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 19 November 2023:
1. Strange Ways AI Disrupts Business Models, What’s Next For Creativity & Marketing, Some Provocative Data – Scott Belsky
Increasing perversion of certain business models that are liable to be gamed or constrained by AI: We’re shifting from a world where data analysis required long cycles (analysts need lots of time to run queries, analyze, and then present findings in a way that people understand) to a new world of real-time optimization and insights (AI will mine the data to surface insights and make optimization decisions in real-time). But when businesses start optimizing themselves, all sorts of crazy things might start happening (or at least be suggested by the AI). What wild examples can we think of here? For dating apps, where the perfect match of two people increases churn, will Tinder or Bumble constrain the efficiency of AI so the product doesn’t become too “unsustainably effective”? Or in the world of music streaming: Since Spotify pays artists per song, will Spotify automatically optimize its algorithms to favor longer songs, taking into account the number of minutes each customer listens per day? As AI gets really good at optimization, some industries and business models will need to change…
…AI will threaten subjectivity in purchase decisions, and with it the sway of brand and marketing. As we gain trust in the guidance of agent-assisted experiences, will the impact of brand, referral, and relationships in purchase decisions be diminished? Whether we’re buying batteries, sneakers, potato chips, or kitchen appliances, we are often influenced more than we care to admit by brand perceptions as opposed to factual comparisons. However, as your “AI Agent” gets to know you better – infused by every personal preference and previous purchase as well as every online review and consumer reports determination – you may start trusting the guidance of your agent more than any other signal. Perhaps the stakes are even more pronounced in the enterprise, where a procurement process tainted by human emotions, laziness, and previous relationships is the persistent fear of any CFO. How many purchase decisions are made for the wrong reasons – like relationships strengthened by football games and steak dinners with salespeople as opposed to the value and quality of a solution? Companies like Globality (in my portfolio, tackling enterprise procurement) and many others are leveraging AI to radically transform every function of a company. And if you look at this wave of companies overall, they are tackling the tremendous costs of subjectivity in decision making and are designed to yield better and more cost-effective solutions. Ultimately, elevating product meritocracy solves problems in both the worlds of consumer and enterprise purchasing. AI threatens subjective decision making tainted by human error and bias and will usher in an era where the best product at the best value may in fact win. This is a win for buyers, but may be quite disruptive to sellers who fail to innovate and endlessly optimize.
2. 15-Year Anniversary of the Business Owner Fund – Robert Vinall
On Monday the Biden administration released an Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence. This Executive Order goes far beyond setting up a commission or study about AI, a field that is obviously still under rapid development; instead it goes straight to proscription…
If the wrong mental model or a lack of intellectual acumen is not why people fail to beat the market, what is? In my view, it is the sheer difficulty of remaining rational – i.e., buying businesses for less than they are worth and selling them for more than they are worth – when being constantly bombarded with market gyrations, news flow, social media, expert opinions, and any number of other influences. This is not something that I or, likely, anyone is immune to. Over the last five years, I likely became too optimistic in some of my assumptions as the bull market approached its peak in 2021.
That the emotions interfere with rational thought is not an original idea. The definitive book on psychological biases has already been written – “Thinking, Fast and Slow,” by Israeli-American Nobel Prize winner Daniel Kahneman…
…In practice, there are two main failings resulting from emotional biases that an investor needs to eliminate – turning overly pessimistic when markets or investments are down and turning overly optimistic when they are up. Perhaps it could even be argued that turning overly pessimistic when markets are down is the key risk to be cognizant of. Assuming markets trend upwards over time – albeit in a lumpy fashion – the single most important attribute in an investor is the ability to remain steadfast when the outlook temporarily looks bleak. However, given how damaging to wealth it can be to be caught up in a bubble, I will leave the list at two…
…I cannot overstate the importance of being independent. It is far easier to reach a rational conclusion about any topic if your thought process is unclouded by the opinions of others.
In the 1950s, psychologist Solomon Asch conducted a series of psychological experiments known as the Asch conformity experiments. A group of eight participants engaged in a simple perceptual task, whereby all but one of the participants were actors. Each participant was shown a card with one line on it followed by another card with three lines of differing lengths on it… The task was to state which line was of similar length, a simple task that everyone got right when left to their own devices. The catch is that in some trials, the actors gave the wrong response. When this happened, the study’s subject was far more likely to give the wrong response as well. The research suggests people are more likely to conform than they might expect.
Furthermore, the study found that people are more likely to conform when a) more people are present; b) the task is more difficult; and c) the other members of the group are of higher social status. The study found they are less likely to conform when able to respond privately.
This suggests to me four ways to increase your chances of thinking independently: avoid large groups, stick to simple investment opportunities, avoid experts and gurus, and make investment decisions in private, i.e., not in a committee. It is fascinating to me that three of these four measures suggest working alone is better than in a team, and the fourth (keeping it simple) is independent of team size. All the evidence suggests that the smaller the team size, the better the decision-making…
…Given that a good investment idea should be obvious, but the analysis before investing needs to be detailed, it stands to reason that the optimal approach is to analyse many ideas superficially and a handful (the ones considered for investment) in depth. In other words, it is necessary to kiss lots of frogs until you find a prince.
The investment blog, value and opportunity, occasionally takes an entire stock market and analyses every company in it. I am a big fan of the idea. The blogger’s reasons for rejecting an investment sometimes amount to just a single sentence, so these entries will not win any prizes for their intricacy. However, to the end of creating as many free options as possible, it is great…
…If the name of the game is to keep an even keel despite what is happening around you, I cannot for the life of me imagine how having a prominent social media presence can improve investment returns. Social media tends to amplify whatever emotions are prevalent at the time. When returns are good, you are likely to be celebrated as the next Warren Buffett. When they are bad, you will be pummelled mercilessly. An ideal environment is the exact opposite – one where you receive gentle encouragement when things are going badly and a reality check when things are going well. I realise that building a prominent social media presence is an effective way to raise capital fast. But if you live by the sword, expect to die by the sword…
…The single best way I have found to evaluate whether something is important or not is to consider whether I will care about it or even remember it in 10 years’ time. Changes in interest rates, disappointing quarters and even recessions are things that people will likely not care about in ten years’ time. A customer exodus, the breach of debt covenants, and a disruptive new entrant potentially are. Looking through the lens of how things will appear in the future helps to separate signal from the noise. Note though, it is only possible to practice long-term thinking if you have capital providers who take a similarly long-term perspective.
The final point is the importance of humility. Markets occasionally do unexpected things and the best investment strategies ultimately fail as competitors imitate them. Anyone who thinks they have everything figured out is riding for a fall. It is important to be humble.
You have read on two occasions in this memo that it is not clear to me whether I will beat the market in the long-term. This is not false humility. I believe it – not just because of the sobering experience of the last five years, but for the simple reason that so few investors do beat the market over the long-term. Why should I be the chosen one? I hope this is not too disconcerting to my investors. It should not be. Even Buffett is circumspect about Berkshire’s ability to continue to beat the market given its enormous scale, though he would no doubt fancy his chances with a smaller capital base. Anyone who is certain they are going to beat the market belongs in the marketing department, not the investment department.
3. Attenuating Innovation (AI) – Ben Thompson
On Monday the Biden administration released an Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence. This Executive Order goes far beyond setting up a commission or study about AI, a field that is obviously still under rapid development; instead it goes straight to proscription…
…To rewind just a bit, last January I wrote AI and the Big Five, which posited that the initial wave of generative AI would largely benefit the dominant tech companies. Apple’s strategy was unclear, but it controlled the devices via which AI would be accessed, and had the potential to benefit even more if AI could be run locally. Amazon had AWS, which held much of the data over which companies might wish to apply AI, but also lacked its own foundational models. Google likely had the greatest capabilities, but also the greatest business model challenges. Meta controlled the apps through which consumers might be most likely to encounter AI generated content. Microsoft, meanwhile, thanks to its partnership with OpenAI, was the best placed to ride the initial wave generated by ChatGPT.
Nine months later and the Article holds up well: Apple is releasing ever more powerful devices, but still lacks a clear strategy; Amazon spent its last earnings call trying to convince investors that AI applications would come to their data, and talking up its partnership with Anthropic, OpenAI’s biggest competitor; Google has demonstrated great technology but has been slow to ship; Meta is pushing ahead with generative AI in its apps; and Microsoft is actually registering meaningful financial impact from its OpenAI partnership.
With this as context, it’s interesting to consider who signed that letter Allen referred to, which stated:
Mitigating the risk of extinction from AI should be a global priority alongside other societal-scale risks such as pandemics and nuclear war.
There are 30 signatories from OpenAI, including the aforementioned CEO Sam Altman. There are 15 signatories from Anthropic, including CEO Dario Amodei. There are seven signatories from Microsoft, including CTO Kevin Scott. There are 81 signatories from Google, including Google DeepMind CEO Demis Hassabis. There are none from Apple or Amazon, and two low-level employees from Meta.
What is striking about this tally is the extent to which the totals and prominence align to the relative companies’ current position in the market. OpenAI has the lead, at least in terms of consumer and developer mindshare, and the company is deriving real revenue from ChatGPT; Anthropic is second, and has signed deals with both Google and Amazon. Google has great products and an internal paralysis around shipping them for business model reasons; urging caution is very much in their interest. Microsoft is in the middle: it is making money from AI, but it doesn’t control its own models; Apple and Amazon are both waiting for the market to come to them.
In this ultra-cynical analysis the biggest surprise is probably Meta: the company has its own models, but no one of prominence has signed. These models, though, have been gradually open-sourced: Meta is betting on distributed innovation to generate value that will best be captured via the consumer touchpoints the the company controls.
The point is this: if you accept the premise that regulation locks in incumbents, then it sure is notable that the early AI winners seem the most invested in generating alarm in Washington, D.C. about AI. This despite the fact that their concern is apparently not sufficiently high to, you know, stop their work. No, they are the responsible ones, the ones who care enough to call for regulation; all the better if concerns about imagined harms kneecap inevitable competitors…
…I wrote at the time in an Update:
In 1991 — assuming that the “dawn of the Internet” was the launch of the World Wide Web — the following were the biggest companies by market cap:
$88 billion — General Electric
$80 billion — Exxon Mobil
$62 billion — Walmart
$54 billion — Coca-Cola
$42 billion — Merck
The only tech company in the top 10 was IBM, with a $31 billion market cap. Imagine proposing a bill then targeting companies with greater than $550 billion market caps, knowing that it is nothing but tech companies!
What doesn’t occur to Senator Klobuchar is the possibility that the relationship between the massive increase in wealth, and even greater gain in consumer welfare, produced by tech companies since the “dawn of the Internet” may in fact be related to the fact that there hasn’t been any major regulation (the most important piece of regulation, Section 230, protected the Internet from lawsuits; this legislation invites them). I’m not saying that the lack of regulation is causal, but I am exceptionally skeptical that we would have had more growth with more regulation.
More broadly, tech sure seems like the only area where innovation and building is happening anywhere in the West. This isn’t to deny that the big tech companies aren’t sometimes bad actors, and that platforms in particular do, at least in theory, need regulation. But given the sclerosis present everywhere but tech it sure seems like it would be prudent to be exceptionally skeptical about the prospect of new regulation; I definitely wouldn’t be celebrating it as if it were some sort of overdue accomplishment.
Unfortunately this week’s Executive Order takes the exact opposite approach to AI that we took to technology previously…
…I fully endorse Sinofsky’s conclusion:
This approach to regulation is not about innovation despite all the verbiage proclaiming it to be. This Order is about stifling innovation and turning the next platform over to incumbents in the US and far more likely new companies in other countries that did not see it as a priority to halt innovation before it even happens.
I am by no means certain if AI is the next technology platform the likes of which will make the smartphone revolution that has literally benefitted every human on earth look small. I don’t know sitting here today if the AI products just in market less than a year are the next biggest thing ever. They may turn out to be a way stop on the trajectory of innovation. They may turn out to be ingredients that everyone incorporates into existing products. There are so many things that we do not yet know.
What we do know is that we are at the very earliest stages. We simply have no in-market products, and that means no in-market problems, upon which to base such concerns of fear and need to “govern” regulation. Alarmists or “existentialists” say they have enough evidence. If that’s the case then then so be it, but then the only way to truly make that case is to embark on the legislative process and use democracy to validate those concerns. I just know that we have plenty of past evidence that every technology has come with its alarmists and concerns and somehow optimism prevailed. Why should the pessimists prevail now?
They should not. We should accelerate innovation, not attenuate it. Innovation — technology, broadly speaking — is the only way to grow the pie, and to solve the problems we face that actually exist in any sort of knowable way, from climate change to China, from pandemics to poverty, and from diseases to demographics. To attack the solution is denialism at best, outright sabotage at worst. Indeed, the shoggoth to fear is our societal sclerosis seeking to drag the most exciting new technology in years into an innovation anti-pattern.
4. Bad Office – Marc Rubinstein
On the very same avenue, there have been multiple examples of borrowers handing back keys to lenders on office properties:
- Between 55th and 56th Streets, Blackstone gave up on a $308 million loan on 26-storey 1740 Broadway after tenants L Brands and law firm Davis & Gilbert relocated.
- Between 49th and 50th, Brookfield surrendered the deeds to the 11-storey Brill Building at 1619 Broadway in a transfer valued at $216 million, six years after buying it.
- At Times Square, CIM Group and Australian pension fund QSuper handed back the keys on 1440 Broadway after being unable to pay a $399 million loan. They had bought the building in 2017 and had it valued at $540 million when they took the loan out two years ago.
Such stress in the office market stems from a combination of lower occupancy and higher interest rates. Over three years on from the start of the pandemic, occupancy in major US office markets remains depressed. Latest turnstile swipe data from Kastle indicates that office occupancy stands at 49.8% of pre-pandemic levels, a figure which has remained stable for eighteen months. And data from XY Sense, which uses sensor data to measure physical office presence, points to office utilisation of around 30% compared with around 60% pre-pandemic, consistent with a roughly 50% drop in occupancy. Whatever incentives companies deploy to get employees back into the office, they’re not working.
For a team of New York-based academics, this doesn’t bode well. In a recent paper, they established a clear connection between companies’ remote work policies and their actual reductions in leased office space. Because only a third of pre-pandemic office leases have come up for renewal, the impact has yet to fully flow through even with vacancy rates at 30-year highs (22.1% in Manhattan). They estimate that on the basis of current working behaviours, New York office stock is worth 42% less than it was in December 2019. At that level, even 60% loan-to-value financing deals are at risk.
In the meantime, higher interest rates are also squeezing borrowers. A lot of debt in the commercial real estate market is floating rate. When times were good, floating rate loans gave borrowers the flexibility to prepay early and sell assets. A typical structure is a five year loan, with the rate hedged for the first two years. With rates up, borrowers have to decide whether to buy new rate protection or alternatively, what to do with the asset. To finance its downtown Los Angeles portfolio, Brookfield took on a lot of floating-rate debt and when an interest-rate hedge expired on one of its properties last year, it opted not to get a new one, leading to it defaulting on a $319 million loan.
Not all of the office debt is with banks. For commercial real estate overall – encompassing hotels, retail, industrial and multifamily as well as office – banks sit on around 50% of debt outstanding. The rest is in commercial mortgage-backed securities structures (16%), government and government sponsored enterprise pools (13%), insurance companies (13%) and Real Estate Investment Trusts (5%).
In some of these segments, stress has been evident for some time. Office REIT stock prices are down 60% since the end of 2019 and commercial mortgage-backed securities spreads have widened. For banks, though, the pressures have been slower to build.
This week, Bawag, another Europe-based commercial real estate lender, took a €20 million provision against a specific US office exposure as part of its third quarter earnings. The bank underwrote the loan in 2019 based on a rent roll that failed to materialise and has now written down the value of the collateral (to “an 8.5% cap rate, which I think is quite conservative, if you kind of benchmark that to where other people are valuing assets,” said the CEO on his earnings call). The write-down reflects a concern the European Central Bank recently expressed, that bank property valuers may be slow to update estimates. “Despite its importance, collateral valuation is a blind spot for many of the banks reviewed,” ECB supervisors warned last year.
Other banks are trying to get ahead of the curve. Among the largest US banks, PNC has the highest exposure to office (2.7% of total loans). Although it has barely seen any losses in its portfolio, it has begun to classify many of the loans as non-performing. In total, it views 23% of its office portfolio as “criticised” and in the third-quarter, it shifted $373 million of those onto non-performing status. “I think they’re actually all still accruing. We just kind of get there because we don’t think they’re refinanceable in the current market,” explained CEO Bill Demchak on his earnings call. “The move to non-performing from already being criticised comes about as you just watch cap rates creeping higher and adjust the underlying value of the properties accordingly.”
PNC has now set aside reserves to cover 8.5% of its total office loans and within that 12.5% of multi-tenant office loans. Other banks have provisioned at similar levels. Wells Fargo is at 10.8% in the large corporate office segment (although only at 2.2% for small offices); US Bancorp is at 10%.
For many, the crunch will come when borrowers look to refinance. Bank of America has disclosed that around a half of its office loans mature before the end of 2024. As long as they are still paying, many banks may be tempted to roll out the maturity rather than force a loss. Willy Walker, CEO of commercial real estate finance company Walker & Dunlop, calls it “extend and pretend” (emphasis added):
“What the regulator is allowing the banks to do is to take provisions for loan losses and then go and renegotiate those loans and extend and pretend. And given that the banking system is so overcapitalised right now, very much unlike the great financial crisis, a lot of this paper is just going to get rolled. Because the banks are sitting there going: I don’t want to foreclose on this; there’s no sale market for me to get rid of it. Do I want 60 cents on the dollar today or hope that maybe I get 80 or 90 cents on the dollar if I allow them to hold the asset, or I get worked out? The only place where this obviously causes some problems is in the CMBS world where you don’t have the flexibility because you have a special servicer who has a fiduciary responsibility to the bondholders to seize the asset.”
5. RWH034: The High Road To Riches w/ Peter Keefe – William Green and Peter Keefe
[00:17:43] Peter Keefe: And I think if you, opened up the minds of a lot of people in this business. You discover that their motivations may not be exactly what they think they are. And I think money is an incredibly powerful motivator and people may not be willing to admit just how powerful of a motivator it is. And I think it was Henry Kissinger who said money’s the ultimate aphrodisiac and it just can accomplish all kinds of things.
[00:18:11] Peter Keefe: And I think we all know that subconsciously. And so, and of course, am I interested in the rewards, the financial rewards of this business? Absolutely. I don’t know anybody in this business who isn’t, and I’d worry about you a little bit if you said that you weren’t, but having said that, This business is a calling and I think that when I’m talking to people about why they want to be in this business or when I’m mentoring younger investors, I do, this is sort of, it’s sort of an ominous statement says we’re all think that we’re in service to others.
[00:18:50] Peter Keefe: But sometimes you’re serving yourself. So, I sort of ask this question, it’s gently, you’re serving someone, but who are you serving? Make sure you understand who you’re serving. So, you know, we’re all in service to others, but. Make sure you understand who you’re serving.
[00:19:07] William Green: I wonder if it changes as we get older, because I often find when I interview great investors, it seems like early in their lives, there’s a sort of, I have no factual basis for this, it’s more impressionistic, but I have this sense that there’s a real hunger, often, for money, a kind of ill-defined hunger for money, whether it’s to get out of straightened circumstances, if you’re someone like Bill Miller or Mario Gabelli who grew up with nothing or desire to sort of impress people and get, you know, be noticed, you know, which I think, you know, if you were someone like Bill Ackman, who came from a very successful family, you know, you needed to make your mark. And then at a certain point, it shifts, maybe one, at least for a lot of people. I don’t know.
[00:19:54] William Green: And then also there’s a sense of just loving the game, right? I remember you, one thing that I heard you would ask the people you were interviewing for jobs was you would say to them, would you do this on a teacher’s salary for five years? And I think that’s a really important issue as well. Like, you know, actually having to enjoy the game enough the actual craft. Sorry, I’m going on. Well, do you have any thoughts?
[00:20:17] Peter Keefe: You’ve got to enjoy the game, but you’ve really got to appreciate the craft, and you do have to, the reason I asked that question, would you do this on a teacher’s salary it’s serious, but it’s also a trick question, because anybody who’s good at this is not going to have to live on a teacher’s salary for very long.
[00:20:34] Peter Keefe: I don’t want to be involved professionally with people who are doing this solely for the money. You are serving someone, and you should be serving those who need your skills. If you are good at this business, then you have an obligation to give those skills to those who need it. And they’re desperately needed.
[00:20:57] Peter Keefe: They’re desperately needed by hospitals, schools, retirees, poor people. Wealthy people who simply don’t care about investing, so the need is enormous, so I think it’s important to approach this business from a standpoint of service, and if you’re any good at it, you know, the money is going to rain down upon you more money than you ever imagined and more money than you’re ever going to need.
[00:21:23] Peter Keefe: So, you need to take the money out of the equation. Cause if you’re any good, you’re going to make a lot of it. If you’re not, you still might make a lot of it, but I think the principal motivation has to be to serve. Now, when you’re a young man, young woman, you know, we’ve all been there. You just want to go out and slay the world.
[00:21:41] Peter Keefe: I think that’s just part of the natural deal of you know, being young and moving to a new city like I did and wanting to do something. I mean, I tell people I had no idea what I wanted to do, but I wanted to do something, and I wanted to make an impact on people’s lives, a favorable impact on people’s lives.
[00:21:59] Peter Keefe: I’m not sure I even cared about making a favorable impact. I think I wanted to be noticed and I wanted my life to amount to something. You know, there was just a sort of ill-defined desire, this yearning to make some kind of mark. It was very ego filled, definitely. I think we’re saying exactly the same thing.
[00:22:18] Peter Keefe: I mean, I think that over time, my objectives evolved. Yeah. You know, on day one, you’ve got to pay the rent. You know, on day two, you know, you’re thinking about building a family. Day three, you’re thinking about the legacy. So, your way you approach your life evolves over time. And but yeah, I mean, I just, like I said, I got here in DC and I thought I was going to be a lawyer and then decided that was a really bad idea and I just wanted to do something, you know, I had a lot of energy and I was curious about everything, you know, which can be a problem because if you’re curious about everything, it’s hard to focus on one thing…
…[00:31:49] William Green: Yeah, I wanted to dwell for a moment on that idea of the biggest mistakes you’ve made, because you said recently that my biggest mistakes have been early sales of great businesses, and you described that as the silent killer, where you sell compounders too soon, and while we’re dwelling on your mistakes, can I cause you heart palpitations by asking you about Pool Corp, which is a pretty good example of this.
[00:32:14] Peter Keefe: Sure. Yeah. I think Pool Corporation’s the biggest mistake I’ve ever made in my investment career. And like you said, you know, selling early is the high blood pressure of the investment business. It’s a silent killer. And you know, people will always talk about the business they bought that went to zero, or the one that went down 50% or 75%.
[00:32:32] Peter Keefe: Yes, that’s bad. You want to avoid that but the business that you sold too early, that went on the compound tenfold, or 20-fold after that in my career, has been a real killer. I bought Pool Corp at the right price. Interesting story that I tell you about going down to visit management in Covington, Louisiana, which is not exactly a business mecca, but in any event, you know, it checked all our boxes.
[00:32:58] Peter Keefe: Manny Perez de la Mesa, who was still the chairman of the board, I think, was the CEO then, he’d been in GE, he had a great background, he was, understood capital allocation beautifully, and Pool Corp was a terrific business, and for those of your listeners who aren’t familiar with it, I’ll tell them in a breath.
[00:33:18] Peter Keefe: It’s a distributor of pool supplies and equipment, and it gets margins in the mid-single digits, most distributors, margins in the low single digits, but Pool Corp has this unique franchise that permits it to get these ridiculously high returns for a distributor. And those ridiculously high returns multiplied by frequent inventory turnover mean they get huge returns on capital and do everything that you want a compounder to do.
[00:33:50] Peter Keefe: Well, I bought it right and sold it after depreciating four or five times. In our portfolio, because I allowed some thinking about erroneous thinking about evaluation and probably about the economy didn’t creep into my thinking and full construction is somewhat like to the construction cycle. And so, I probably let all these things influence my thinking and went up selling the position in its entirety and having made, like I said, four or five times our capital on the business. Well, I think it’s appreciated about tenfold since then. So, what that taught me was that you either have to be an investor or an economist. Not many people can be both, and I don’t know any wealthy economists, so I’d rather be an investor.
[00:34:38] Peter Keefe: And I, so I just try to tune out some of this economic stuff that can infect your thinking unusually negatively.
[00:34:46] William Green: Yeah, I was reading your letters to shareholders yesterday, and there was one from, I guess, August 2020, so in the middle of the COVID pandemic, and you wrote, We have no predictions about the direction of the economy or markets, and certainly not the virus.
[00:35:01] William Green: The trajectory of the virus and its ultimate duration and impact on the economy are unknowable. What is knowable? is that on occasion the unthinkable happens, unforeseen acts of terrorism occur, real estate bubbles burst, or a pandemic emerges. This means we must own businesses with both bulletproof balance sheets and outstanding and durable business models that can withstand unthinkable economic hardship, which are run by ethical managers whom we can trust to act in our best interests.
[00:35:26] William Green: And that strikes me as such an important insight that you, I mean, in a way it gets back to stoicism, right? It’s like controlling what we can control and letting go of what we can’t control and just recognizing the fact that the direction of the economy and the market and viruses and stuff is just not really knowable unless maybe you’re Soros or Druckenmiller or someone like that, I don’t know. And so just that recognition, having the humility to recognize that’s not knowable strikes me as a really important first step-in long-term investment success.
[00:35:58] Peter Keefe: Yeah, so I, one of the things I tell young investors when I’m mentoring them is, make a choice, you’re either an economist or an investor, unless you’re one of those five people you mentioned.
[00:36:10] Peter Keefe: And I just rhetorically say there’s probably five people on the planet who can consistently tell you what the dollar is going to do, what the price of gypsum is going to be, what oil might be, or the price of money. I know none of those things, and I simply don’t have enough mental bandwidth to be able to allocate any room at all to these things.
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