The Digest #165
Buffett on Inflation, Dollar General, Due Diligence, Personal Libraries, The role of AI in drug discovery, Small-cap opportunities, Interviews of Peter Brown, Bill Gross, Chris Bloomstran, and more...
Buffett on Inflation
In the mid-1960s, inflation began to accelerate in the United States. There were two brief periods of disinflation, but the overall trend between 1965 and 1982 was a long escalator to higher and higher rates of inflation. It took some serious medicine dispensed by Fed Chairman Paul Volcker to finally bring inflation under control.
Warren Buffett took control of Berkshire Hathaway in 1965 at the start of what is now known as The Great Inflation. He had to deal with the pernicious effects of rising prices when it came to managing Berkshire’s subsidiaries as well as making investments in securities. He also attempted to provide guidance to his partners regarding bond investments when the Buffett Partnership ended in 1970.
I’ve been reviewing Warren Buffett’s commentary on inflation in the 1970s and early 1980s over the past week and wrote the first in a series of articles focusing on his advice to partners regarding investing in bonds. The article was sent to paid subscribers yesterday and includes a brief free preview. I am working on the second installment of this series and it will be sent out to paid subscribers later this week.
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Articles, September 4, 2023. Earlier this month, I spent some time reading about Dollar General and posted my thoughts on the company. Being new to Dollar General, I found this detailed write-up interesting, in particular the risks associated with Wal-Mart’s omnichannel initiatives. I previously discounted the risk of competition with Wal-Mart due to the closure of the Wal-Mart Express small format concept in 2016. (The Science of Hitting)
Permanent Equity’s Diligence Process. “Permanent Equity is in the business of confidently investing in smaller private businesses using other people’s money, and the aim of diligence … is not to uncover gotchas that would prompt us to renegotiate, but rather to gain an accurate understanding of how a business works and what its opportunity set is so we can do make the investment. Because the more we can confidently invest, the better, so we’re excited to show our work so we can get better too.” (Permanent Equity)
Rate Hikes Make Big Companies Richer by James Mackintosh, September 15, 2023. Just as creditworthy consumers were able to lock in long-term fixed rate mortgages well under 3% in 2021, large creditworthy companies were able to lock in cheap debt. “The winners from higher rates were high-quality borrowers, who locked in low interest rates around the pandemic with bonds maturing further in the future than any time this century. Higher rates have little immediate impact on their borrowing costs—only affecting bonds when they are refinanced—while they earn more on their cash piles straight away.” (WSJ), September 14, 2023. “If it were necessary, I’m confident that you could raise enough money to buy out Spotify or a big record label or a ticketing company. Or all three. Maybe that’s an option, but you don’t need to do that. You can create something better from scratch. You can bring together all of the best things about music into a single operation owned by musicians and run by people who love music—encompassing streaming, physical albums, and live music. You can create a unifying vision. You can build something that’s fair and transparent and gets people excited about music again.” (The Honest Broker), September 13, 2023. I was reminded of Nassim Taleb’s concept of an anti-library when I read this article. There’s nothing wrong with accumulating more books than you can read. “End of the day, my salient point in all this is that for readers and writers, this book list and acquisition thing is a way of life. We’re going to do it compulsively anyway. So if it’s not hurting ourselves or anybody else, I figure we lean into it and try to enjoy it all without any guilt.” (The Write Books), September 13, 2023. “Everyone needs at least one creative outlet in their lives. We spend most of our days consuming what others have made, whether it’s reading, watching, or listening. I believe it’s crucial that you cultivate at least one place in which you truly express yourself. Forget about sharing and forget about money. Just find one creative activity that you enjoy and that allows you to express and reflect on your unique experience of life. I don’t know what suits you best. For me, it has been mainly writing.” (Neckar’s Alchemy of Money)
AI can help to speed up drug discovery — but only if we give it the right data by Marissa Mock, Suzanne Edavettal, Christopher Langmead, and Alan Russell, September 19, 2023. “Artificial-intelligence tools that enable companies to share data about drug candidates while keeping sensitive information safe can unleash the potential of machine learning and cutting-edge lab techniques, for the common good.” (Nature)
A Few Things I’m Pretty Sure About by Morgan Housel, September 14, 2023. I can certainly relate to this: “Some of my best work was easy to write, and the worst stuff I’ve ever written was agonizing to write. I think it’s similar in most fields. If an idea is good, the work flows easily. Writers’ block – or its equivalent in other jobs – usually means the idea is wrong.” (Collaborative Fund)
A conversation with Renaissance Technologies CEO Peter Brown, September 11, 2023. 41 minutes. “In this special episode of Goldman Sachs Exchanges: Great Investors, Peter Brown, CEO of Renaissance Technologies, talks about his career and building the hedge fund company. He also recounts how the firm navigated market crises such as the ‘quant quake’ and the Global Financial Crisis, and describes how computer models and algorithms have long played a role in Renaissance’s growth.” (Goldman Sachs Exchanges) h/tFive lessons from Peter Brown, CEO of Renaissance Technologies
The Man Who Solved The Market, December 28, 2019. This article is my book review of The Man Who Solved The Market, a biography of Jim Simons, the founder of Renaissance Technologies. (The Rational Walk)
Bill Gross on the End of the Great Bond Bull Market, September 13, 2023. 47 minutes. “Bill Gross became known as the Bond King during his legendary, multi-decade run at Pimco, eventually growing the company to manage trillions of dollars. Of course, that success coincided with a remarkable bond bull market -- a bull market that came to a screeching halt over the course of the last two years. So what does Gross think of markets today? And could there ever be a new bond king in this environment?” (Odd Lots)
The Vigilant Investor w/Chris Bloomstran, September 16, 2023. 1 hour, 27 minutes. This episode is part one of a two part series. “Chris explains how to achieve long-term success by seeking a ‘dual margin of safety’ that comes from owning high-quality businesses at attractive prices. He also warns about the perennial dangers of irrational exuberance, which he now sees in hot stocks like Tesla & Nvidia.” (Richer, Wiser, Happier)
Lessons From Buffett & Berkshire w/Chris Bloomstran, September 16, 2023. 1 hour, 18 minutes. This is part two of the series. “Chris discusses what we can learn from studying Berkshire Hathaway & Warren Buffett; weighs the risks of Berkshire’s huge Apple stake; discusses Berkshire’s valuation; & explains why the stock should beat the S&P 500. He also talks about avoiding charlatans and living with integrity.” (Richer, Wiser, Happier)
Small Caps at Multi-Decade Valuation Low vs. Large Caps: Opportunity or Trap?, September 18, 2023. “In this episode, co-hosts Elliot Turner, Phil Ordway, and John Mihaljevic discuss the small-cap versus large-cap dichotomy, as reflected by US small caps recently hitting a 22-year low versus large caps (measured as the ratio of the Russell 2000 to the Russell 1000). We debate whether the time has come to seek outperformance in small caps versus large caps.” (This Week in Intelligent Investing)
Berkshire Hathaway - 1976 Annual Report, September 13, 2023. 26 minutes. Transcript. An analysis of when Berkshire started to invest float in stocks: “1976 is when everything changed. This is where I draw the line of demarcation for its insurance subsidiaries. The level of stocks within the insurance group just narrowly squeaked ahead of its equity capital. The subsidiary had $93 million of stocks, while there was $88 million of equity capital. I interpret this as about $5 million of stocks were funded by insurance liabilities in the form of float. Stocks consistently outpaced equity capital in the insurance group after this point in time, so this was a turning point for the organization.” (10-K Podcast)
Hyde Park, London
This painting by Camille Pissarro depicts an early fall scene in Hyde Park in 1890. It seems like a timely selection as the autumn equinox approaches.
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