The Digest #95
The Digest #95
Executive Compensation, Howard Marks, Innovation Hubs, The Eternal Present
“One thing a lot of investors do is they cut their flowers and water their weeds. They sell their winners and keep their losers, hoping the losers will come back even. Generally, it’s more effective to cut your weeds and water your flowers. Sell the things that didn’t work out, and let the things that are working out run.”
— Lou Simpson
Articles
How GE Violated Its Own Compensation Principles—and How Flawed Policies Led to a Fabled Company’s Long Decline by Roger Lowenstein, January 14, 2022. This is an outstanding article regarding the broken executive compensation system in America. Roger Lowenstein uses GE as an example, but the same flaws can be seen in proxy statement after proxy statement. “These executives have for decades preached the mantra of “pay-for-performance” but they rarely live up to it. They are overpaid when they succeed and—no other word for it—obscenely overpaid for failure.” (Substack)
Selling Out by Howard Marks, January 13, 2022. “Howard Marks’s latest memo considers one of investing’s most fundamental questions: when to sell. Howard explains that it’s foolish to sell because prices are up and because they’re down – and why, most of the time, staying invested is ultimately “the most important thing.” (Oaktree Capital)
What a World by Morgan Housel, January 13, 2022. “Optimism is a helluva drug. People believe things that aren’t true, are only loosely true, true but improbable, or true but lacking important context. To do otherwise hurts too much. They tell themselves stories, find statistics, and surround themselves with incentives to make their beliefs seem as real as possible. They’ve done it forever. They’ll do it forever.” (Collaborative Fund)
How a Flood of Money Swamped Cathie Wood’s ARK by Jason Zweig, January 15, 2022. Cathie Wood’s ARK Innovation ETF was one of the red-hot funds during 2020, rising 157 percent and attracting torrents of new cash from investors. However, in 2021, the fund declined by 23 percent, and it is down 17.3 percent over the first two weeks of 2022. Despite gaining over 31 percent annualized over the past five years, investors in aggregate have lost money chasing returns in the fund as it has swelled in size. Jason Zweig explores the reasons behind this paradoxical situation. (WSJ)
First pig-to-human heart transplant: what can scientists learn? by Sara Reardon, January 14, 2022. Exciting news for people on transplant lists: “Xenotransplantation has seen significant advances in recent years with the advent of CRISPR–Cas9 genome editing, which made it easier to create pig organs that are less likely to be attacked by human immune systems. The latest transplant, performed at the University of Maryland Medical Center (UMMC), used organs from pigs with ten genetic modifications.” (Nature)
A Dozen Things I’ve Learned from Nassim Taleb about Optionality/Investing by Tren Griffin, October 13, 2013. One of Nassim Taleb’s observations that I have always found compelling is that Americans do not stigmatize entrepreneurial failure in the way many other cultures do. This is a major competitive advantage for America. “Like Britain in the Industrial Revolution, America’s asset is, simply, risk taking and the use of optionality, this remarkable ability to engage in rational forms of trial and error, with no comparative shame in failing again, starting again, and repeating failure.” (25iq)
Innovation Hubs – Past, Present & Future by Jamie Catherwood, January 15, 2022. What does late nineteenth century Cleveland have in common with Silicon Valley over the past half century? Cities are incubators of innovation. “Optimistic projections about technology and the future often fall short because they ignore humans’ need to congregate. If a telegraph and other innovations annihilate time and space, why do people still choose to live in cities that are dirty, exorbitantly expensive, more dangerous, and cramped? The answer is easy: social benefits and the advantages of proximity. From a business perspective, research shows that social proximity is a key factor for innovation.” (Investor Amnesia)
The Curse of The Eternal Present by Thomas J. Bevan, January 16, 2022. All of the wisdom of the world is in reach of everyone with an internet connection, so why is society so beholden to recency bias? “The problem- to quickly summarize- is that this era of internet enabled devices has created a culture that is neither oral or literate in its orientation. In terms of outcome it is a middle ground between the two and as such it has the disadvantages of both without the consolations of either. Living a neck-craned screen-bound life you are trapped, disembodied, in the perpetual present.” (Note: I found this author by listening to a recent Infinite Loops podcast.) (The Commonplace)
One of the Investment Greats Explains His Portfolio Strategy by Robert Korajczyk, November 2, 2017. Robert Korajczyk, a professor of finance at the Kellogg School of Management at Northwestern University, sat down with Lou Simpson in 2017 to discuss his remarkably successful investment strategy. Lou Simpson passed away on January 8. More links to resources regarding Mr. Simpson’s life and legacy can be found in the January 11 newsletter. (Kellogg Insight)
Marcus Aurelius on Business, Investing, and Modern Life, January 18, 2017. In 2016, I began to read about stoic philosophy more seriously, having been exposed to many isolated quotations over several years. Little did I know how helpful a stoic mindset would be over the next few years. Sometimes we imagine that money and power are panaceas for the vicissitudes of life. In reality, nothing could be further from the truth. Marcus Aurelius was arguably the most powerful man on earth during his lifetime but nevertheless faced enormous obstacles. His private journals were not intended to be published for posterity, but luckily for us they were preserved. (The Rational Walk)
Podcasts
Jason Zweig, The Wall Street Journal: Traders vs. Investors, January 13, 2022. “In today’s episode, we start with Jason’s beginnings on a farm in upstate New York. We then compare traders vs. investors and discuss the gamification of investing, time on device (TOD; a term casinos often use as a measure of success), and the boredom market hypothesis (BMH; doing nothing). Jason then discusses how we can improve as an investor emotionally, the lone thing we can often control.” (The Investors First Podcast) h/t Joe Koster
Revenge of the Small Investor?, January 16, 2022. Roben Farzad interviews Spencer Jakab, author of The Revolution That Wasn't: GameStop, Reddit, and the Fleecing of Small Investors, which will be published next month. The book was reviewed on The Rational Walk in December. (NPR - Full Disclosure)
Investing and Life Lessons from Lou Simpson, January 16, 2022. “In this episode, co-hosts Phil Ordway, Elliot Turner, and John Mihaljevic discuss (i) investing and life lessons learned from the late Lou Simpson; and (ii) Buffett's quote, “Charlie (Munger) and I would much rather earn a lumpy 15 percent over time than a smooth 12 percent.” (This Week in Intelligent Investing)
Investing and Life Masterclass with Guy Spier, January 15, 2022. Guy Spier expands on many of the topics he discussed in The Education of a Value Investor (reviewed on The Rational Walk in 2014). His comments regarding how to constructively emulate role models like Charlie Munger were very illuminating. Among other things, how should we interpret Mr. Munger’s characterization of bitcoin as “rat poison” at a time when many other intelligent investors vehemently disagree? (We Study Billionaires)
Ryan Holiday: A Stoic Life, January 2022. “Stoic philosopher and author Ryan Holiday shows us how to use ancient philosophy to calm our minds and create a foundation for lasting success. Listen as Holiday takes us behind the scenes, revealing how he not only reads books and what he looks for but his process for writing and retaining information he can later put to use. He also discusses why he journals, the four virtues of Stoicism and more” (Farnam Street)
Tren Griffin — Welcome to the Tren-verse: Stories on Life and Business, January 13, 2022. Tren Griffin, author of 25iq, is interviewed for the third time by Jim O'Shaughnessy. Topics include: (1) Why Gates didn’t write an autobiography; (2) How “rude” Q&As can be helpful; (3) Having a purpose in life; (4) Keeping business separate from the personal. (Infinite Loops)
Tweet of the Week
Compounding can be directly observed and measured with quantitative measures, but the same principles also apply when it comes to knowledge, as Charlie Munger’s latticework of mental models illustrates.
This Twitter thread illustrates the power of compounding and exponential growth very well. All of 10-K Diver’s twitter threads can be found at this link.
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