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The Digest #118
Inflation Hedges, Startups, Madoff's Playbook, Beginner's Mind, ESG Pushback, Central Banking in the 1790s
“When you buy a book, you establish a property right in it, just as you do in clothes or furniture when you buy and pay for them. But the act of purchase is actually only the prelude to possession in the case of a book. Full ownership of a book only comes when you have made it a part of yourself, and the best way to make yourself a part of it— which comes to the same thing— is by writing in it.”
An Inflation Follow Up: The Disparate Effects on Companies by Aswath Damodaran, May 20, 2022. In a follow up to an article published in early May, Professor Damodaran explores the factors that determine whether a company is likely to withstand inflation. “In an environment where finding inflation hedges has become the first priority for most investors, the search is on for companies that are less exposed to high and rising inflation. The conventional wisdom, based largely on investor experiences from the 1970s, is that commodity companies and firms with pricing power are the best ones to hold, if you fear inflation, but is that true, and even if it is true, why is it so?” (Musings on Markets)
The Cost of Living and the Cost of Cows by Jason Zweig, May 17, 2022. Talk about a narrow basket to reference when it comes to measuring consumer price inflation! “Prices in Massachusetts shot up more than 32-fold between 1777 and 1780 after the state government printed vast quantities of money to pay for military expenditures. By early 1780, investors were so distrustful that they were saying, in effect, "Where's the beef?" So the government in Boston had to back its bonds partly with beef.” (The Intelligent Investor)
Default Alive or Default Dead by Paul Graham, October 2015. When I read this article, I thought of Warren Buffett’s advice to never rely on the kindness of strangers when it comes to survival. “When I talk to a startup that's been operating for more than 8 or 9 months, the first thing I want to know is almost always the same. Assuming their expenses remain constant and their revenue growth is what it has been over the last several months, do they make it to profitability on the money they have left? Or to put it more dramatically, by default do they live or die?” (PaulGraham.com) h/t The Curiosity Chronicle
How Crypto Is Using the Behavioral Dynamics of Bernie Madoff’s Fraud by Pam Martens, May 23, 2022. A personal account of how the author first suspected Bernie Madoff’s operations to be a fraud after being asked if she could match Mr. Madoff’s “guaranteed 13%”. This conversation took place in 1991! She sees many parallels between the Madoff fraud and how crypto has been promoted in recent years. “My cognitive processes sized up the situation like this: if this man is willing to brazenly break the law by guaranteeing stock returns, if he has delivered 13 percent returns steadily for more than a decade – including during years in which the S&P 500 had a negative return — then it is highly likely he is running a Ponzi scheme.” (Wall Street on Parade)
Boredom and Impatience, May 22, 2022. “The only way to become good at something is to practice the ordinary basics for an uncommon length of time. Most people get bored. They want excitement. They want something to talk about and no one talks about the boring basics. For example, we know that dollar-cost averaging into an index fund is likely to generate wealth, but cryptocurrency will give us a bigger thrill. Boredom encourages you to stop doing what you know works and do something that might work.” (Farnam Street)
When Product Lines Take a Sharp Turn by Gregg Opelka, May 18, 2022. Sometimes a business evolves into something its founders could never have expected or anticipated. “A funny thing happened on the way to the showroom. The flagship product made a wrong turn. I call them detour companies: A business doing one thing, often very well, morphing into an even more successful but different enterprise. The history of American industry is awash in shining examples of companies that made revolutionary changes, becoming essentially new businesses en route.” (WSJ)
Trying Too Hard by Morgan Housel, May 16, 2022. The more experience you have, the better prepared you are to make decisions, right? While I believe that this is usually true, there are definitely cases where the weight of experience, especially obsolete experience, can introduce major errors. The concept of beginner’s mind is something I thought of while reading this article. “There is one set of skills that comes from being an expert, and another that comes from being a novice, unburdened by the weight of experience or incentives. The former is obvious, the latter too easy to ignore.” (Collaborative Fund)
Another Industry on which Berkshire Could Have Been Built by Jacob McDonough, May 19, 2022. “The insurance industry has been the backbone on which Berkshire Hathaway has been built. Warren Buffett has discussed the benefits, as well as the pitfalls, of the insurance business throughout his career. Despite the topic being widely analyzed in recent years thanks to Buffett, opportunity still exists in this space. However, there is a different industry that could provide a similar launching pad to a business owner trying to create the next Berkshire Hathaway type conglomerate.” (McDonough Investments) Note: Jacob McDonough is the author of Capital Allocation: The Financials of a New England Textile Mill, a book about Berkshire Hathaway that I reviewed in 2020.
The Welcome Pushback Against Politicized Investment Managers by C. Boyden Gray and Jonathan Berry, May 19, 2022. “This political push isn’t subtle: All of the Big Three express willingness to vote out corporate directors for failure to meet climate or diversity goals, and they all boast about their influential engagements with C-suites between shareholder elections. The result, Berkshire Hathaway’s Charlie Munger says, is that “we have a new bunch of emperors, and they’re the people who vote the shares in the index funds. . . . I think the world of Larry Fink, but I’m not sure I want him to be my emperor.” (WSJ)
I walked the perimeter of Britain – in pictures by Quintin Lake, October 19, 2020. I’ve added walking the U.K. to my bucket list after reading this. “I set off from the steps of St Paul’s Cathedral on 17 April 2015, walking east towards Kent before heading west along the south coast. My mission was to walk the perimeter of Britain in order to get under the skin of our island nation – and find photographic inspiration.” (The Guardian) h/t Chris Arnade
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Goldman Sachs: Fortune Favors The Old, May 19, 2022. “We cover what it means to sit at the center of capital system and the various ways that bank facilitates risk management and risk transfer. We cover the DNA of bank profitability as we go through the core segments of a bank, asset management, sales and trading and investment banking. And we talk about culture, the mystery and the prestige that has followed Goldman since its days as a private partnership.” (Business Breakdowns)
Mastermind Q2 2022 w/Tobias Carlisle and Hari Ramachandra, May 21, 2022. The topics covered in this episode include the investment thesis for Domino’s Pizza and Meta (also known as Facebook), as well as the criteria to consider when selecting an investment manager and why podcast host Stig Brodersen decided to invest with Mohnish Pabrai. (The Investor’s Podcast)
Should the United States Have a National Bank? The concept of a central bank has been controversial since the founding of the United States. In this podcast, the debate between Thomas Jefferson and Alexander Hamilton regarding a national bank is discussed. Clay Jenkinson portrays Thomas Jefferson and, speaking “in character”, presents Jefferson’s case against central banking. (The Thomas Jefferson Hour)
Willow Oak Investment Panel
This investment panel took place in Omaha on April 30 following the Berkshire Hathaway annual meeting. I’ve often posted links to the Focused Compounding podcast, and this panel includes Geoff Gannon and Andrew Kuhn.
“Hosted by Andrew Kuhn of Focused Compounding Capital Management, the panelists consisted of Shree Viswanathan of SVN Capital, Geoff Gannon of Focused Compounding Capital Management, Keith Smith of Bonhoeffer Capital Management, and Steven Kiel of Arquitos Capital Management.”
Tweet of the Week
There is a widely held misconception that has become pervasive in the 21st century. Many people believe that capitalism is somehow exploitive and that success for owners of business comes at the expense of society. Nothing could be further from the truth, provided that markets are competitive. 10-K Diver provided a great chart of how great businesses provide value for all interactions — with suppliers, customers, employees, shareholders, creditors, and government.
The tweet reminded me of something that I have heard Markel CEO Tom Gayner say on a number of occasions:
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For more on Mortimer Adler, I recommend my review of How to Read a Book: The Classic Guide to Intelligent Reading.