Interesting Reading – January 20, 2017

Suggested reading material on a variety of topics of interest

What to Make of the ‘Davos Class’ in the Trump Era – The New York Times, January 16, 2017.  Andrew Ross Sorkin reports on the mood of the “Davos Class” as the World Economic Forum got underway earlier this week.  This annual gathering has long been known as a setting where leaders from politics, business, and non-profits congregate to discuss important issues of the day with a focus on the benefits of globalization.  Those benefits are increasingly not apparent to many ordinary people throughout the developed world as we have seen with the Brexit vote and Donald Trump’s election as U.S. President.  With Marine Le Pen now leading in the polls in the race for the French Presidency, one wonders whether Davos attendees are taking that possibility more seriously than they took Donald Trump’s chances at this time last year.

Expert Opinion – Memo to Oaktree Clients by Howard Marks, January 10, 2017.  Howard Marks is well known for his timely memos to Oaktree clients which are also made available to the general public.  His latest memo contains a number of observations regarding the folly of believing in “expert” predictions on various subjects.  The most salient example is, of course, the recent U.S. Presidential election.  Something clearly went wrong in the expert polling that overwhelmingly predicted a Hillary Clinton victory.  Furthermore, the predictions regarding the market reaction to a Donald Trump victory were also wrong.  Howard Marks is the author of The Most Important Thing, one of the most illuminating books on investing published in recent years.

Warren Buffett in New HBO Documentary:  ‘I’m Getting Down to Salvage Value’ – The Wall Street Journal, January 11, 2017.  A new HBO documentary examines Warren Buffett’s life with a focus on his family relationships and the personal sacrifices he had to make in order to build Berkshire Hathaway.  Apparently, most of the details are already well known to people who have studied Warren Buffett’s life, particularly to those who have read Alice Schroeder’s lengthy biography of Mr. Buffett.  The idea that Mr. Buffett is down to “salvage value” is amusing for those who have owned Berkshire Hathaway for a long time.  Mr. Buffett reached normal retirement age in 1995 and has continued to run Berkshire ever since.  Berkshire Hathaway shares closed at $25,400 on August 30, 1995, Mr. Buffett’s 65th birthday, compared to $240,280 today, representing a compound annual return of about 11 percent.  The vast majority of Mr. Buffett’s wealth has been generated as a senior citizen.

Inside Sears’ Death Spiral:  How an Iconic American Brand Has Been Driven to the Edge of Bankruptcy – Business Insider, January 8, 2017. This is a long (and depressing) account of the failure of Sears and Kmart as viable retailers in the United States.  Through a series of transactions, Chairman and CEO Eddie Lampert has delayed the final day of reckoning for the retail business and there may yet be value to be extracted from the various remaining brands and real estate owned by the holding company.  However, it is quite clear that it is past the point where a retail turnaround can be reasonably expected.  John Huber of Base Hit Investing has also written an interesting mini case study of Sears: Importance of Knowing Your Investment Boundaries (Sears Mini-Case Study). Eddie Lampert and Bruce Berkowitz are both very smart investors but one has to wonder whether they got in over their heads in this situation and what the end game will look like.

Struggling Hedge Funds Still Expense Bonuses, Bar Tabs – Reuters, January 19, 2017.  Hedge funds, in general, have not been performing very well in recent years and active strategies of all kinds have been losing assets to passive investment vehicles.  One reason is that hedge funds charge high fees.  The 2 & 20 model (2 percent of assets and 20 percent of investment gains, sometimes over a hurdle rate) is obviously expensive but apparently it gets worse in situations where funds “pass through” additional expenses to clients.  For example, Millennium, a $34 billion hedge fund, charged its clients the “usual fee” of 5 or 6 percent of assets and 20 percent of gains in 2016, which left investors in their flagship fund with a net return of just 3.3 percent.

The Great Unbundling – Stratechery, January 18, 2017.  This is a great article outlining the way in which the internet has changed the media business over the years.  The “media business” is obviously divided into a number of different categories (print, music, television, etc) , most of which have vastly different economics.  The internet has had different impacts on each category.  One of the most important developments in recent years is the manner in which services that used to be delivered as bundles are being broken apart into much more granular components.  A good example involves cable television and the erosion of the traditional huge cable bundle.  Stratechery has been around for a number of years but might not be well known in the value investing community.  Much of the content is offered under a subscription model but there is also very worthwhile free content such as The Great Unbundling.  

What Not to Eat:  ‘The Case Against Sugar’ – The New York Times, January 2, 2017.  The New York Times reviews a new book, The Case Against Sugar, which presents the logic that has led an increasing number of local governments to impose “soda taxes” on carbonated beverages such as Coca-Cola.  The book apparently makes a comparison between smoking and consuming sugar.  This seems absurd, but the author insists that “sugar kills”.  Is a calorie just a calorie?  Or is there something about sugar that is especially bad in terms of promoting obesity and the litany of related illnesses plaguing the United States?  While we must keep an open mind, even if the case against sugar is as solid as the author claims, the idea that only soda should be taxed rather than sugar itself seems politically opportunistic.  Why target only soda rather than sugar laden drinks such as a Starbucks Vente Frappuccino?  At a time of frustration among those who feel economically left behind, perhaps taxing the construction worker’s Big Gulp while exempting the $5 luxury drink of office workers isn’t the most intelligent (or fair) political move.

Under One Roof:  What Can We Learn From the Mayo Clinic? – Farnam Street, January 17, 2017.  With the inauguration of Donald Trump as President of the United States, the subject of health care reform is again on the minds of Americans, particularly those who are currently covered under “ObamaCare”.  In light of this attention, it was interesting to read Farnam Street’s discussion of how the Mayo Clinic has been able to earn its sterling reputation for quality health care over the years.  The incentive structure that the Mayo Clinic has put in place, along with the multi-disciplinary approach that encourages teamwork and treats all of the patient’s conditions in a unified manner, clearly makes an enormous difference when it comes to clinical outcomes.  Donald Trump has made some big promises when it comes to the level of quality Americans can expect from his upcoming health care reform plan.  One would hope that the lessons of systems that have worked well are studied in some detail, especially when it comes to incentive systems.