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The Digest #143
Gell-Mann Amnesia, GEICO, Todd Combs, Onboarding Directors, Damodaran on Meta, Paul Graham's Essays, Home Depot, Nick Sleep
“Briefly stated, the Gell-Mann Amnesia effect works as follows. You open the newspaper to an article on some subject you know well. In Murray's case, physics. In mine, show business. You read the article and see the journalist has absolutely no understanding of either the facts or the issues. Often, the article is so wrong it actually presents the story backward-reversing cause and effect. I call these the ‘wet streets cause rain’ stories. Paper's full of them.
In any case, you read with exasperation or amusement the multiple errors in a story-and then turn the page to national or international affairs, and read with renewed interest as if the rest of the newspaper was somehow more accurate about far-off Palestine than it was about the story you just read. You turn the page, and forget what you know.”
Here’s the trouble under the hood at Warren Buffett’s Berkshire Hathaway by Steve Goldstein, November 8, 2022. My recent article, A Closer Look at Berkshire’s Operating Income, was quoted at length in this article which focuses on GEICO. While I am happy to be quoted and definitely have concerns about GEICO, I am not quite as negative as the excerpts might imply. GEICO could be a topic in Warren Buffett’s 2022 shareholder letter as well as the subject of questions for Mr. Buffett and Vice Chairman Ajit Jain at the 2023 annual meeting. (MarketWatch)
Graham & Dodd Annual Breakfast 2022, November 4, 2022. Todd Combs was the guest speaker at the Graham and Dodd breakfast which took place on October 28. While these notes are interesting, I should point out that the link is from a brand new Substack account and the event invitation said that it was “off the record” (I did not attend). I found the notes interesting enough to post a link with this caveat. On Todd Combs’ schedule: “From an allocation perspective, 100-110% at GEICO, 16-hour days there, and he does his investing at nights and weekends, which makes up approximately 25%, and finally bank board meetings and other is 25%” (Investment Management Insights)
Companies Look for Ways to Bring New Directors Up to Speed Quickly by Emily Glazer, November 7, 2022. The premise of this article is peculiar. There are references to sending new directors the company’s annual report and proxy in a binder as part of an “onboarding process”. This is shocking to those of us who expect directors to already be significant shareholders who are very familiar with the business for which they have become fiduciaries. Shouldn’t someone under consideration for a director role already be a shareholder who is familiar with the company’s annual reports? (WSJ)
Berkshire Hathaway’s Corporate Governance Guidelines is a short document that describes director orientation: “All new directors receive an orientation from the Chief Executive Officer and are expected to maintain the necessary level of expertise to perform his or her responsibilities as a director. The Company does not maintain any formal orientation or continuing education programs.” (Berkshire Hathaway)
Meta Lesson 1: Corporate Governance by Aswath Damodaran, November 4, 2022. This is the first in a three-part series on Meta. In addition to discussing corporate governance issues, the article has a useful recap of Meta’s recent results in the context of the larger decline of technology stocks this year. “In this first post, I will use the investor debate about Facebook to talk about corporate governance, what it is, why it matters and how I think governance disclosure research, rules and scoring services have lost the script in the last two decades.” (Musings on Markets)
Why Costco and Trader Joe’s Stopped Selling Your Favorites by Nathaniel Meyersohn, November 5, 2022. Trader Joe’s shares similarities with Costco in terms of merchandising. Both carry a limited number of SKUs, have an extensive private label business, high quality standards, and a customer-centric focus. This article explains the logic behind allowing certain products to go out of stock. (CNN Business)
Becoming Trader Joe, February 17, 2022. This article reviews Trader Joe’s founder Joe Coulombe’s autobiography. (The Rational Walk)
Costco Wholesale Corporation, October 25, 2022. In this business profile, we examine Costco's impressive track record and consider whether future growth prospects are likely to justify today's lofty valuation. (Rational Reflections)
How Do the Wealthy Invest by Nick Maggiulli, November 8, 2022. The wealthy have investment options that are not available to the masses. This article looks into how the wealthy invest with a focus on how younger and older wealthy households allocate capital. One point made in the article is important but often overlooked: We should not assume that the wealthy got rich due to their investments. In many cases, wealthy people amassed their fortunes in other ways, so how they allocate capital today isn’t necessarily responsible for how they got rich to begin with. (Of Dollars and Data)
How to Power Down to Reclaim Your Life by Sahil Bloom, November 9, 2022. These ideas especially useful for those of us who work at home. “It’s difficult to overstate the importance of having a Power Down Ritual. Without one, we allow our work and professional life the freedom to completely control every other aspect of our life. This makes us less present with our family, friends, and personal activities, leading to atrophy in these areas, which are so important to building a comprehensive, fulfilling life.” (The Curiosity Chronicle)
The Staircase of the Self by Lawrence Yeo, November 2022. This is an interesting essay regarding the journey our sense of identity takes through life. I wrote a few sentences attempting to summarize the essay but deleted them, finding my description to be quite inadequate. Although this essay is quite long, I think that the ideas presented are worth the time investment. (More to That)
Paul Graham’s Essays were featured on the Founders Podcast in a two-part series. These essays are familiar to longtime readers of the Weekly Digest. Paul Graham is most well-known for co-founding Y Combinator but he is also a prolific essayist on a wide range of interesting topics. (Founders Podcast)
Founders #275: Paul Graham's Essays, November 2, 2022, 1 hour 30 minutes.
Founders #276: Paul Graham’s Essays, Part 2, November 9, 2022, 53 minutes.
How to Lose Time and Money by Paul Graham, June 2010. “If you'd asked me as a kid how rich people became poor, I'd have said by spending all their money. That's how it happens in books and movies, because that's the colorful way to do it. But in fact the way most fortunes are lost is not through excessive expenditure, but through bad investments.”
The Capacity to Suffer Applied to Meta, November 6, 2022. 41 minutes. Tom Russo has often spoken about the concept of “capacity to suffer” which has to do with the willingness to endure short-term pain in order to generate exceptional long-term results. Is this what Mark Zuckerberg has been doing at Meta with his massive bet on the metaverse via the Reality Labs segment? (This Week in Intelligent Investing)
The Home Depot: The Pro Builder’s Choice, November 2, 2022. Home Depot has executed very well in recent years. Although the store count has been flat for over a decade and revenue growth has been in the mid-single digit range, management has successfully expanded operating margins resulting in strong earnings growth which has translated to excellent shareholder returns. This podcast breaks down the key elements of the business and management’s recent strategy. (Business Breakdowns)
Nick Sleep: The Best Investor You’ve Never Heard Of, November 7, 2022. “Clay Finck reads through Nick Sleep’s letters and distills the biggest lessons he learned from studying his writings and investment career. Through Sleep’s fund, the Nomad Investment Partnership, he achieved a stellar total return of 921% versus 117% for the world index from 2001 to 2014. Sleep is known for betting a good majority of his personal fortune on just three stocks – Amazon, Costco, and Berkshire Hathaway.” (We Study Billionaires)
Ooni Pizza Ovens, November 7, 2022. Fascinating story of how two entrepreneurs created a $250 million business starting with a $26,000 kickstarter campaign. “In 2012, Kristian Tapaninaho was experimenting with making his own pizza, but he couldn’t get his home oven hot enough to produce an authentic, Neapolitan-style crust … Kristian decided to design a portable, wood-fired outdoor oven.” (How I Built This)
Tweets of the Week
This is a disturbing thread about Twitter’s culture. There are many opportunities for privacy violations given the voluminous amount of data tracked by apps.
This is similar to Taleb’s suggestion that surgeons should not look like surgeons.
“… The one who doesn’t look the part, conditional of having made a (sort of) successful career in his profession, had to have much to overcome in terms of perception. And if we are lucky enough to have people who do not look the part, it is thanks to the presence of some skin in the game, the contact with reality that filters out incompetence, as reality is blind to looks.”
TikTok is the 21st century version of a Trojan Horse. How long will we ignore the obvious evidence that TikTok is harming an entire generation of young people?
I highly recommend following The Cultural Tutor’s account. The Wikipedia article for The Battle of Alexander at Issus is also very interesting. The painting is located at the Alte Pinakothek museum in Munich, Germany.
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