The Digest #53
The Moon Is Down, Diminishing Privacy, First Principles, I Bonds
The Moon Is Down
I recently found a compilation of John Steinbeck’s lesser known writing which includes The Moon Is Down, a short novel set in an unnamed Northern European country during the early days of the Second World War. Characterized as a “propaganda novel” by detractors, Steinbeck’s tale of resistance was an inspiration for occupied people in Europe when it was translated and illicitly distributed during the war.
Invading forces are often able to find local collaborators to help them control the population and to add a sense of legitimacy to their rule. The invaders asked the mayor of a small town in a strategic coal-mining region to help them control the people who were actively sabotaging their rule. Mayor Orden had the following dialog with his confidante, Doctor Winter, shortly before facing execution for refusing to collaborate with the occupying forces:
“You know, I couldn’t stop it if I wanted to.”
“I know, said Winter, “but they don’t know.” And he went on with a thought he had been having. “A time-minded people,” he said, “and the time is nearly up. They think that just because they have only one leader and one head, we are all like that. They know that ten heads lopped off will destroy them, but we are a free people; we have as many heads as we have people, and in a time of need leaders pop up among us, like mushrooms.”
Orden put his hand on Winter’s shoulder and he said, “Thank you. I knew it, but it’s good to hear you say it. The little people won’t go under, will they?” He searched Winter’s face anxiously.
And the doctor reassured him, “Why, no, they won’t. As a matter of fact, they will grow stronger with outside help.”
The invaders continue to harangue Orden in a futile attempt to get him to comply, but to no avail:
“I have no choice of living or dying, you see, sir, but — I do have a choice of how I do it. If I tell them not to fight, they will be sorry, but they will fight. If I tell them to fight, they will be glad, and I who am not a very brave man will have made them a little braver.” He smiled apologetically. “You see, it is an easy thing to do, since the end for me is the same.”
Say Goodbye to Privacy
General Motors aims to transform the auto insurance industry, according to a press release issued by the company on Wednesday. GM’s insurance brand, OnStar Insurance, is an extension of the company’s OnStar connected car service and aims to use the data collected by the service to set rates that reflect risky driver behavior.
As the Wall Street Journal reported on Thursday, GM offered auto insurance to drivers through GMAC but exited the business around the time of its 2009 bankruptcy. Maybe the company will have better luck this time if underwriting accuracy improves with more driver data.
Attempting to set rates based on driver behavior is nothing new. Progressive’s Snapshot usage-based insurance product has offered discounts to drivers willing to subject themselves to monitoring. Privacy is quickly becoming a thing of the past in our society and drivers who might have bridled at being monitored in the past could very well accept this practice in exchange for discounts.
First Principles
I purchased a 1965 Mustang as a sixteen year old in the late 1980s. I had no problem having the car serviced for many years but by the late ‘00s, the number of mechanics who still understood how to work on carbureted engines diminished to the point where I decided to learn how to rebuild a carburetor myself. Fortunately, YouTube made it easy to learn how to tinker, and sometimes tinkering is the best way to learn.
But there are limits to tinkering with no underlying understanding of the fundamentals, no understanding of the principles behind what you are playing with. A carburetor is a device that is responsible for mixing fuel and air in the proper ratio needed for efficient combustion. Taking the small amount of time to read the Wikipedia entry on the science involved and then studying a book on tuning made all the difference in the world.
The Farnam Street blog has long been an advocate of going back to first principles when your goal is to master a new topic. I had to understand at least the basics of the science behind carburetion to become a halfway competent mechanic. The same applies to a wide array of fields including cooking, as Farnam Street describes in How Julia Child Used First Principles Thinking. Blindly following a recipe might yield decent results in a single case but you’ll never learn to transform seemingly random ingredients into a creative meal without understanding the first principles of cooking.
MacGyver was a popular television program in the 1980s and featured a brilliant protagonist who got out of all kinds of bad situations using common everyday items. He was able to do so because he had a mastery of a wide array of skills and used applied physics to ingeniously come up with solutions. A broad multi-disciplinary framework is key to success in most fields of human endeavor.
Savings Bonds
What investment could be more boring than United States savings bonds when you can open a Robinhood account and trade stocks in seconds without paying commissions? With the Federal Reserve pushing short term interest rates to nearly zero, everyone knows that “cash is trash”, right?
Except, of course, when it isn’t. Cash is an indispensable asset class when it comes to paying for near-term expenses and saving for shorter term goals. As Nick Maggiulli points out in How to Save for a Big Purchase, you need to match the asset class you are using as a savings vehicle with the timeframe of your savings goal. Historically, stocks have been most useful for saving for long-term objectives. Bonds have proven superior to cash in the medium-term, and cash is safest for the short-run.
But what if you can obtain an interest rate materially higher than the ten year treasury yield while taking zero risk of loss of capital?
Such an option is available for small investors who use boring I Series savings bonds. Investors can put up to $10,000 per year into these bonds, offered via Treasury Direct. I Series bonds pay a fixed “real” rate of interest plus the rate of inflation as measured by the consumer price index for urban consumers (CPI-U). Although the current real rate is 0%, the addition of the inflation adjustment brings the yield to 1.68%. The inflation adjustment changes every six months.
Investors cannot redeem a savings bond for the first year and any bond redeemed before five years incurs a three month interest penalty. Despite these limitations, savings bonds could be the best choice for many investors saving for shorter term objectives.
Book Talk With Bruce Greenwald
Bruce Greenwald and Tano Santos discuss the Second Edition of Greenwald’s Value Investing: From Graham to Buffett and Beyond in this interview recorded last week:
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