P 500 is down just 2-3% on the year. What happens next is anyone’s guess.

I don’t know.

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.

What We’re Reading (Week Ending 31 May 2020)

The best articles we’ve read in recent times on a wide range of topics, including investing, business, and the world in general.

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!

Here are the articles for the week ending 31 May 2020:

1. We Need To Talk About Ergodicity – Joe Wiggins

A system is deemed ergodic if the expected value of an activity performed by a group is the same as for an individual carrying out the same action over time. Rolling a dice is an example of an ergodic system. If 500 people roll a fair six-sided dice once, the expected value is the same as if I alone roll a fair six-sided dice 500 times.

The Russian roulette example is a non-ergodic system. The expected value of the group differs sharply to the average of an individual carrying out the action through time. In the group situation the average outcome is to live and become wealthy. As an individual performing the activity through time – on average – I am dead. In a non-ergodic system the group expected value is deeply misleading as it pertains to individual experience.

Although these may seem like somewhat frivolous examples, the concept of ergodicity is incredibly important. Much of classical economics assumes about human behaviour is founded on the expected average outcome of the group (see Expected Utility Theory). This works under the assumption that most environments or situations are ergodic, when in fact this is not the case.

2. Not even wrong: ways to predict tech – Ben Evans

A lot of really important technologies started out looking like expensive, impractical toys. The engineering wasn’t finished, the building blocks didn’t fit together, the volumes were too low and the manufacturing process was new and imperfect. In parallel, many or even most important things propose some new way of doing things, or even an entirely new thing to do. So it doesn’t work, it’s expensive, and it’s silly. It’s a toy.

Some of the most important things of the last 100 years or so looked like this – aircraft, cars, telephones, mobile phones and personal computers were all dismissed.

But on the other hand, plenty of things that looked like useless toys never did become anything more.

This means that there is no predictive value in saying ‘that doesn’t work’ or ‘that looks like a toy’ – and that there is also no predictive value in saying ‘people always say that’. As Pauli put it, statements like this are ‘not even wrong’ – they give no insight into what will happen. You have to go one level further. You have to ask ‘do you have a theory for why this will get better, or why it won’t, and for why people will change their behaviour, or for why they won’t’?

3. My Son’s Entrepreneurship Journey – Investment Pilgrim

In Primary 4, he and his classmates started playing this traditional local game called “kuti kuti” where each player will control a small plastic animal. Each player is to maneuver his/her animal around the table with the aim of resting his/her animal over the other player’s animal. Once that is done, the game is won and the winner takes possession of the loser’s animal. This was very much like how I used to play the flag erasers with my friends when I was younger.

He started playing with large plastic animals. One weekend, he was out with his maternal grandfather when he saw a pack of the plastic animals selling for $2.50 for a pack of 10. He bought the pack, or his grandfather did anyway, and brought his new toys to school. He managed to sell each plastic animal for $1! In a few days, he sold all of them. Pretty good margin, lol.

He did not tell me any of this until it was over. When I found out about his transgressions away from school work, I did what any responsible parent would do. I laid down the law.

“Son, I need to tell you that your school work is the most important thing for you at this point.”

Pause.

“I’d also like you to think about growing this business.”

4. The Fourth Great Unlock – Scott Galloway

Jeff Bezos, at the outset of their earnings call, warned shareholders they “may want to take a seat.” He has done this several times. “This” is snatching profits from the jaws of shareholders to reinvest in the firm. With the exception of Netflix, no firm has been given this much runway. Bezos has used every foot of it to set aloft a vessel that nobody will likely catch. Imagine a Spruce Goose but at twice the speed of sound.

Bezos told investors that the $4 billion in profits they were expecting would be reinvested. The investment had a theme: Covid-19. Specifically, Bezos outlined a vision for at-home Covid tests, plasma donors, PPE equipment, distancing, additional compensation, and protocols to adapt to a new world. Jeff Bezos is developing the earth’s first “vaccinated” supply chain.

The genius here is breathtaking. Walmart can’t follow, as they don’t own their distribution for last-mile commerce. Outside of Walmart, few firms have the balance sheet to pull this off. Maybe FedEx, UPS, or Prologis? But it’s unlikely they could make this sort of investment, this fast — it would be perceived as reckless.

5. The Epic Games Primer: Parts I-VI Directory – Matthew Ball & Jacob Novak

Epic Games was founded by Tim Sweeney and Mark Rein in 1991. Sweeney is the CEO and majority/controlling shareholder, while Tencent owns roughly 40%. As a private company, Epic does not publicly disclose its financials. According to press reports, it was valued at roughly $15B in 2018 (when it last raised capital) and is currently raising more at a “significantly higher” price, per Bloomberg.

Compared to Facebook, Amazon, Apple, Microsoft and Google, which are worth $600B to $1.4T, Epic’s valuation is modest. However, Epic has the potential to become one of the largest, most influential tech companies in the world. This might seem hyperbolic to those who know Epic only as the marker of the hit video game Fortnite: Battle Royale. In fact, even long-time fans of Epic’s games might find such a pronouncement odd given Fortnite has generated more revenue in three years than the rest of Epic has in almost as many decades. But behind the scenes, it looks increasingly likely that Epic will be at the very center of society’s digital future.

6. Uncertainty II – Howard Marks

By definition, people who lack the expertise in a given field required for superior judgments also lack the expertise required to assess their level of expertise. As I mentioned, they qualify as John Kenneth Galbraith’s forecasters “who don’t know they don’t know.”

While re-reading my memo, I realized I had left out an important further ramification. Not only do most people fail to possess superior expertise – as well as the ability to know it – but they also lack the ability to figure out who does have it. That’s the catch: you may have to be an expert in a field in order to be able to figure out who the true experts are. That’s why research in most fields is subjected to “peer review,” meaning a review by experts, (not to be confused with “a jury of one’s peers,” meaning other lay citizens)…

… Nowadays, like everyone else, I’m bombarded with conflicting views regarding the wisdom of rapidly reopening the U.S. economy. Yet I recognize that not only is my opinion on that topic of little value, but I also don’t have the expertise required to know for sure whose opinion does count. What I do know is that the last thing I should do is choose an expert because his or her opinions agree with mine, and allow confirmation bias to affect my decision…

… So (a) true expertise is scarce and limited in scope, (b) expertise and predictive ability are two different things, and (c) we all should be careful about whom we listen to and how much weight we give to their pronouncements.

What we probably don’t realize is that walking can be a kind of a behavioral preventive against depression. It benefits us on many levels, physical and psychological. Walking helps to produce protein molecules in muscle and brain that help repair wear and tear. These muscle and brain molecules—myokines and neurotrophic factors, respectively—have been intensively studied in recent years for their health effects. We are discovering that they act almost as a kind of fertilizer that assists in the growth of cells and regulation of metabolism. They also reduce certain types of inflammation.

These essential molecules are produced by movement and the increased brain and body activity created by movement. If you’re not moving about, placing heart and muscle under a bit of positive stress and strain, these molecules aren’t produced in sufficient quantities to perform their roles.

7. If Robots Steal So Many Jobs, Why Aren’t They Saving Us Now? – Matt Simon

Modern Capitalism has never seen anything quite like the novel coronavirus SARS-CoV-2. In a matter of months, the deadly contagious bug has spread around the world, hobbling any economy in its path. In the United States, where consumer spending accounts for more than two-thirds of economic activity, commerce has come to a standstill as people stay home to slow the virus’ spread. Hotels and restaurants and airlines have taken massive hits; Delta has cut its flight capacity by 70 percent. One in five US households has already lost work. And that’s all because of the vulnerabilities of the human worker. When we get sick—or we have to shelter in place to avoid getting sick—the work that depends on people grinds to a stop.

Why haven’t the machines saved us yet?

This economic catastrophe is blowing up the myth of the worker robot and AI takeover. We’ve been led to believe that a new wave of automation is here, made possible by smarter AI and more sophisticated robots. San Francisco has even considered a tax on robots—replace a human with a machine, and pay a price. The problem will get so bad, argue folks like former presidential candidate Andrew Yang, we’ll need a universal basic income to support our displaced human workers. (UBI seems to have actually arrived, in a sense, with the Trump administration’s proposed payout to American households to weather the crisis: A $1,000 check for most, with an extra $500 for every child.)

What We’re Reading (Week Ending 24 May 2020)

The best articles we’ve read in recent times on a wide range of topics, including investing, business, and the world in general.

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!

Here are the articles for the week ending 24 May 2020:

1. The Three Sides of Risk – Morgan Housel

At a conference a few months ago I was asked what skiing taught me about investing. This was on stage, where you can’t ponder your answer – you have to blurt out whatever you can think of.

I didn’t think skiing taught me anything about investing. But one incident came to mind…

…But it opened my eyes to the idea that there are three distinct sides of risk:

The odds you will get hit.
The average consequences of getting hit.
The tail-end consequences of getting hit.

The first two are easy to grasp. It’s the third that’s hardest to learn, and can often only be learned through experience.

But once you go through something like that, you realize that the tail-end consequences – the low-probability, high-impact events – are all that matter.

2. Doordash and Pizza Arbitrage – Ranjan Roy

In March 2019 a good friend who owns a few pizza restaurants messaged me (this friend has made appearances in prior Margins’ pieces). For over a decade, he resisted adding delivery as an option for his restaurants. He felt it would detract from focusing on the dine-in experience and result in trying to compete with Domino’s.

But he had suddenly started getting customers calling in with complaints about their deliveries.

Customers called in saying their pizza was delivered cold. Or the wrong pizza was delivered and they wanted a new pizza.

Again, none of his restaurants delivered.

He realized that a delivery option had mysteriously appeared on their company’s Google Listing. The delivery option was created by Doordash…

…. But he brought up another problem – the prices were off. He was frustrated that customers were seeing incorrectly low prices. A pizza that he charged $24 for was listed as $16 by Doordash…

… If someone could pay Doordash $16 a pizza, and Doordash would pay his restaurant $24 a pizza, then he should clearly just order pizzas himself via Doordash, all day long. You’d net a clean $8 profit per pizza

3. Mental Models – Oliver Sung

Surfing

You won’t be able to surf if you don’t catch the wave. And if you do catch it, you can stay on it for long. The trick is catching the one that lasts the longest as early as possible and not to get off. Microsoft was a result of a 16-year-old catching a wave of software revolution right on the edge.

Cockroach Theory

When bad news are revealed, there may be many more related negative events yet to be revealed. There’s never just one cockroach in the kitchen.

Minsky Moment

A sudden collapse of asset values marking the end of a credit cycle or an economic cycle.

Framing

The way a question or situation is framed can determine your response and lead to an action decided based on whether the options are presented with positive or negative connotations. Mixed with the narrative fallacy, framing can turn out dangerous for errors in decision making and might be used as power over other’s behavior.

Hindsight Bias

Also called creeping determinism, it’s the tendency of overestimating one’s ability to have predicted an outcome that could not possibly have been predicted. Hindsight bias is dangerous because it hinders one from learning from past mistakes. If we feel like we knew it all along, it means we won’t stop to examine why something really happened.

4. Our weird behavior during the pandemic is messing with AI models – Will Douglas Heaven

It took less than a week at the end of February for the top 10 Amazon search terms in multiple countries to fill up with products related to covid-19. You can track the spread of the pandemic by what we shopped for: the items peaked first in Italy, followed by Spain, France, Canada, and the US. The UK and Germany lag slightly behind. “It’s an incredible transition in the space of five days,” says Rael Cline, Nozzle’s CEO. The ripple effects have been seen across retail supply chains.

But they have also affected artificial intelligence, causing hiccups for the algorithms that run behind the scenes in inventory management, fraud detection, marketing, and more. Machine-learning models trained on normal human behavior are now finding that normal has changed, and some are no longer working as they should.

5. Common Myths About the Federal Reserve – Cullen Roche

Myth #5 – The Fed “Manipulates” Interest Rates

It’s very common to hear that the Federal Reserve “manipulates interest rates”. This is based on the idea that interest rates would be better “set” if they were controlled by a private market instead of a government entity like a Central Bank. Unfortunately, this is based on a lack of understanding of banking and central banking.

A Central Bank is little more than a central clearinghouse where payments settle. Before there were central banks payments between banks were settled at private clearinghouses. The problem with this arrangement was that banks would stop settling payments during financial panics and this would exacerbate depressions. A central bank leverages government powers to ensure that this doesn’t happen. The 2008 financial crisis was a great example of this. When private banks stopped lending to one another the Fed operated as the “lender of last resort”. This meant that even though many banks were insolvent mom and pop could still buy necessities via the banking system because most banks didn’t stop operating thanks to the Fed’s backstop. Had the Fed not lent to firms in need the crisis would have bankrupted even the largest banks and the economy would have certainly entered a substantially more catastrophic crisis. You literally wouldn’t have been able to buy anything unless you had cash under your mattress.

In order to operate as a central clearinghouse the Fed needs to set an overnight rate at which it lends to banks. Since the Fed requires most banks to utilize this system the banks naturally try to lend their reserve deposits which puts downward pressure on overnight interest rates. Therefore, the natural rate of interest on overnight loans is 0% in the Fed Funds market. This means the Fed actually has to manipulate rates HIGHER from this 0% rate. This is not theoretical, this is simply a mathematical reality of a system with a Fed Funds market in which banks operate within this closed system.

6. Why Walking Matters—Now More Than Ever – Shane O’Mara

7. Pandemics & Markets: Part II – Jamie Catherwood

As news of the Spanish Flu began to spread, a September 28, 1918 issue of The Commercial and Financial Chronicle regrettably stated:

‘An epidemic of Spanish influenza has checked business to some extent, but is not expected to be lasting. The Department of Health of this city has just voted $25,000 to fight influenza, which it calls pneumonia in epidemic form. It is said to be in reality the old-fashioned grippe [flu].’

In hindsight we all know how inaccurate this prediction turned out to be, but it is mind boggling to think about how someone could think this so shortly before the Spanish Flu took the world by storm.

Well, this quote inspired me to do a little further digging into what, if any, of the major themes and questions we’re asking today were also prevalent during the Spanish Flu of 1918. Turns out there is a lot in common!

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.

What We’re Reading (Week Ending 17 May 2020)

The best articles we’ve read in recent times on a wide range of topics, including investing, business, and the world in general.

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!

Here are the articles for the week ending 17 May 2020:

1. Why the Most Futuristic Investor in Tech Wants to Back Society’s Outcasts – Polina Marinova

As humans, we construct this very linear narrative where you say, “I did X, and then I did Y, and it led to Z.” If you’re really intellectually honest, it’s really this crazy ball of randomness. You just never know. So randomly, there was a guy in my investment banking group whose dad worked with a famous investor. We got to pitch that famous investor, whose name was Bill Conway, one of the co-founders of the Carlyle Group.

Bill’s disposition at the moment when we met was one of enthusiasm and support for a bunch of young entrepreneurially naive guys. And he bet on us. What that meant was helping us capitalize our management company, which would become Lux Capital.

2. Does Covid-19 Prove the Stock Market Is Inefficient? – Robert Shiller & Burton Malkiel

The economics profession has an explanation for this difficulty based on the idea that markets are “efficient.” If markets are perfect, prices will incorporate all publicly available information about the future. Speculative prices will be a “random walk,” to borrow a phrase from the physicists and statisticians. The changes in prices will look random because they respond only to the news. News, by the very fact that it is new, has to be unforecastable, otherwise it is not really news and would have been reflected in prices yesterday. The market is smarter than any individual, the theory goes, because it incorporates information of the smartest traders who keep their separate real information secret, until their trades cause it to be revealed in market prices…

… EMH [Efficient Market Hypothesis] does not imply that prices will always be “correct” or that all market participants are always rational. There is abundant evidence that many (perhaps even most) market participants are far from rational. But even if price setting was always determined by rational profit-maximizing investors, prices (which depend on imperfect forecasts) can never be “correct.” They are “wrong” all the time. EMH implies that we can never be sure whether they are too high or too low. And any profits attributable to judgments that are more accurate than the market consensus will not represent unexploited arbitrage possibilities.

3. Israeli engineers created an open-source hack for making Covid-19 ventilators – Chase Purdy

A team of scientists in Israel this week unveiled what they’re calling the AmboVent-1690-108, an inexpensive ventilator system made from a handful of off-the-shelf items. Project leader David Alkaher also heads the technology work of the Israeli Air Force’s confidential Unit 108, which is comprised of electronics specialists. Whereas a typical hospital ventilator costs around $40,000, the AmboVent system can be made for about $500 to $1,000…

… More on the makeshift side, the French sporting goods company Decathalon has been selling scuba gear to the Rome-based Institute of Studies for the Integration of Systems, where it’s being enhanced with 3D-printed valve parts to make basic ventilator systems. The institute notes the devices are only for emergencies where it’s impossible to find official healthcare supplies.

4. The Most Important Stock Investment Lessons I Wish I Had Learned Earlier – Safal Niveshak

Tony shares the story of an Arabic date farmer he met who had inherited an orchard that had about a thousand trees. As the farmer was showing Tony around his orchard, and took him to something like a hundred trees that were recently planted, Tony asked him out of curiosity, “How long will it take this tree to bear fruit?”

The farmer replied, “Well this particular variety will bear fruit in about 20 years. But that is not good enough for the market. It may be about 40 years before we can actually sell it.”

Tony replied, “I have never heard this. I did not know this. Are there other date trees that would produce faster?” Meanwhile, he looked at all those trees that were being harvested and realized that this farmer could not have possibly planted them.

The farmer tells Tony, “Okay. Here’s my grandfather and my father, great grandfather.”

5. Does Better Virus Response Lead to Better Stock Market Outcomes? – Ben Carlson

I went through each of these lists to check the year-to-date performance of each country’s stock market to see if there is any correlation between getting a handle on the virus and stock market performance in 2020. I looked at both ETF and local currency performance..

… I guess my main takeaway after going through the data is this — the stock market is rarely a good gauge of the health and strength of your country, especially when dealing with a crisis like this.

The stock market is not the economy but it’s also not its citizens or government leaders or crisis response team either.

6. The Great Depression – Gary Richardson

An example of the former is the Fed’s decision to raise interest rates in 1928 and 1929. The Fed did this in an attempt to limit speculation in securities markets. This action slowed economic activity in the United States. Because the international gold standard linked interest rates and monetary policies among participating nations, the Fed’s actions triggered recessions in nations around the globe. The Fed repeated this mistake when responding to the international financial crisis in the fall of 1931. This website explores these issues in greater depth in our entries on the stock market crash of 1929 and the financial crises of 1931 through 1933.

An example of the latter is the Fed’s failure to act as a lender of last resort during the banking panics that began in the fall of 1930 and ended with the banking holiday in the winter of 1933. This website explores this issue in essays on the banking panics of 1930 to 1931, the banking acts of 1932, and the banking holiday of 1933.

7. One Young Harvard Grad’s Quixotic Quest to Disrupt Private Equity – Richard Teitelbaum

Bain’s investment process was flawed, according to the report. For example, for a prospective target to pass muster, the firm required a projected internal rate of return of 25 percent over the life of the investment. That was a common projected IRR. “The first thing I noticed was this massive dispersion of returns,” Rasmussen says. Bain would generate seven or eight times on some of its investments, but with others, zero, and the number that hit the 25 percent return bogey was infinitesimally small. The upshot was thousands of man-hours wasted modeling investment outcomes because the forecasts were inevitably wrong.

There was another surprise. The single best predictor of future returns had nothing to do with the amount of leverage employed, operational changes, company management, or even the underlying soundness of the business. The driver of superior returns was the price paid by the private-equity firm — companies purchased at a lower ratio of price to earnings before interest, taxes, depreciation, and amortization tended overwhelmingly to outperform.

The cheapest 25 percent of private-equity deals based on price-to-Ebitda accounted for 60 percent of the industry’s profits. Cheap buys made good investments. “With the inexpensive ones, there’s a margin of safety,” Rasmussen says.

The firm’s touted skills for selecting companies, arranging financing, and improving operations proved to be a mirage. Instead the best private-equity deals relied on a simple formula — “small, cheap, and levered,” as Rasmussen puts it. He expected the study to prompt major changes at the firm. “Now that we have the data, how do we change our behavior?” he wondered.

8. Young Bulls and Old Bears – Michael Batnick

What do Bill Gross, Sam Zell, Jeremy Grantham and Carl Icahn have in common? They’re all old, they’ve all had brilliant careers, and they’re all bearish on the stock market. (From April 2016)

Whether it be in music or in sports or in markets, the prior generation never thinks “kids” will ever measure up. Even Benjamin Graham- the man who basically invented value investing- fell victim to the “get off my lawn syndrome.”

From Roger Lowenstein’s Buffett: The Making of an American Capitalist.

“I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook “Graham & Dodd” was first published; but the situation has changed”

What We’re Reading (Week Ending 10 May 2020)

The best articles we’ve read in recent times on a wide range of topics, including investing, business, and the world in general.

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!

Here are the articles for the week ending 10 May 2020:

1. How To Achieve 12,000% Returns Against The Odds – Chin Hui Leong

The table below is a sample of stocks that I have held for nine years or more.

The returns may look phenomenal now… but the outlook was not like that over a decade ago….

There I was, in the middle of the Global Financial Crisis, back in early 2008, a downturn so severe that it was eventually billed as the worst recession to happen in over 50 years.

Things were looking bad. Really bad.

And there I was, right in the centre of the economic storm.

If today’s COVID-19 economic scenario feels similar, you might want to stick around for what I am about to share.

2. Why Isn’t The Market Down More? – Sean Stannard-Stockton

The most important thing to keep in mind is that S&P 500 is often referred to as “the market,” but of course the S&P 500 is essentially the 500 largest companies in the US, which, especially during this crisis, are not indicative of the economy as a whole. And the largest 25 companies make up nearly 40% of the S&P 500…

…Now whatever you think about those companies, most all investors would agree that they are far, far more likely to survive this crisis than the average company. And, in fact, with so many smaller companies struggling it seems very likely that many of these large companies will thrive in a post-Coronavirus world in which their competition has been dealt a huge setback.

So looked at this way, the fact that the S&P 500 is only down 16% from its highs does not suggest that the market thinks the economy will be OK, but rather that the largest companies in the world will see their way though, and as demand returns they will face much less competition.

If instead, the market was reflecting investors being naively optimistic about the economic impact of Coronavirus, then you would expect to see economically sensitive stocks leading the recovery. But the reverse is true.

3. Scientists Create Jet Engine Powered By Only Electricity – Dan Robitzski

A prototype jet engine can propel itself without using any fossil fuels, potentially paving the way for carbon-neutral air travel.

The device compresses air and ionizes it with microwaves, generating plasma that thrusts it forward, according to research published Tuesday in the journal AIP Advances. That means planes may someday fly using just electricity and the air around them as fuel.

4. What Have We Learned Here? – Morgan Housel

The two most important economic stories are the size of the business collapse and the magnitude of the stimulus. It’s easy to focus on the former because it’s personal and devastating while ignoring the latter because it’s political and hard to contextualize. But they are equally huge. Despite 15% unemployment, Goldman Sachs estimates household income will be higher in Q2 2020 than it was in Q2 2019, largely because of stimulus…

…Done right, forecasting is a delicate balance of probabilities. But people want certainty, especially when the stakes are high. The people who make forecasting models probably have less faith in their accuracy than those who read them, if only because things like confidence intervals are rarely discussed in the media.

5. Inside the Biggest Oil Meltdown in History – Leah McGrath Goodman

Many of the market participants caught in the crossfire were not sophisticated investors, but simply members of the retail public who did not understand how oil futures contracts work — and that they can expire or trade negative.

When pressed about these investors’ portfolio losses, CME chairman Terrence Duffy, who appeared on CNBC in the aftermath of negative oil prices, did not mince words. “Futures contracts have been around for hundreds of years and I will tell you, since Day 1, everybody knows that it’s unlimited losses in futures,” he said. “So nobody should be under the perception that it can’t go below zero.”

6. Owning Stocks is a Long-Term Project – Safal Niveshak

“Mountains should be climbed with as little effort as possible and without desire. The reality of your own nature should determine the speed. If you become restless, speed up. If you become winded, slow down. You climb the mountain in an equilibrium between restlessness and exhaustion. Then, when you are no longer thinking ahead, each footstep isn’t just a means to an an end but a unique event in itself. This leaf has jagged edges. This rock looks loose. From this place the snow is less visible, even though closer. These are things you should notice anyway. To live only for some future goal is shallow. It’s the sides of the mountain that sustain life, not the top. Here’s where things grow.”

7. Why Most Post-Pandemic Predictions Will Be Totally Wrong – Rob Walker

When a cataclysmic event is fresh or still unfolding, it’s hard to see beyond its immediate contours and even harder to imagine what the next unpredictable events will be and how those will affect whatever change is in motion right now. As this moment ought to remind us, the most influential and important events are the ones that emerge spontaneously and with little warning — like the coronavirus itself.

But it’s so seductively easy to double down on sweeping pronouncements: E-sports will replace football and basketball, movie theaters will never return, and telemedicine will become the new normal. (We’ve even made a few.)

Anything is possible, but take a closer look at how often definitive predictions about permanent change are simply extrapolations of recently observable trends taken to some maximum extreme.

What We’re Reading (Week Ending 3 May 2020)

The best articles we’ve read in recent times on a wide range of topics, including investing, business, and the world in general.

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!

Here are the articles for the week ending 3 May 2020:

1. 68 Bits of Unsolicited Advice – Kevin Kelly

It’s my birthday. I’m 68. I feel like pulling up a rocking chair and dispensing advice to the young ‘uns. Here are 68 pithy bits of unsolicited advice which I offer as my birthday present to all of you…

…Gratitude will unlock all other virtues and is something you can get better at…

…The more you are interested in others, the more interesting they find you. To be interesting, be interested…

… Perhaps the most counter-intuitive truth of the universe is that the more you give to others, the more you’ll get. Understanding this is the beginning of wisdom…

…Hatred is a curse that does not affect the hated. It only poisons the hater. Release a grudge as if it was a poison…

…Anything real begins with the fiction of what could be. Imagination is therefore the most potent force in the universe, and a skill you can get better at. It’s the one skill in life that benefits from ignoring what everyone else knows….

… Over the long term, the future is decided by optimists. To be an optimist you don’t have to ignore all the many problems we create; you just have to imagine improving our capacity to solve problems.

2. The Simon Abundance Index 2020 – Gale L. Pooley and Marian L. Tupy

The time price denotes the amount of time that a person has to work in order to earn enough money to buy something. To calculate the time price, the nominal money price is divided by nominal hourly income. (We got the former from the World Bank and the International Monetary Fund, and the latter by combining the World Bank’s GDP figures with Conference Board’s estimate of annual hours worked.) The average time price of 50 commodities fell by 74.2 percent. That means that for the same length of time that a person needed to work to earn enough money to buy one unit in our basket of 50 commodities in 1980, he or she could buy 3.87 units in 2019. In other words, the average person saw his or her level of abundance rise by 287.4 percent. That amounts to a compound annual growth rate of 3.63 percent and implies a doubling of abundance every 19.45 years (see Figure 1)…

…Simon’s revolutionary insights with regard to the mutually beneficial interaction between population growth and availability of natural resources, which our research confirms, may be counterintuitive, but they are real. The world’s resources are finite in the same way that the number of piano keys is finite. The instrument has only 88 notes, but those can be played in an infinite variety of ways. The same applies to our planet. The Earth’s atoms may be fixed, but the possible combinations of those atoms are infinite. What matters, then, is not the physical limits of our planet, but human freedom to experiment and reimagine the use of resources that we have.

3. How I Helped to Make Fischer Black Wealthier – Jay R. Ritter

By December of 1983, Donald Keim, Jeremy Siegel, myself, and many other academics (and nonacademics) took long positions in the March Value Line 1984 futures, with a short position in the March 1984 S&P 500 futures (to hedge against market movements) in order to capitalize on the turn-of-the year effect. As usual, the Value Line index outperformed the S&P 500 in early January of 1984, and we made money…

… The rest of the summer, I lost lots of money on the March-December spread as it fell from +1.80 to -1.60, but made up most of it on the September-December spread. In December, I made lots of money when the basis on the March contract was bid up by speculators anticipating the turn-of-the-year effect. But for the year as a whole, 1986 was a bad year. I lost more in the futures market than I made from my academic salary. And I decided that maybe I wasn’t an informed trader after all, but instead was one of those traders who think that they are informed, when in reality they are providing the profits to the truly informed investors.

Years later, I found out who was on the other side of the trades in the summer of 1986. It was Goldman Sachs, with Fischer Black advising the traders, that took me to the cleaners as the market moved from one pricing regime to another.

In the first four years of the Value Line futures contract, the market priced the futures using the wrong formula. After the summer of 1986, the market priced the Value Line futures using the right formula. The September 1986 issue of the Journal of Finance published an article (Eytan and Harpaz, 1986) giving the correct formula for the pricing of the Value Line futures. In the transition from one pricing regime to the other, I was nearly wiped out.

[Ser Jing here: The author (Jay R. Ritter) and Jeremy Siegel are both finance professors. Siegel, in particular, is a high-profile finance professor and the author of prominent investment books, including Stocks For The Long Run.]

4. The excess burden of death from coronavirus COVID-19 is closer to a month than to a year – Michael Levitt

The Medium post by David Spiegelhalter from the Winton Center at Cambridge University is well written and reassuring ((see https://medium.com/wintoncentre/how-much-normal-risk-does-covid-represent-4539118e1196 and attached). It concludes that if infected with COVID-19, your risk of dying is the same as the risk of dying for the coming year from natural causes. This is true for all age groups. The article is fine except it is totally wrong. The correct conclusion is that “your risk of dying is the same as the risk for the coming MONTH from natural causes.

5. When You Have No Idea What Happens Next – Morgan Housel

Accepting that forecasts have little use doesn’t mean you become a blind fatalist. When you pay more attention to history than forecasts you pick up on the patterns that guide how people respond to unforeseen events, which – given how stable behavior is over time – is the next best thing to knowing what will happen next.

I don’t know when this recession will end, and I’m not interested in your forecast. But I am interested in the historical observation that progress happens too slowly for people to notice but setbacks happen too quickly to ignore, which causes most people to recognize when a recession ended only with considerable hindsight, which requires maintaining investing optimism even when the economy around you feels broken.

6. The Coffee Can Portfolio – Budget Babe

“The potential impact of this…was brought home to me drastically as the result of an experience with one woman client. Her husband, a lawyer, handled her financial affairs and was our primary contact. I had worked with the client for about 10 years, when her husband suddenly died. She inherited his estate and called us to say that she would be adding his securities to the portfolio under our management.

When we received the list of assets, I was amused to find that he had secretly been piggy-backing our recommendations for his wife’s portfolio. Then, when I looked at the total value of the estate, I was also shocked. The husband had applied a small twist of his own to our advice: He paid no attention whatsoever to the sale recommendations. He simply put about $5,000 in every purchase recommendation. Then he would toss the certificate in his safe-deposit box and forget it.

Needless to say, he had an odd-looking portfolio. He owned a number of small holdings with values of less than $2,000. He had several large holdings with values in excess of $100,000. There was one jumbo holding worth over $800,000 that exceeded the total value of his wife’s portfolio and came from a small commitment in a company called Haloid; this later turned out to be a zillion shares of Xerox.”

7. The U.S. Needs Way More Than a Bailout to Recover From Covid-19 – Barry Ritholtz

When the stock market crashed in 1929, the Federal Reserve was a young institution with limited authority. Reviving the economy was the job of the White House and Congress. Programs such as the Works Progress Administration, in which the federal government hired workers to build more than half a million miles of streets and 10,000 bridges, along with airports, dams, highways, and sanitation systems, helped alleviate mass unemployment. However, the lasting economic gains came not from temporary work programs, but rather from the Reconstruction Finance Corp., a public-private entity better known as the RFC…

… The RFC was an enormous economic multiplier. Start with the Depression-era breakdown of the banking system. That institutional collapse wasn’t caused by a lack of capital; larger national banks such as National City Bank and Bank of America had idle cash. But low potential returns, combined with post-traumatic stress lingering from the stock crash, made bankers so risk-averse they wouldn’t even lend to each other.

The RFC’s solution in 1934 was for private bank employees to work with its subsidiary, the Federal Housing Administration, to create insurance for pools of mortgages. This led to a resurgence of financing for home purchases. Another RFC subsidiary, the Rural Electrification Administration, worked with farm cooperatives and banks to issue low-interest 20-year loans to run thousands of miles of electrical wires to rural farms and ranches—something the private sector had said would be too expensive.

During the years before World War II, the RFC created the Defense Plant Corp., offering loans and tax benefits for the manufacture of tanks, planes, and other weapons used by the Allies to fight the Nazis. The DPC helped add 50% to the country’s manufacturing capacity by the war’s end, according to Hyman. In 1940 it was responsible for 25% of the nation’s entire gross domestic product. Hyman noted that it remade the U.S. aerospace and electronics industries, turning them into some of the largest sectors in the economy.

What We’re Reading (Week Ending 26 April 2020)

The best articles we’ve read in recent times on a wide range of topics, including investing, business, and the world in general.

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!

Here are the articles for the week ending 26 April 2020:

1. The first modern pandemic – Bill Gates

Melinda and I grew up learning that World War II was the defining moment of our parents’ generation. In a similar way, the COVID-19 pandemic—the first modern pandemic—will define this era. No one who lives through Pandemic I will ever forget it. And it is impossible to overstate the pain that people are feeling now and will continue to feel for years to come.

The heavy cost of the pandemic for lower-paid and poor people is a special concern for Melinda and me. The disease is disproportionately hurting poorer communities and racial minorities. Likewise, the economic impact of the shutdown is hitting low-income, minority workers the hardest. Policymakers will need to make sure that, as the country opens up, the recovery doesn’t make inequality even worse than it already is.

At the same time, we are impressed with how the world is coming together to fight this fight. Every day, we talk to scientists at universities and small companies, CEOs of pharmaceutical companies, or heads of government to make sure that the new tools I’ve discussed become available as soon as possible. And there are so many heroes to admire right now, including the health workers on the front line. When the world eventually declares Pandemic I over, we will have all of them to thank for it.

2. Charlie Munger, Unplugged – Jason Zweig and Nicole Friedman

If I have to be a little bit more cheerful about things, then I say to myself, ‘I’m lying, but I’m going to do it anyway.’ [Pause.] I had a son [Teddy] who died [of leukemia in 1955]. I told him he wasn’t going to die. When he started his thing, I lied. It just killed me, but I just lied to him. [Long pause.] He was 9 years old. [Extended pause.] I’m sure I did the right thing, but it hurts. [Clears his throat.]

3. It’s Time To Build – Marc Andreessen

You see it in housing and the physical footprint of our cities. We can’t build nearly enough housing in our cities with surging economic potential — which results in crazily skyrocketing housing prices in places like San Francisco, making it nearly impossible for regular people to move in and take the jobs of the future. We also can’t build the cities themselves anymore. When the producers of HBO’s “Westworld” wanted to portray the American city of the future, they didn’t film in Seattle or Los Angeles or Austin — they went to Singapore. We should have gleaming skyscrapers and spectacular living environments in all our best cities at levels way beyond what we have now; where are they?

You see it in education. We have top-end universities, yes, but with the capacity to teach only a microscopic percentage of the 4 million new 18 year olds in the U.S. each year, or the 120 million new 18 year olds in the world each year. Why not educate every 18 year old? Isn’t that the most important thing we can possibly do? Why not build a far larger number of universities, or scale the ones we have way up? The last major innovation in K-12 education was Montessori, which traces back to the 1960s; we’ve been doing education research that’s never reached practical deployment for 50 years since; why not build a lot more great K-12 schools using everything we now know? We know one-to-one tutoring can reliably increase education outcomes by two standard deviations (the Bloom two-sigma effect); we have the internet; why haven’t we built systems to match every young learner with an older tutor to dramatically improve student success?

4. What’s Different This Time – Morgan Housel

We are medically more prepared to fight disease than ever before. But, psychologically, the mere thought of a pandemic has never felt so foreign, so unprecedented. What was a tragic but expected part of life 100 years ago is now a tragic and inconceivable part of life in 2020.

Compared with other pandemics even as recent as the 1960s, it’s different this time because so few people today had the slightest expectation that an infectious disease would ever impact their lives. Even if covid-19 ends up medically less impactful than what happened in 1957 or 1968, the shock and surprise effect may be greater.

What We’re Reading (Week Ending 19 April 2020)

The best articles we’ve read in recent times on a wide range of topics, including investing, business, and the world in general.

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!

Here are the articles for the week ending 19 April 2020:

1. Coronavirus Case Counts Are Meaningless* – Nate Silver

The number of reported COVID-19 cases is not a very useful indicator of anything unless you also know something about how tests are being conducted.

In fact, in some cases, places with lower nominal case counts may actually be worse off. In general, a high number of tests is associated with a more robust medical infrastructure and a more adept government response to the coronavirus. The countries that are doing a lot of testing also tend to have low fatality rates — not just low case fatality rates (how many people die as a fraction of known cases) but also lower rates of death as a share of the overall population. Germany, for example, which is conducting about 50,000 tests per day — seven times more than the U.K. — has more than twice as many reported cases as the U.K., but they’ve also had only about one-third as many deaths.

2. Who Pays For This? – Morgan Housel

We’re all just guessing, but when this is all over – however you want to define that – it would not surprise me if the direct federal cost of Covid-19 is something north of $10 trillion.

I’ve heard many people ask recently, “How are we going to pay for that?”

With debt, of course. Enormous, hard-to-fathom, piles of debt.

But the question is really asking, “How will we get out from underneath that debt?”

How do we pay it off?

Three things are important here:

(1) We won’t ever pay it off.

(2) That’s fine.

(3) We’re lucky to have a fascinating history of how this works.

3. Knowledge of the Future – Howard Marks

The market seems to have passed judgment with regard to the future. U.S. deaths have reached 23,000 and continue to rise. Weekly unemployment claims are running at 10 times the all-time record. The GDP decline in the current quarter is likely to be the worst in history. But people are cheered by the outlook for therapies and vaccines, and investors have concluded that the Fed/Treasury will reduce the pain and bring on a V-shaped recovery. There’s an old saying that “you can’t fight the Fed” – that is, the Fed can accomplish whatever it wants – and investors are buying it. Thus, the S&P 500 has risen 23% since its bottom on March 23, and there’s little concern about the retrenchments that typically have been part of past market rallies.

But Justin Beal, my artist son-in-law, is mystified. “I don’t get it,” he told me on Saturday. “The virus is rampant, business is frozen, and the government’s throwing money all over the place, even though tax revenues have to be down. How can the market be rising so strongly?” We’ll find out as the future unfolds.

4. The Stock Market is Not Your Benchmark – Ben Carlson

If you’re upset that the stock market isn’t getting killed every day even as the news gets worse you don’t really understand how the stock market works. Everyone is confused during a bear market as investors are recalibrating expectations on the fly. Right or wrong, this is how the stock market operates at times. It doesn’t always make sense.

This doesn’t mean the stock market is always right in its forward-looking assessments of the world. But the stock market moves quickly (in both directions) and sometimes doesn’t match the sentiment of the world at large.

This is a good reminder that the stock market is also not a benchmark for economic success (or lack thereof).

Think about it — the top 5 companies make up 19.3% of the S&P 500. The top 10 companies make up more than 26% of the index. And the top 20 names comprise 36% of the S&P.

Those 20 companies don’t control 36% of the economy. They don’t employ 36% of workers. They don’t produce 36% of the products and services or profits or revenues.

So why should we compare this market-cap-weighted basket of stocks directly to the economy at large?

Throughout the remainder of the crisis there will be times when the stock market seemingly moves in lockstep with the economic data. Other times (now for instance) the stock market will seem utterly detached from the economic reality on the ground.

Get used to it.

5. Charlie Munger: ‘The Phone Is Not Ringing Off the Hook’ – Jason Zweig

In 2008-09, the years of the last financial crisis, Berkshire spent tens of billions of dollars investing in (among others) General Electric Co. and Goldman Sachs Group Inc. and buying Burlington Northern Santa Fe Corp. outright.

Will Berkshire step up now to buy businesses on the same scale?

“Well, I would say basically we’re like the captain of a ship when the worst typhoon that’s ever happened comes,” Mr. Munger told me. “We just want to get through the typhoon, and we’d rather come out of it with a whole lot of liquidity. We’re not playing, ‘Oh goody, goody, everything’s going to hell, let’s plunge 100% of the reserves [into buying businesses].’”

He added, “Warren wants to keep Berkshire safe for people who have 90% of their net worth invested in it. We’re always going to be on the safe side. That doesn’t mean we couldn’t do something pretty aggressive or seize some opportunity. But basically we will be fairly conservative. And we’ll emerge on the other side very strong.”

What We’re Reading (Week Ending 12 April 2020)

The best articles we’ve read in recent times on a wide range of topics, including investing, business, and the world in general.

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!

Here are the articles for the week ending 12 April 2020:

1. Message from Ser Jing’s friend

Last week, Ser Jing’s friend shared a list of wholesome activities we can all do to add more meaning to our lives during this difficult Circuit Breaker period. It bears repeating:

– Picking up a book that you have been wanting to read
– Taking this period of time to rest and re-calibrate yourself
– Spending quality time and doing stuffs for your loved ones
– Taking up online courses. Think Coursera and etc
– Starting up your own side line business
– Developing a new skill or hobby
– Practicing meditation, yoga and journalism to master your inner thoughts and emotions (Ser Jing meditates regularly)
– Spending some time alone in nature
– Getting in touch with your friends
– Spend time reflecting

2. The places that escaped the Spanish flu – Richard Gray

“Although they knew about the flu and did what they could to prevent it from coming, it arrived anyway,” says Katherine Ringsmuth. “The disease struck so quickly, most people didn’t have a chance to respond.” A fall in salmon stocks may have ultimately helped the Egegak village. “It was a terrible year for salmon as they had been producing so much canned salmon for the war effort in Europe, it caused the fish numbers to decline.

“It might have meant no one had any reason to visit the area. It was just chance.”

Survival, it seems, can sometimes come down to blind luck.

3. What Next? (Two Questions) – Morgan Housel

Covid-19 has separated workers into two clearly defined buckets: Those who can work from home and those who can’t.

You can break it out further into those who work for companies that can do business online and those that can’t.

In human terms, there are now flight attendants and waiters whose careers vanished overnight, and lawyers/bankers/consultants/programers who continue earning their nice salaries and benefits while in their pajamas.

That’s generalizing. There are exceptions on both sides. But it’s directionally accurate. And it’s a big deal because a key income inequality characteristic over the last three decades has been the disparity between those who work with their hands and those who work with their heads. That trend just sped up exponentially.

4. FUNDSMITH Annual Shareholders’ Meeting 25th February 2020 [link goes to video] – Fundsmith

Ser Jing here: Fundsmith is one of the best fund management companies I know of. Its founder, CEO, and CIO (chief investment officer), Terry Smith, is one of the best fund managers I know of. In late February 2020, Fundsmith held its annual shareholders’ meeting for the investors in its funds. Smith gave a presentation and answered questions from his investors together with his team. The entire meeting was recorded on video and it is 1 hour and 30 minutes of pure investing goodness. One of my favourite parts of the video is when Smith talked about investing during recessions and the current COVID-19 crisis (watch from 34:20 onwards).

5. My New Theory About Future Stock Market Returns – Ben Carlson

Said another way — if stocks don’t have the risk of a Great Depression-like crash on the table, does that mean expected returns should be lower going forward?

Looking at valuations over the long-term, you could make the case that the market has been pricing this in for some time now. Robert Shiller has pieced together U.S. market data going back to 1871 to calculate his cyclically-adjusted price-to-earnings ratio.

This valuation measure is far from perfect but it is telling to see how the averages have changed over time:

There is an obvious upward move in the average over time. There are a number of explanations for this increase — interest rates and inflation have fallen over time, accounting rules have changed on corporate earnings, the underlying structure of the market has changed (think more tech companies), the U.S. economy and markets are more mature, etc.

But another reason for this is the Fed now plays a larger role in the economy and management of the financial system, and thus, financial assets. If the stock market is “safer” over time, in that the Fed will do its best to smooth economic cycles, it would make sense that valuations should rise over time.

6. I Became a Disciplined Investor Over 40 Years. The Virus Broke Me in 40 Days – James B Stewart

At least I didn’t commit what Mr. Murtha considers the most serious error, which is to sell into a steep decline. “That’s where people really get hurt,” he said. “Once you’re out, the emotional leverage works against you. Either the market drops further, which confirms your fear. Or it goes up, and you don’t want to buy after you just sold. Then it gets further and further away from you. People don’t realize how hard it is to get back in.”

7. Calibrating – Howard Marks

The old saying goes, “The perfect is the enemy of the good.” Likewise, waiting for the bottom can keep investors from making good purchases. The investor’s goal should be to make a large number of good buys, not just a few perfect ones. Think about your normal behavior. Before every purchase, do you insist on being sure the thing in question will never be available lower? That is, that you’re buying at the bottom? I doubt it. You probably buy because you think you’re getting a good asset at an attractive price. Isn’t that enough? And I trust you sell because you think the selling price is adequate or more, not because you’re convinced the price can never go higher. To insist on buying only at bottoms and selling only at tops would be paralyzing…

…The bottom line for me is that I’m not at all troubled saying (a) markets may well be considerably lower sometime in the coming months and (b) we’re buying today when we find good value. I don’t find these statements inconsistent.

What We’re Reading (Week Ending 5 April 2020)

The best articles we’ve read in recent times on a wide range of topics, including investing, business, and the world in general.

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!

Here are the articles for the week ending 5 April 2020:

1. Message from Ser Jing’s friend

Ser Jing’s friend recently sent a wonderful text message on a list of wholesome activities we can all do during these difficult times to still add grace, beauty, purpose, and meaning to our lives:

– Picking up a book that you have been wanting to read
– Taking this period of time to rest and re-calibrate yourself
– Spending quality time and doing stuffs for your loved ones
– Taking up online courses. Think Coursera and etc
– Starting up your own side line business
– Developing a new skill or hobby
– Practicing meditation, yoga and journalism to master your inner thoughts and emotions [Ser Jing meditates regularly]
– Spending some time alone in nature
– Getting in touch with your friends
– Spend time reflecting

2. A Coronavirus Fix That Passes the Smell Test – Michael Lewis

Encourage everyone in the world with access to the internet to report whether they can or cannot smell. Make it easy for them to do so. Find widely admired people with big social-media followings to make short videos on the subject — at the bottom of which there’d be a simple button that allows anyone watching to report their sense of smell. Go viral with the virus [COVID-19]. Before long you’d have a pile of data that smart analysts could use to map it, and evaluate its risks. The results might not be perfect, but they were far better than what we have now in any rich country and far better than what they might ever have in countries with fewer resources.

I love this idea. Hancock is well on his way to building an organization to make it happen — the website is sniffoutcovid.org. He is in the market for both widely admired people and data scientists. Here’s to hoping he finds them before my father calls me to say that he can no longer smell his Burgundy.

3. Great Love & Great Suffering – Josh Radnor

I have noted in myself a kind of reflexive optimism (i.e. “This is going to be okay,” “We’ll get through this,”) of which I’m becoming suspicious. Do I just feel that way because I’ve been inoculated by my privilege? Surely this is going to be calamitous for many people – far beyond the sick and the dying – and I don’t want to turn a blind eye toward that suffering: the suddenly unemployed and homeless, the relapsing addict and those that love them, those trapped in abusive and unsafe homes, etc.

It feels like this moment is asking me to grow up, to stop relying on false-hope granting platitudes and accept that pain, suffering, and grief are part of the birthright of being a human being. I say that with the full knowledge and deep belief that love, joy, laughter, and art are also part of that birthright. Light and shadow are inextricably bound up with each other and it’s naïve to think that darkness can be vanquished or banished in favor of everlasting light. That’s magical thinking of a kind to which I refuse to subscribe.

4. The Greatest Investment Quotes of All Time – Nick Maggiulli

“If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century, you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get.”
-Charlie Munger, Interview with BBC

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
– Paul Samuelson

“I tell my father’s story of the gambler who lost regularly. One day he hears about a race with only one horse in it, so he bet the rent money. Halfway around the track, the horse jumped over the fence and ran away.”
-Howard Marks, The Most Important Thing

5. The Corona Crisis vs. The Great Depression – Ben Carlson

However, there are a number of differences between 1929-1932 and its aftermath and the current situation.

The Fed. The Federal Reserve was still relatively new during the Great Depression, having been founded just 16 years prior. Not only did they pour gasoline on the fire during the speculative period leading up to the crash, but they did next to nothing in trying to stop the crisis as it was unfolding.

John Kenneth Galbraith once wrote, “The Federal Reserve Board in those times was a body of startling incompetence.”

In the current crisis, the Fed has acted fast and they’ve gone big. Central banks around the globe have pumped liquidity into the system to make sure the plumbing of the financial markets continues to function.

This was not happening during the Great Depression and it’s one of the reasons there was a run on the banks and a huge number of bank failures.

Government Spending. During a severe economic contraction, individuals and corporations spend less money so it’s typically up to the government to make up for this shortfall.

During the Great Depression, they did the opposite. Republicans and Democrats alike sought to balance the budget and cut spending. Even in 1932, at the depths of the depression, they wanted to shrink government spending by 25%.

Today, we’re getting $2 trillion in fiscal stimulus rescue funds plus another $4 trillion in loans from the Fed. It’s likely we’ll need even more government spending depending on how long it takes to beat the virus.

6. Why does Covid-19 get the blame when Eagle Hospitality Trust’s woes predate it? – Marissa Lee

UC’s fixed payments were supposed to account for 66 per cent of EHT’s projected rental income in 2020, though the US lodging market began to weaken in the second half of last year. EHT’s revenue for 2019 came in 10 per cent lower than forecast. On Feb 17, 2020, a week before the US confirmed its first case of local Covid-19 transmission, UC amended the master lease agreements to allow EHT to receive more rent from any hotels that produce excess cash ow, to make up for shortfalls in any underperforming hotels.

The master lease agreements also formed the basis for EHT’s adopted valuations of its hotels.

According to EHT’s oer document, UC was required to hand over a US$43.7 million security deposit to EHT during the IPO, equivalent to nine months of fixed rent. UC funded US$23.7 million in cash, and indicated in the offer document that it would provide the balance of US$20 million by way of a letter of credit on or around EHT’s listing on May 24, 2019.

After EHT’s IPO, most investors assumed that the full US$43.7 million was safely in escrow, until they were told differently on March 19, 2020.

What they learnt is that UC had used US$5 million in cash to top up its security deposit to US$28.7 million, though it still had not managed to procure a letter of credit for the remaining US$15 million of the US$43.7 million.

7. The Shock Cycle – Morgan Housel

Then you ignore good news because you’re once bitten, twice shy. Avoiding further downside becomes such a focus that you lack the mental bandwidth to even recognize good news.

Then you deny good news. You’re so attuned to risk that you reflexively think good news must be wrong or out of context. Anyone promoting good news is criticized by the masses, who enjoy safety in numbers.

Then you realize you missed the good news. In hindsight you realize things turned a corner while people were most certain about how bad it was. You look back and can’t believe how obvious it was that people were too pessimistic, and can’t believe clear the signs of improvement were.