The Digest #102
Washington's Farewell, Commitment Bias, Default Habits, Derivatives, Amazon, Executive Compensation, Better Sleep
Thoughts on George Washington’s Farewell Address, February 22, 2022. Today is George Washington’s 290th birthday. I spent several hours yesterday writing about Washington’s farewell address which still has relevance in the twenty-first century. Although most people refer to the holiday as President’s Day, the official Federal holiday is called Washington’s Birthday. The irony is that the Uniform Monday Holiday Act of 1968 ensures that the holiday will always occur on a day between February 15 and 21, never on Washington’s actual birthday! (The Rational Walk)
Buffett Clarifies Activision Investment Timing, February 17, 2022. Warren Buffett has released a letter to journalists which clarifies the timing of Berkshire Hathaway’s investment in Activision Blizzard. I wrote about the investment a week ago and the story was also covered by The Wall Street Journal. Apparently Warren Buffett himself was the unnamed source cited in the Journal’s article. Confusion regarding the story prompted the letter which was posted on Berkshire’s website. (Berkshire Hathaway)
Stock Market Got You Worried? Write a D-Day Note by Jason Zweig, February 18, 2022. “Before you make a big trade, consider writing a note like this: ‘My investment has been a failure, and I am selling. I based the decision on information I believed to be valid, but I was wrong because [blank]. It was a bad investment, but that doesn’t make me a bad investor.’” Zweig also recommends that investors should not constantly talk about their investment ideas because doing so invites commitment bias which makes it harder to change your mind if circumstances change. (WSJ)
Sharing Ideas? Beware of Negative Lollapalooza Effects, March 16, 2017. I used to write about many of my investments without realizing the risks involved in doing so. As Jason Zweig points out, commitment bias is a hazard when you make repeated public stands regarding your thesis. This can make it harder to change your mind. In this article written five years ago, I study a couple of situations where writing about an investment idea caused problems. I hardly ever write about investment ideas anymore, mostly because of the perils of commitment bias. (The Rational Walk)
The Inflation Mess and a Financial Refuge by Joshua Rauh and Kevin Warsh, February 21, 2022. This op-ed suggests that the annual purchase limit for I Bonds should be temporarily increased from $10,000 to $100,000 to facilitate inflation protection for a larger number of investors. This is a good idea, but I would prefer to see the $30,000 annual purchase limit that existed at the turn of the century permanently reinstated. In fact, the limit should be closer to $50,000 to account for inflation since 2000. I wrote about the inflation protection of I Bonds in November. Changing the I Bond purchase limit is something Treasury Secretary Janet Yellen can do with her executive authority. No legislation is necessary. (Wall Street Journal)
Designing Defaults by Shane Parrish, February 20, 2022. This reminds me of many of the important lessons I learned from reading James Clear’s Atomic Habits. “The most successful people consistently do the thing they’re great at. They do it on easy days and they do it on hard days. They do it when they feel like it and when they don’t. Only what I’ve learned is that they’re not more disciplined than you or I. So how do they do it? The answer is they create a ritual.” (Farnam Street)
Derivatives: Past, Present & Future by Jamie Catherwood, February 20, 2022. This article takes a long view of the history of derivatives. “Even Ancient Mesopotamia (circa 1,400 B.C.E.) offers instances of contracts related for purchasing crops that shared similarities with modern forward contracts. Many of these contracts included qualities like forward contracts today. For example, contracts stipulated the quantity of grains a seller would deliver on a future date at a fixed price agreed upon at the time of contract.” (Investor Amnesia)
Amazon's $31B ad business by Trung Phan, February 19, 2022. “Amazon is the latest Big Tech company to officially unveil a “sizeable side hustle”. Two weeks ago, the company broke out its ad business (for years, it was classified in company filings under “other revenue”). The punchline: Amazon’s ad platform generated revenue of $31B in 2021, which is nearly 3x the combined sales of Twitter, Pinterest and Snap (all ad-based social platforms).” (SatPost by Trung Phan)
Are the Big 4 Accounting Firms Focused on their Public Duty or Optimizing their Payday? by Francine McKenna, February 21, 2022. This is a good article to read as we approach the annual report and proxy season for companies that report results on a calendar year basis. The auditing industry has always been plagued by conflicts of interest and nothing has really changed or improved very much despite various reform efforts over the years. (Wall Street on Parade)
Podcasts and Videos
Why Executive Compensation Matters, February 20, 2022. This is one of the best discussions regarding executive compensation that I’ve heard in many years. In particular, the discussion regarding the problems equity based compensation can cause is worth paying attention to. What happens when employees are paid with stock of a highflying company and the stock subsequently crashes? Are there better ways to align the incentives of employees with owners? This podcast reminded me of an article I wrote a few years ago regarding the importance of carefully reading proxy statements. (This Week in Intelligent Investing)
Matthew Walker: The Power of Sleep, February 22, 2022. Sleep quality is a trendy topic these days and there are all sorts of high-tech products available including wearable devices and mattresses that regulate temperature. What I liked about this podcast is that most of the advice was less technical and actionable for those who do not want to use these consumer products. In particular, Matthew Walker’s advice related to caffeine and alcohol is worth implementing. (The Knowledge Project)
A First Course on Fragility, Convexity, and Antifragility, by Nassim Taleb, January 21, 2022. This is an excellent and fairly non-technical explanation of fragility and antifragility and serves as a good introduction. “A first, very introductory presentation of fragility as linked to both nonlinearity and dislike of variations. Antifragility is almost the opposite, limited to a specific range of variations. Explains: + Why everything fragile must be concave. + The medical S curve. + Why harm to the climate is necessarily nonlinear in dose response. + How hospitals can be overcrowded unless there are redundancies.” (YouTube)
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