What We’re Reading (Week Ending 24 May 2020) - 24 May 2020
Reading helps us learn about the world and it is a really important aspect of investing. The legendary Charlie Munger even goes so far as to say that ““I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading.” Jeremy and myself read widely across a range of topics, including investing, business, technology, and the world in general. We want to regularly share the best articles we’ve come across recently. Here they are (for the week ending 24 May 2020):
1. The Three Sides of Risk – Morgan Housel
At a conference a few months ago I was asked what skiing taught me about investing. This was on stage, where you can’t ponder your answer – you have to blurt out whatever you can think of.
I didn’t think skiing taught me anything about investing. But one incident came to mind…
…But it opened my eyes to the idea that there are three distinct sides of risk:
- The odds you will get hit.
- The average consequences of getting hit.
- The tail-end consequences of getting hit.
The first two are easy to grasp. It’s the third that’s hardest to learn, and can often only be learned through experience.
But once you go through something like that, you realize that the tail-end consequences – the low-probability, high-impact events – are all that matter.
2. Doordash and Pizza Arbitrage – Ranjan Roy
In March 2019 a good friend who owns a few pizza restaurants messaged me (this friend has made appearances in prior Margins’ pieces). For over a decade, he resisted adding delivery as an option for his restaurants. He felt it would detract from focusing on the dine-in experience and result in trying to compete with Domino’s.
But he had suddenly started getting customers calling in with complaints about their deliveries.
Customers called in saying their pizza was delivered cold. Or the wrong pizza was delivered and they wanted a new pizza.
Again, none of his restaurants delivered.
He realized that a delivery option had mysteriously appeared on their company’s Google Listing. The delivery option was created by Doordash…
…. But he brought up another problem – the prices were off. He was frustrated that customers were seeing incorrectly low prices. A pizza that he charged $24 for was listed as $16 by Doordash…
… If someone could pay Doordash $16 a pizza, and Doordash would pay his restaurant $24 a pizza, then he should clearly just order pizzas himself via Doordash, all day long. You’d net a clean $8 profit per pizza
3. Mental Models – Oliver Sung
Surfing
You won’t be able to surf if you don’t catch the wave. And if you do catch it, you can stay on it for long. The trick is catching the one that lasts the longest as early as possible and not to get off. Microsoft was a result of a 16-year-old catching a wave of software revolution right on the edge.
Cockroach Theory
When bad news are revealed, there may be many more related negative events yet to be revealed. There’s never just one cockroach in the kitchen.
Minsky Moment
A sudden collapse of asset values marking the end of a credit cycle or an economic cycle.
Framing
The way a question or situation is framed can determine your response and lead to an action decided based on whether the options are presented with positive or negative connotations. Mixed with the narrative fallacy, framing can turn out dangerous for errors in decision making and might be used as power over other’s behavior.
Hindsight Bias
Also called creeping determinism, it’s the tendency of overestimating one’s ability to have predicted an outcome that could not possibly have been predicted. Hindsight bias is dangerous because it hinders one from learning from past mistakes. If we feel like we knew it all along, it means we won’t stop to examine why something really happened.
4. Our weird behavior during the pandemic is messing with AI models – Will Douglas Heaven
It took less than a week at the end of February for the top 10 Amazon search terms in multiple countries to fill up with products related to covid-19. You can track the spread of the pandemic by what we shopped for: the items peaked first in Italy, followed by Spain, France, Canada, and the US. The UK and Germany lag slightly behind. “It’s an incredible transition in the space of five days,” says Rael Cline, Nozzle’s CEO. The ripple effects have been seen across retail supply chains.
But they have also affected artificial intelligence, causing hiccups for the algorithms that run behind the scenes in inventory management, fraud detection, marketing, and more. Machine-learning models trained on normal human behavior are now finding that normal has changed, and some are no longer working as they should.
5. Common Myths About the Federal Reserve – Cullen Roche
Myth #5 – The Fed “Manipulates” Interest Rates
It’s very common to hear that the Federal Reserve “manipulates interest rates”. This is based on the idea that interest rates would be better “set” if they were controlled by a private market instead of a government entity like a Central Bank. Unfortunately, this is based on a lack of understanding of banking and central banking.
A Central Bank is little more than a central clearinghouse where payments settle. Before there were central banks payments between banks were settled at private clearinghouses. The problem with this arrangement was that banks would stop settling payments during financial panics and this would exacerbate depressions. A central bank leverages government powers to ensure that this doesn’t happen. The 2008 financial crisis was a great example of this. When private banks stopped lending to one another the Fed operated as the “lender of last resort”. This meant that even though many banks were insolvent mom and pop could still buy necessities via the banking system because most banks didn’t stop operating thanks to the Fed’s backstop. Had the Fed not lent to firms in need the crisis would have bankrupted even the largest banks and the economy would have certainly entered a substantially more catastrophic crisis. You literally wouldn’t have been able to buy anything unless you had cash under your mattress.
In order to operate as a central clearinghouse the Fed needs to set an overnight rate at which it lends to banks. Since the Fed requires most banks to utilize this system the banks naturally try to lend their reserve deposits which puts downward pressure on overnight interest rates. Therefore, the natural rate of interest on overnight loans is 0% in the Fed Funds market. This means the Fed actually has to manipulate rates HIGHER from this 0% rate. This is not theoretical, this is simply a mathematical reality of a system with a Fed Funds market in which banks operate within this closed system.
6. Why Walking Matters—Now More Than Ever – Shane O’Mara
What we probably don’t realize is that walking can be a kind of a behavioral preventive against depression. It benefits us on many levels, physical and psychological. Walking helps to produce protein molecules in muscle and brain that help repair wear and tear. These muscle and brain molecules—myokines and neurotrophic factors, respectively—have been intensively studied in recent years for their health effects. We are discovering that they act almost as a kind of fertilizer that assists in the growth of cells and regulation of metabolism. They also reduce certain types of inflammation.
These essential molecules are produced by movement and the increased brain and body activity created by movement. If you’re not moving about, placing heart and muscle under a bit of positive stress and strain, these molecules aren’t produced in sufficient quantities to perform their roles.
7. Pandemics & Markets: Part II – Jamie Catherwood
As news of the Spanish Flu began to spread, a September 28, 1918 issue of The Commercial and Financial Chronicle regrettably stated:
‘An epidemic of Spanish influenza has checked business to some extent, but is not expected to be lasting. The Department of Health of this city has just voted $25,000 to fight influenza, which it calls pneumonia in epidemic form. It is said to be in reality the old-fashioned grippe [flu].’
In hindsight we all know how inaccurate this prediction turned out to be, but it is mind boggling to think about how someone could think this so shortly before the Spanish Flu took the world by storm.
Well, this quote inspired me to do a little further digging into what, if any, of the major themes and questions we’re asking today were also prevalent during the Spanish Flu of 1918. Turns out there is a lot in common!
