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The Digest #161
Feynman on knowledge, TransDigm's controversial business model, Costco's history, The Ozempic/Wegovy band-aid, Plus insights from Todd Combs, Michael Burry, Joel Tillinghast, Lee Ainslie, and more ...
Knowledge vs. Understanding
In recent years, there has been a backlash against the use of standardized tests in college admissions. The main argument is that wealthy students gain an unfair advantage from expensive programs and tutoring designed to improve test scores. The more important question is the extent to which scores predict a student’s capacity to succeed in college. Raw knowledge of memorized facts will not necessarily translate into the understanding needed to apply knowledge to new areas of inquiry.
Richard Feynman’s memoir is full of charming anecdotes about his life. Most of the early anecdotes have to do with his curiosity as a child. This curiosity, coupled with a precocious intellect, drove Feynman to learn about his surrounding environment. Decades later, he still seemed surprised that everyone doesn’t learn by understanding.
“I don’t know what’s the matter with people: they don’t learn by understanding; they learn by some other way — by rote, or something. Their knowledge is so fragile!”
As a child, Feynman learned about concepts through tinkering. He applied his skills to earn money fixing radios during the Great Depression. As I read various accounts of Feynman’s early life, they brought to mind the experience Steve Jobs had as a child learning about electronics from his father who never graduated from high school. Jobs later deepened his knowledge by putting together Heathkits.1
“These things were not mysteries anymore. I mean, you looked at a television set, and you would think, ‘I haven’t built one of those—but I could. There’s one of those in the Heathkit catalog, and I’ve built two other Heathkits, so I could build a television set.’ Things became much more clear that they were the results of human creation, not these magical things that just appeared in one’s environment that one had no knowledge of their interiors. It gave a tremendous degree of self-confidence that, through exploration and learning, one could understand seemingly very complex things in one’s environment.”
It is important to learn general principles, but without applying concepts in a memorable way, facts and figures will soon fade from memory. When I was in high school, kids who were on the “college track” avoided taking classes that provided real-world skills, such as auto shop. After all, they were not going to be mechanics. Of course, auto shop could prepare a student to be a mechanic but projects like rebuilding a carburetor have the potential to apply important theoretical concepts to the physical world in ways that will be memorable for years or decades to come.
In the investing world, maybe students should spend more time reading annual reports and less time reading books on investing. Understanding basic concepts is very important but is it really necessary to read a dozen books covering the same topic in slightly different ways? Going through the process of understanding individual companies is the investing equivalent of rebuilding a carburetor in auto shop.
As I was editing this article, I stumbled upon a tweet from Nassim Taleb written this morning that hits the nail on the head regarding this topic!
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Articles, May 14, 2023. This article discusses Berkshire’s history with tobacco. Warren Buffett and Charlie Munger have made a distinction between owning securities of tobacco companies and owning a tobacco subsidiary. As they admit, drawing moral lines can be messy and complex. It is particularly interesting given that, at other times, Warren Buffett makes absolutely no distinction between owning partial interest in a company and owning all of it. For example, he has made it clear that he now thinks of owning shares of Apple in the same way he thinks about owning all of BNSF. (Invariant)
Meet The Billionaire Who Built A Fortune ‘Price-Gouging’ Customers Like The Pentagon by Alex J. Berliner, August 7, 2023. Putting aside the inflammatory title, I found this article on TransDigm and Nick Howley very interesting. The TransDigm story is probably familiar to most readers and I looked at the company myself several years ago. The most important concept I learned from studying TransDigm is that tremendous pricing power exists when you sell mission critical components that, individually, represent a small part of the cost of a larger system and the huge cost of potential component failure makes buyers very reluctant to economize. (Forbes), August 22, 2023. This is a transcript of a rare interview of Todd Combs earlier this year. It is obvious that Combs values his privacy, so when he speaks it is worth paying attention. I listened to this podcast when it was released but appreciated being able to go through the discussion slowly in writing. It’s hard to believe that it has been nearly twelve years since Todd Combs joined Berkshire Hathaway. (Kingswell)
Joel Tillinghast’s Advice for Investors by Ryan Ermey, August 21, 2023. I remember reading about the Fidelity Low-Priced Stock Fund many years ago and found it odd that one criteria was investing in stocks trading for less than a certain price per share. The fund still sets such a goal with the current criteria set to $35. Of course, the price per share should make no difference. Market capitalization is what counts. But you can’t argue with the track record of Joel Tillinghast who has run the fund since 1989, posting an annualized return of 13%, four points higher than his benchmark. (CNBC), August 23, 2023. This is the first article in a new series on topics that every investor should know. Two businesses with very different return on capital profiles are used as examples: Berkshire Hathaway in 1964 and Coca-Cola in 1987. (Watchlist Investing), August 22, 2023. Few investors have as much capacity to suffer as Michael Burry. This article recounts Burry’s experience in the markets of the mid-2000s. His conviction was not met with immediate success, something that is easy to overlook in hindsight. (Investment Talk)
No You Can’t Have It All (Especially as a Parent) by Ryan Holiday, August 21, 2023. “I sometimes look at the Twitter feeds of very important and busy people—people who I know have babies at home or teenagers in high school—and I wonder what they’re doing. Forget all the companies he runs, Elon Musk has 9 kids, ages 1 to 18, and he’s got time to tweet 30 times a day? He’s seeking out culture war issues to get sucked into?” (RyanHoliday.net)
Intelligent vs. Smart by Morgan Housel, August 22, 2023. “Some people are intelligent but don’t have a lick of smarts. Their ability to succeed in the world might surprise you on the downside. Others lack intelligence but gush smarts. Their potential will surprise you on the upside. On rare occasions you meet people who are both intelligent and smart. They run laps around everyone.” (Collaborative Fund) A podcast of this article is also available.
The Complete History & Strategy of Costco, August 20, 2023. 3 hours, 2 minutes. This is a very long podcast but I broke it up into a few sessions and found it to be well done. It’s impossible to understand Costco without going back to Sol Price and FedMart, so I appreciated that part of the discussion. I’ve only been a member of Costco for ten months but the combination of shopping there and researching the company last year made me a “cult member”, although not a shareholder quite yet. If you’re looking for a solid introduction, this podcast is a good place to start. (Acquired)
The Cultural Tutor on Writing Every Day, Growing a Twitter Audience, and Reading Old Books, August 23, 2023. 1 hour, 23 minutes. David Perell has created a new podcast devoted to the art of writing. In this episode, he speaks to The Cultural Tutor, to this point an anonymous account on the internet who I have recommended several times in the past. He almost defines meteoric success, growing a Twitter following from nothing to 1.5 million followers since May 2022. (How I Write)
Lee Ainslie - Hedge Fund Maverick, August 22, 2022. 1 hour, 36 minutes. Aspiring hedge fund managers will definitely want to listen to this episode. “Lee Ainslie is the founder of Maverick Capital. We cover how his career at Tiger helped him build Maverick, the impact of rates on hedge fund returns, and the biggest lessons he's learned about the craft of investing.” (Invest Like the Best)
How do weight-loss medications affect metabolic health?, August 17, 2023. 51 minutes. “Medications, such as Ozempic, Wegovy, and more, have become increasingly popular for weight loss. These drugs are glucagon-like peptide 1 (GLP-1) receptor agonists, and they mimic a hormone that … tells the brain a person is full so they eat less. But are they safe, and do they help improve metabolic health? Dr. Rob Lustig and Dr. Casey Means discuss these weight-loss drugs and their effects on the body, and why such medications likely won’t solve the obesity crisis, for which the food industry is culpable.” (A Whole New Level)
Macintosh Launch Video
It’s hard to believe that the Macintosh will be forty years old in just a few months. When Steve Jobs introduced the computer on January 24, 1984, he was a month shy of his twenty-ninth birthday and Apple was less than eight years old. I thought it would be interesting to share the video as we await Apple’s annual iPhone event next month. Today’s devices are vastly more sophisticated but many of the sales techniques that Jobs pioneered so long ago are still used very effectively today.
Summer in Southern Utah
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Vintage Heathkits are still available but a more modern alternative might be Snap Circuits. I have experience giving Snap Circuits as gifts. They are a lot of fun to put together and you might be tempted to “help” a child too much. Of course, the entire point is for children to learn for themselves. Anything that puts a child in contact with the physical world and gets them to step away from blindly consuming “content” on electronic devices is a good thing.