The Digest #80
Berkshire Succession, Excess Efficiency, Crazy Ideas, Taleb's Mini-Lessons, VISA
“I think that the Chinese government will allow businesses to flourish. It was one of the most remarkable things that ever happened in the history of the world when a bunch of committed Communists just looked at the prosperity of places like Singapore and said, “The hell with this. We’re not going to stay here in poverty. We’re going to copy what works.” They changed communism. They just accepted Adam Smith and added it to their Communism. Now we have Communism with Chinese characteristics, which is China with a free market with a bunch of millionaires and so forth.”
— Charlie Munger, 2021 Berkshire Hathaway annual meeting (transcript)
Berkshire Chooses Greg Abel as Warren Buffett’s Successor in CEO Role by Geoffrey Rogow and Justin Baer, May 3, 2021. During the Berkshire Hathaway annual meeting, Charlie Munger indicated that Greg Abel would be responsible for keeping the company’s culture intact, implying that Abel would be the next CEO. Warren Buffett soon confirmed that Abel is currently the “name in the envelope”. However, Buffett has no plans to step down anytime soon. Lawrence Cunningham, who has written several books on Berkshire, applauded the move and characterized Abel as a capable operator and capital allocator. Berkshire’s stock price has also been rising this week, perhaps partly due to greater clarity over the company’s long term leadership. (WSJ)
Berkshire’s Oriental Trading Acquires Morris Costumes by Catherine Muccigrosso, May 4, 2021. Berkshire has not been able to acquire an “elephant” in quite some time but its Oriental Trading Company subsidiary just caught a “minnow”. While entirely immaterial to Berkshire’s overall results, these types of “bolt-on” acquisitions are not uncommon for smaller Berkshire subsidiaries. Berkshire has a very decentralized management structure but all capital allocation decisions are ultimately made by Warren Buffett. My guess is that Greg Abel is already handling small capital allocation decisions like this without much, if any, input from Omaha. (Charlotte Observer)
Auto Makers Retreat From 50 Years of ‘Just in Time’ Manufacturing by Sean McLain, May 3, 2021. Just-in-time manufacturing has been taught in business schools for decades. I still recall visiting the NUMMI plant in Fremont, California in the early 1990s as part of a course on manufacturing. The problem with maintaining lean inventories and relying on a global supply chain to keep your production lines running is that the entire system becomes fragile to disruptions. This article describes some of the fragility that automakers have suffered from in recent months. Nassim Nicholas Taleb described just-in-time as “pseudoefficiency” in a recent tweet. (WSJ)
Efficiency is the Enemy, by Farnam Street, May 5, 2020. Maybe the auto makers burned by excessive zeal in just-in-time manufacturing need to consider the virtues of slack: “Slack is the time when reinvention happens. It is time when you are not 100 percent busy doing the operational business of your firm. Slack is the time when you are 0 percent busy. Slack at all levels is necessary to make the organization work effectively and to grow. It is the lubricant of change. Good companies excel in creative use of slack. And bad ones only obsess about removing it.” (Farnam Street)
The Rage of Carson Block by Michelle Celarier, April 19, 2021. Short sellers are often vilified, not only by the companies that they target but by the media and the investment community in general. I’ve long been convinced that short-sellers play a key role in surfacing important information in markets. Whether the information involves fraud or simply a case of inflated expectations, reading about short sellers can be an educational experience. This article profiles Carson Block and provides great insight into the life of a short-seller. h/t The Profile. (Institutional Investor)
Graham & Doddsville Spring Newsletter. The Spring 2021 issue of the student-led investment publication of Columbia Business School includes interviews with Brian Bares, founder of Bares Capital Management, Sean Stannard-Stockton of Ensemble Capital, and Dan Rasmussen of Verdad Advisers. (Columbia Business School)
The Limits of Investing Sanity by Morgan Housel, May 6, 2021. “Crazy is normal; beyond the point of crazy is normal. Every few years there seems to be a declaration that markets don’t work anymore – that they’re all speculation or detached from fundamentals. But it’s always been that way. People haven’t lost their minds; they’re just searching for the boundaries of what other investors are willing to believe.” (Collaborative Fund)
Crazy New Ideas by Paul Graham, May 2021. Don’t dismiss crazy sounding new ideas without considering the source: “Most implausible-sounding ideas are in fact bad and could be safely dismissed. But not when they're proposed by reasonable domain experts. If the person proposing the idea is reasonable, then they know how implausible it sounds. And yet they're proposing it anyway. That suggests they know something you don't. And if they have deep domain expertise, that's probably the source of it.” (PaulGraham.com)
Why You’re Christian by David Perell, April 30, 2021. This article starts off with a controversial proposition: “If you believe in human rights but don’t believe in God, you need a logical explanation for why they’re self-evident.” The author, who was raised in the Jewish faith and now characterizes himself as a “tepid non-believer”, credits Christianity with establishing the concept of human rights so firmly that it is nearly universally considered as a self-evident truth among believers and non-believers alike. While this article might be considered controversial, it certainly isn’t an attempt to proselytize and I found it thought provoking. (Perell.com)
Nassim Taleb’s Probability Mini-Lessons. Over the past week, Nassim Taleb has posted five mini-lessons on probability covering correlation, the central limit theorem, the law of large numbers, fat tails, and standard deviation. I recommend subscribing to his channel because it seems like there will be more of these talks. They are brief and non-technical. (YouTube)
Visa: The Original Protocol Business. Patrick O'Shaughnessy and Alex Rampell discuss the fascinating process that occurs behind the scenes when someone uses a Visa credit card for a payment. Everyone is familiar with the use of credit cards from a consumer perspective but very few people understand the intricacies of interchange fees. One take-away from this episode was that those of us who are creditworthy enough to obtain “Signature” Visa cards end up capturing the lion’s share of the interchange through 2% cash back rewards. Unless you are an expert in this field already, you are likely to learn something new in this episode. (Business Breakdowns)
Jim Collins: Relationships vs. Transactions. “Renowned researcher and author Jim Collins makes his second appearance on The Knowledge Project, this time to share a wealth of life lessons learned from his mentor and collaborator, Bill Lazier. Jim recently released BE 2.0 (Beyond Entrepreneurship 2.0), an ambitious upgrade of his first book Beyond Entrepreneurship, co-authored with Lazier and focused on effective leadership style.” (Farnam Street)
Richer, Wiser, Happier
A few weeks ago, I shared a podcast episode featuring William Green, the author of Richer, Wiser, Happier. I recently read the book and highly recommend it. This is not a book of practical investment advice, but instead a study of remarkable individuals who have made very successful careers as investors. Some of them are very well known while others are relatively obscure. I found the chapters on Tom Gayner, Ed Thorp and Mohnish Pabrai particularly interesting.
Green had remarkable access to these investors. But he had something more than mere access. He obviously has a way of drawing out the inner personality of his subjects in ways that are often revealing and surprising.
Most of the individuals in the book enjoy their wealth but also understand the limitations of money. They reinforced my long-held view that the main utility of money is to reach financial independence and have full control of your time. In other words, it is useful for the first two layers of Maslow’s hierarchy of needs. And it can provide the time and space needed to pursue the higher needs. The rest is up to you.
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