What We’re Reading (Week Ending 12 March 2023) - 12 Mar 2023
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.” We (the co-founders of Compounder Fund) 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 12 March 2023):
1. Bank Execs on SVB Fallout: ‘2,000 Times Better If a Buyer Comes In’ This Weekend – Amir Efrati, Jackie Reses, Kristine Dickson, and Oren Zeev
The Information: Let’s start with what’s happening now after the FDIC took over SVB.
Reses: In any bank failure, the FDIC becomes the resolution authority regardless of who the regulator is for a bank. The FDIC comes in and takes over and they actually show up at a bank and they start working with a group of bank employees that continue to be employed and help them start to add up and bring forward liquidity positions and they will start to create an orderly disposition process immediately, which is why they publish that note that they will start managing the process on Monday.
The Monday note is very important because they’re trying to provide people with assurances that at least up until the FDIC insured amount, which is $250,000 per account, $500,000 for a joint consumer account, they will insure and get that money actually paid out so that they could try to insure an orderly set of operations for companies. Now, it doesn’t mean that the assets have matched the liabilities and they need to go through and make sure that the bank can pay out its depositors and see what’s left over.
And so there actually is a water flow that again is in their playbook. It’s [Federal Home Loan Bank] payments, administrative expenses, they go through their insured deposits. And then they do this math of what’s available to pay out based on the liabilities they have outstanding. And that process could take some time.
That raises a lot of questions to your point about what that means for Monday, for payroll, for next week. And on that, unfortunately, there’s not a great answer because it depends on the immediate liquidity situation and their ability to actually get wires, ACH’s processed throughout the week. And so they will be working 24-7, including this weekend, on making that happen.
Typically, what you’ve seen in history is that banks are taken over on Thursdays or Fridays so that the FDIC can go in, work the weekend, and then present on a Monday morning, before an opening, how they are going to manage and to whom they are managing and creating liquidity for. And so I wish I had better news for many companies out there, but there is going to be disruption in how money goes out, how wires go out, how payroll goes out. And so I think that’s the biggest problem everyone’s dealing with. And unfortunately there’s no good answer here around what that timing is going to be and what the balance sheet looks like on the inside.
Kristine Dickson: Prior to joining Lead I have spent the last 10 years helping to manage the wind down of the Lehman Brothers estate. And if those in the clock can even believe that Lehman went under in 2008 and no it is still not done. And yes it still has hundreds of millions of dollars left to distribute to its creditors. So, as Jackie said, for unsecured creditors, it can take some time. But I do want to provide some assurances that the regulators today and this weekend will be laser focused on protecting all of SVB’s depositors and customer assets. So this weekend will be a frenzy of activity. There will obviously be more clarity on Monday, but if history is any guide, what the regulators have preferred to do in the past is to merge failed lenders with larger and more stable institutions.
And while SVB is the second largest failed lender in U.S. history, the first was Washington, Mutual, Wamu, which the regulators orchestrated in a sale to J.P. Morgan Chase. So again, there’s more clarity to come on Monday. We don’t know exactly how they’re going to work it out but depositors will be top of mind for the regulators all weekend…
…The Information: If there is a buyer does that free up the uninsured deposits a lot faster?
Dickson: It is 2,000 times better if a buyer comes in and tries to continue the work of the bank as it is as opposed to having the FDIC attempt to liquidate the assets and then figure out the order of priority and the waterfall and then try to distribute those assets later. It is a million times better to go that direction. So that is what they will be focused on this weekend.
There was also a question about why didn’t that already happen? I think, as Jackie had said, trying to understand what it is a buyer would actually be buying would be easier once the bank is now taken over by the FDIC. They have the weekend to actually pour through the books and do the appropriate diligence to actually understand it. So I think it’s actually, once the bank gets to this point, one would expect that all the buyers would sit it out and wait for the regulators to come in and then start talking seriously. So hopefully that’s what’s happening…
…Dickson: The issues that happened at SVB and really at Silvergate, behind the scenes there’s bank balance sheet management issues, every bank faces the challenge of trying to align its deposits, which can grow and shrink with little to no warning with their investments and what they do with those deposits. And in February, the regulators put out a report that says that U.S. banks have an aggregate over $600 billion of unrealized losses on their balance sheets. That means there may be some other banks out there that have these looming issues if their deposits go down in some steep way, the way that SVB and Silvergate’s did.
Now the reasons they went down at SVB and at Silvergate, may be very specific to those banks. at Silvergate, it was crypto winter and FTX contagion. And at SVB, it had its own reasons. But the underlying issue of just bank balance management issues, is it’s out there more broadly. So it’s something that folks need to keep an eye on and think about as you’re picking bank partners…
...The Information: To what extent did venture capitalists spark this run on the bank?
Dickson: At its heart, it was a balance sheet and liquidity management issue, sort of a boring issue in the tech world, but they took in deposits and they had in 2021, they were awash in deposits during the height of the tech boom. They had excess deposits that they need to invest.
And ideally, again, as I said earlier that the bank’s challenge is to manage those deposits in line with how they manage their investments, both for yield and for duration. And for whatever reason in 2021, SVB took a bet and they invested $90 billion—
Zeev: I have the vantage point of someone who was in that situation 24 hours ago. And I do think that I and others did play a role in encouraging other companies to move their money. It’s not because I had any knowledge into the balance sheet or did any rigorous analysis. It’s because I’m not in the business of trying to now evaluate the balance sheet of Silicon Valley Bank. I don’t care. I care about my companies. Even if I think that the risk is minuscule, even if I think the risk is less than 1%, why take it? There’s zero downside in moving the money.
Dickson: I don’t think I’d blame the VCs. The reality is that [SVB] had set up their investment portfolio to be super long dated. Then as [interest] rates shot up super quickly, I mean up 450 basis points in 18 months, a gigantic long-dated investment portfolio shrank in value. At some point the piper was going to come calling. So it maybe hastened that event happening, having the VCs sort of talk it up. But at some point it seems like that was going to come.
2. Irakli Gilauri, is Georgia Capital a chance to invest in quality? – Tilman Versch and Irakli Gilauri
Irakli, let us jump a bit back to the 1990s, the early 1990s. We both were a bit younger then and the world was a bit different then. Georgia just came out of the post-Soviet time, and as I read your biography, I found out that you were studying in the late 1990s in Ireland and in London and learned investing and banking there. But how did you come interested in banking and investing and how was Georgia in the late 1990s or the early 1990s?
[00:02:45] Irakli Gilauri: So, very interesting times. I was very young back in ‘90s when Soviet Union collapsed and it was interesting to observe how the country lost nearly 75% of the GDP. You can imagine that there was no water, no electricity, no roads, roads were collapsing, no eating. Even it was difficult to communicate over the telephone. And I lived as a teenager, I lived in those times and in ’93, I started my university studies at the Georgia Technical University doing business.
Back then, everybody wanted to do business because we didn’t know what the hell the business was. Because everything was owned by the government, you know, nobody knew what the banking was because it was a state-owned bank and state-owned bank was giving loans to the state-owned companies. Retail client base was not existent other than depositing money, which was a small amount of money deposit. You could not even borrow the money from the bank. So, this whole world of doing the private business was really exciting for me and for everybody in Georgia because we didn’t know… I didn’t even know what the marketing was. The word ‘marketing’ or, you know, what kind of action you need to take to sell the product. Because it was, like, all supply driven.
So, when I started my studies in ‘93 in Georgia Technical University, we had the exchange program to study language during the summer. So I applied for the program and I went there for three months and I said that, “Okay, I’m not going back now, you know, I need to stay here and study business”, because, you know, back in Georgia, with all due respect, there was no knowledge of how the business is done, or how economies were working. Because we are in a command economy basically, it was not market economy. So it was really a big eye-opener for me. And so, I applied for the University, I went to the Dean and I had very little English and I persuaded the Dean that I really, really wanted to study here. And the Dean said, “Okay. We usually don’t accept students like this, but you want so much to study that we will accept you.” So, that’s how I ended up, just really wanting to do it.
So for me, it was a game changer basically, because in a way, I was really ahead of my peers in terms of understanding how macroeconomy works, how business works, how accounting works, because there’s different type of accounting as well. But anyway, you know, how the devaluation works, etc. So it was a big difference and after two years studying in the University, I had the choice to choose the banking or management or etc. And I chose the banking because I thought it was something which Georgia really needed to move forward. And I understood that the bank is a big player in the economy. With a good bank, economic can really grow and flourish; without that, it’s very difficult. So it was my choice back then in 1996. In ‘98, I graduated from the University, I had a four year really, really exciting studies there. I’m really grateful to my luck that I ended up there…
…[00:08:01] Tilman Versch: As you had no real private banking or even market economy, so you had to build this banking system from scratch. How much were you involved in this from the beginning or was there already something built when you entered Bank of Georgia?
[00:08:21] Irakli Gilauri: So, when I started with Bank of Georgia in 2004, there were 20,000 debit cards outstanding. Credit card was not existent and debit card cost you a fortune, you had to pay $300 to get debit card. And the bank had eight ATMs. Two handful of ATMs, that was something, yeah. So the strategy was very clear, we wanted to build a retail bank, try to bring people into banking because it was all cash economy. People were using cash, they didn’t even know how to borrow money, banks were not willing to lend to retail client base. So it’s almost all focus was about corporate banks.
When I started with Bank of Georgia, we had a market share of 15%. Market cap of Bank of Georgia was less than 20 million dollars. The balance sheet was 200 million Lari, total assets. I don’t remember the penetration, but it was single digit for sure; could be below five. So total assets to GDP was probably 3% or 4%. And we started consolidating, and we started to open up the branches, we were buying the ATM etc. and we were investing in retail banking heavily. And we went in 2006 in London and we tapped the market. And that was something because we raised $150 million and it was a lot of money back then. It was a huge IPO, it was a big deal. Because we raised the capital and then we issued the Eurobond, that was another big achievement. So we grew very rapidly into retail banking and penetration started to grow, and the assets doubled, tripled in a year. Even more, sometimes we quadrupled in asset size.
So it was a penetration game. It was at very low penetration, consolidation was happening, and this kind of things will never happen now in Georgia in banking, for sure. But there are some sectors you can do where penetrations are low and you have a very fragmented market and that’s where I think that our speciality is, that’s where we can feel the market and grow. And as you know, in this $20 million market cap, we were in the $2 billion market cap in 2018 when we demerged the bank into the investment arm and in the banking. So it was a great ride and I think that fragmented sectors, especially service industry, is a very beautiful thing…
…[00:22:16] Tilman Versch: Georgia has, compared to other markets in the region and also like other developing countries, very pro-business setup. How good or easy is it to do business in Georgia in your eyes?
[00:22:27] Irakli Gilauri: So basically what we have here, is that government understands very well in order to create wealth, we need to bring the investors’ investments in because we don’t have our gas, and we don’t have internal resources, we don’t have internal savings. Investors internally are very limited so we have to be good, friendly to the investors and this is the only way we’re going to grow our GDP. And that government understands very well. That is the primary driver for Georgia to be so business-friendly and investor-friendly. And I think we are very lucky not to have oil and gas, it would be a different country and probably not very well run and managed, to be honest.
It’s my speculation basically, but government knows that we need to have a good governance and they have excellent governance, they have excellent business environment. So we are very happy to be investors here in Georgia. So that’s kind of probably the biggest comfort as well. We as Georgians participate in the building of this country. So that’s a privilege, a lifetime opportunity when you are building the new sectors, you are building new management, you’re building the new companies and you’re doing all of this in your country. These companies are helping Georgia to go forward and you participate in this. You have some small participation in the progress this country is having. It’s a great pleasure to invest here.
[00:24:29] Tilman Versch: Do you see any risk that the pro-business setup changes with political shifts in the near future?
[00:24:37] Irakli Gilauri: I don’t believe because the fall of the Communist 90s, and I’m gonna say probably not very popular thing now, I think we should let all the nations to go fully bankrupt. Because they get their act together and sometimes, we want to help them. We are good people, we don’t want to help them, there is IMF, World Bank, there’s great organizations. But basically, you are not letting the nation to learn it’s lesson and that’s what happened to Georgia in the early 90s when we lost 75% of GDP. Back then, nobody knew what Georgia was. So, we were not even part of the World Bank or IMF probably, in the beginning.
So what happened that Georgia went bust and people realized that there’s two things why we live so badly. One is the corruption, there was a big corruption during Soviet Union and that was the main thing. And second one is socialism and communism. So the side effect we have now, left wing parties have a very, very low popularity, left-wing parties get less than 5% all together. So basically, you need to be a pro-business, pro-market in order to win the elections in Georgia. So, I do not think that any time soon we are fearing this. That is what another reason why we eradicated corruption etc. We tackled this problem was exactly because of this lesson learned in early ‘90s. That was kind of a big help to the country that we were sorting out the governance and we are actually pro-market. Now our governments are pro-market. Some people want equality and socialists and I would love to invite them to Georgia in ‘90s or late ‘80s to experience it…
...[00:56:16] Tilman Versch: Jumping from mistakes to crisis, I think we already mentioned Covid a bit, but we discussed this in the community with you because you came on to chat with us and people who are interested in this can jump into the application form below via the link to the community. So let’s think a bit about the crisis you currently have like, all the crisis we are both in from the impacts of the Russian attack on Ukraine and all the changes. What does this mean for Georgia and Georgia Capital, like, since the beginning of the year, what has changed through the attack of Russia on Ukraine?
[00:56:55] Irakli Gilauri: So Georgia being attacked before, we know what it is like in 2008. But we were lucky that the whole conflict has been resolved very quickly and we had a very brief war basically. So we, as a nation, knew what Russia is capable of. I think that people forget Georgia as it is too far away from Europe, so it’s not happening with us, it’s happening somewhere else. I think Ukraine was very close to Europe, this war was very close to Europe and that woke up the European countries. And it’s good that they woke up.
But for us, it was obviously a big shock in terms of war, next door neighbours, it’s not very pleasant, it’s not good news. But slowly, we realised and we thought it would be a big economic shock on Georgia and we had the different macro models, and we thought we would have zero growth in 2022, something -2 or -3, but we humans don’t know. We can guess something but it’s difficult to know what would happen. That’s why it’s a good thing to live one day at a time, not to worry too much about the future. Anyway, we realised that a lot of the region has changed, the economy of the region changed. So if you had like Central Asian countries transporting oil and gas and different goods through Russia to Europe, they’re now using alternative routes through Georgia.
We also had a lot of Russians, who we did not expect; they just left Russia and moved to Georgia, especially people working in IT industry. And then now, we are having IT services exporting from Russia to Europe and other countries and the services we never exported. So our labour market changed dramatically, labour structure changed dramatically. The potential GDP growth most likely changed dramatically so a big shift happened there. Then exports, for instance, we brew Heineken beer in Georgia and Heineken stopped producing in Russia. They have ten brewers there and they stopped exporting from Russia. So they needed a destination. Now, we are exporting in seven countries where Heineken Russia was exporting.
So we have a lot of side effects which caused the Georgian Lari to appreciate from 3.3 dollar to 2.85. And against the Euro and against Pound, even greater appreciation because we had a big inflow of foreign currency. Georgia’s business-friendly environment also helps here. So we have investment also coming in. If you look at the foreign investment in Q1 versus the GDP, it’s the highest ever recorded. So you have big investments coming into the country. You have labour market shifting, structure changing, you have the logistics changing, the exports going up. And Georgia did a great thing also to have a free trade agreement with China and EU. There are actually two countries who have a free trade agreement with simultaneously China and EU, it’s Switzerland and Georgia. So basically that also helps because our exports also stepped up.
Tourist recovery was amazing and I think that the government managed to change the tourist structure as well. We managed to attract tourists, after the Covid, from high-earning countries and high spenders. So right now, in terms of numbers, we have 65% of number of tourists recovering. So 65% of 2019 tourists are coming to Georgia in numbers. But in terms of the money spent, it’s more than 100% than what we had back in 2019. So last year, we had 10% GDP growth; this year, we have 10% plus GDP growth. So huge growth, I mean, base was high. So if you look at the recovery in 2019 in Europe, we are number two after Ireland.
So Ireland is ahead of us in terms of the growth of GDP compared 2019 and then it’s Georgia. Because we outperformed 2019 by far. Basically, the nominal GDP in dollar terms now stands at around 25 billion dollars. It’s a small amount, but before Covid, we were around 17, 18. So this huge growth and Lari appreciation together created more attractive investor destination for foreigners.
[01:03:11] Tilman Versch: Besides all the good news, I have to play Dr Doom. So, how do you see that Russia one day attacks Georgia again in this decade?
[01:03:25] Irakli Gilauri: You see, we’ve already been attacked and Russia got what they wanted, these two land plots we used to have. So I think attacking Georgia again, unless there is a Olympic sport of attacking Georgia, I don’t think it would happen. It’s my view, but I think other nations are more under danger than Georgia. We are ahead in that game.
[01:04:07] Tilman Versch: So you don’t see a high likelihood of an attack again?
[01:04:12] Irakli Gilauri: Yeah, I don’t think. If you attack Georgia, what will you gain? You already have what you wanted. So I think that there are more things to do than attacking Georgia.
[01:04:30] Tilman Versch: You already mentioned that many Russians came to Georgia now. Do you have a rough number how many Russians are there? To remember for the audience, it’s 3.7 million people that live in Georgia. So even a smaller migration could make a huge difference.
[01:04:48] Irakli Gilauri: Yeah, especially in the industry which is not present in Georgia. Basically, the numbers are somewhere between 80,000 to 200,000 IT specialists, let’s put that way. And even if you have 50,000, they add 50,000 dollars a year. That’s 2.5 billion, that’s 10% of GDP. It’s a very big number. So if you have 100, that’s 20% of GDP.
3. TSMC’s Turning Point – Gregor Stuart Hunter
TSMC is Asia’s most valuable company and the ninth-biggest worldwide; its $461 billion market capitalization exceeds that of corporate titans like JPMorgan Chase & Co, Visa and Exxon Mobil at the time of writing. For Taiwan, which has just 23 million people, it is a source of considerable local pride, and its billionaire founder Morris Chang is feted as a national hero. The company estimates it accounted for 5.7 percent of the island’s gross domestic product in 2021.
But TSMC offers more than just bragging rights and economic might. The company is the leader in an industry that has long been viewed as a pillar of Taiwan’s defense against an invasion from China, which considers the self-governing island a renegade province and has never renounced force in its quest to take control of the young democracy. In his 2001 book Silicon Shield: Taiwan’s Protection Against Chinese Attack, journalist Craig Addison laid out the case that Taiwan’s electronics sector is so crucial in providing the chips needed for advanced weaponry that it creates significant incentives for allied nations to come to its defense — much as in the Gulf War, when Kuwait’s oil exports drew swift military intervention against Iraq…
…Hence why a new factory in Arizona seemed to cause more panic on the island than passing Chinese warships — many in Taiwan fear it represents cracks in the shield.
After the disruptions of the Covid-19 pandemic, the U.S. government is seeking to promote domestic chipmaking through the CHIPS and Science Act, a $52.7 billion package of subsidies for research, development, manufacturing and workforce development, priming the pump for chipmakers like TSMC as it expands its Arizona fab. Although TSMC has operated fabricators in China, a subsidiary in Washington state and joint ventures in Japan and Singapore, the Arizona plant marks its biggest facility outside of its home market yet. The company has also said it is considering opening additional factories in Japan and Europe…
…It also faces pressure not to stretch itself too thin. With demands around the world, playing defense at home, and the ever-present pressure of the cut-throat chip industry, TSMC — once a master of giving clients what they want — may be giving away too much…
…In between Hsinchu and Tainan, surrounded by little else except strip malls, the rail stops near a patch of mostly-vacant grassland that houses a 351-room dormitory complex made from sustainable construction materials and covered in solar panels. It’s here that the company is housing many of its new American engineers for training before they head to Arizona. Some have been lured by $100,000 starting salaries, subsidized accommodation, and the security of a three-year contract, the first half of which is spent in Taiwan. Others are drawn to the adventure of working for the world’s most advanced chipmaker.
Instead, they find themselves chain smoking to manage the stress or exercising constantly to blow off steam after 12-hour workdays.
On a warm evening in January, many could be found consoling each other at a local dive bar, grousing about the demanding work requirements of their local supervisors. Some of the new recruits hinted that they already want to leave. None of the workers spoke on the record, but experiences matching theirs are easily found online. Posts on Glassdoor, an anonymous company review site, describe a culture of micromanagement and frustrations adapting to Taiwanese work practices, pointing out that the environment is decidedly different to, say, Intel. “Certainly not for everyone,” says one of the more positive comments.
For starters, unlike at many American companies, engineers at TSMC work in shift patterns and overtime is quite common. “That’s why TSMC can operate 24 hours a day without any temporary equipment shutdown,” says Lucy Chen, vice president at Isaiah Research.
Taiwanese engineers, brought up in the TSMC ecosystem and ethos, are often prepared for this lifestyle. But watching their new American counterparts struggle to keep up has prompted a culture clash on the factory floor and in the dormitories. On the anonymous Taiwanese bulletin board PTT, an open-source message board similar to Reddit, some complain that the U.S. engineers are “babies.” And Chen, at Isaiah Research, notes that TSMC is having an easier time recruiting Taiwanese engineers to work in its new Japanese plant than its Arizona one, in part because of “culture adaptability.”…
…The narrative circulating in Taiwan that “TSMC is being hollowed out and extracted from Taiwan,” he says, “fails to mention” significant contextual information, such as the fact that by the time 4-nanometer chips are made in America, smaller 3-nanometer chips will have been rolling off the production lines in Taiwan for some time.
Currently, the company produces all of its most advanced chips in Taiwan — and it will stay this way, the company says, for the foreseeable future…
…“The prospect of seizing the world’s most valuable semiconductor fabs and becoming a silicon hegemon could at some point this decade tip Beijing in favor of an invasion,” says Jared McKinney, assistant professor of international security studies at Air University, the U.S. Air and Space Force’s center for professional military education. As China gets shut out of the semiconductor supply chain, it may become more desperate — and aggressive.
Most analysts agree that as much as China might want to possess TSMC’s capabilities, taking the island by force would immediately leave the company unable to produce chips. The physical devastation, ensuing sanctions, and lack of access to chipmaking equipment sold by the U.S. and its allies would effectively decimate TSMC’s operations. Over time, China could potentially restore some of its manufacturing capacity, but TSMC would likely be one of the first casualties of any conflict.
4. Twitter thread on ‘0 Days to Expiration’ (0DTE) options – Genevieve Roch-Decter
0DTE options are ‘0 Days to Expiration’ Options. Basically, they’re options that expire in less than a day. Since today is Friday, there are a massive amount of options expiring today (most contracts expire on a Friday).
0DTE options are more popular than ever. JPMorgan says that the notional value of 0DTE options trading has grown to about $1 trillion PER DAY. The total market cap of all US stocks is about $20 trillion.
For S&P 500 options, trading in 0DTE contracts accounts for about 44% of the 10-day average daily options volume, up from about 19% a year ago, according to Reuters…
…0DTE options are the ultimate tool for speculating. You can take a position in an option and realize a huge gain (or less) within a few hours. A call option selling for $1 could easily hit $2 by the end of the session if the underlying stock has a good day, or it could hit $0.
So what’s the problem? Massive trading in options introduces volatility risk…
…In other words, share prices don’t always reflect the intrinsic value of the underlying cash flows of the respective companies, like Benjamin Graham originally wrote about. Instead, share prices are being influenced by excessive trading in options.
5. Daniel Ludwig: An Invisible Billionaire – David Senra
But it’s this idea of how he started this business with limited money. It’s called the two-name paper idea. This will come up again later, but this is an overview, I think it’s helpful at the very beginning.
He had persevered during the mid-1930s and developed an ingenious ship financing scheme that would make his first fortune. The idea was to use other people’s credit. First, he’d go to an oil company and persuade it to grant him a long-term charter to haul its petroleum. This done, he would go to a bank, where using the charter as collateral, he would take out a loan to obtain a ship to haul the petroleum. Instead of paying Ludwig, each oil company would make the charter payments directly to the bank, which would then deduct the loan payment and put whatever was left into Ludwig’s account. This allowed Ludwig to build or renovate tankers without having to put up collateral or use his own credit.
As long as he would fulfill his charter contracts, he had a small but steady income, and more importantly, by the time the contract expired, he was the owner of a paid-up ship without having invested any of his own money…
…[00:20:00] And this is really important to understand later on. He does this with very little amount of money down. He’s buying ships from the government after the war, after World War I with only 10% down. So it says the sale of surplus ships at bargain prices much less than it would have cost to build the vessels from scratch, started almost as soon as the Armistice was declared. The result was that hundreds of government-owned vessels built at taxpayer expense were being sold off at well below cost to legitimate shippers and to speculators who did the minimum required renovation work and then sold the ships for a quick profit. That’s what Ludwig is doing right now during his career.
What made the deal attractive was the Shipping Board required investors to put up only 10% of the purchase price and the rest could be paid over time. And so this is what him and his partners were doing. That would mean by investing less than $50,000, right, because the total purchase price is $500,000. They could buy three ships, remodel and sell them. If they manage to sell three vessels for $1 million, they would reap over $0.5 million profit on an investment of only $50,000. And so almost 40 years later, when he’s giving this interview, he’s talking about this time in his early career and he says, he was always in hock at the beginning of his car. What that meant is, he’s always owed the government money and he’s constant, this whole book.
At this stage of his career, especially with that price it — doesn’t help he’s got a bunch of like — he’s got this large fleet and the depression comes, essentially like no one was to haul oil. He’s like his ships — his charters aren’t just valuable. He has a real hard time making payments. So it says during the Fortune interview in 1957, Ludwig said that in early business years, he was “Always in hock.” There may have been a good reason. As long as you’re in hock, it’s hard for a creditor to collect the money from you. So there’s so many times where the government is like, “Okay, the payment is due.” I’m making this day up, January 1. And Ludwig is like, “Oh, give me like a 6-month extension.” And then June comes like, “I need another 9-month extension.” It’s just constant back and forth and he constantly gets in to extend time. But what’s amazing is how fast his fortune is going to change.
[00:21:55] I do want to pull out these things because the book starts, he’s a 80-year-old man, richest man in the world, at this point. Started in the business when he’s 19, but he’d go when he’s 34. I’m going to — I’m going to pull up two things here. So at 34, he’s in debt and he’s barely making his interest payment. This is now into the depression. Ludwig wrote another begging letter to the Shipping Board saying that he was doing his best that he could, but that AM Tankers needed more time to make the payment. 3 years later, 37, and he’s almost going broke during the great Depression. 10 years from now, he’s going to be unbelievable wealthy, so I’m telling this.
Shipping Board auditor reviewing the company’s situation came to an unavoidable conclusion. AM Takers was for all practical purposes insolvent. The firm had no securities left to borrow on and virtually no chance remained that the massive liabilities could be paid off from the ship’s small earnings. But there’s an important point here. Like we have to pause because this is all about to change, right? It’s like, oh, they have massive liabilities. They have all these ships, but the ship is not making any money. Why isn’t it making any money. Because of the demand for shipping during the great depression has plummeted.
But the asset that he owns, the ship is still valuable. You just need something to cause demand to skyrocket. And that is exactly what happens in the late 1930s, when Europe breaks out in war. War makes the demand for Ludwig’s products and services, skyrocket. It’s almost the exact opposite of what was happening to him and his business the previous decade. Wars and rumors of wars pre-stage an upturn in international commerce, which for cargo haulers meant greater demand and higher revenues. A tanker that had been sitting idle at the dock since the start of the depression could now be hired out on a long-term basis at high rates or sold for a handsome price. He is going to make money both ways.
In some cases, now something that was just sitting there, not only there was no charter on it, if you had to sell the ship to try to pay off your loan, maybe get $50,000, $100,000. Those same ships are selling for $800,000 or more. And so this is the most important part in the book. This is what I referenced earlier. The two-name paper idea, plus the fact that he’s going to be shipping oil for Rockefeller equals Ludwig’s wealth, which then in turn causes him to go out and buy and start the hundreds of these businesses. Let’s go into this.
[00:24:05] “Ludwig needed a way to obtain ready money without either taking partners or assuming heavy mortgages. His early experiences with partnerships have been costly and borrowing to finance ship renovations was no better. It was at this time that Ludwig came up with a two-name paper arrangement that he said was a chief reason for his wealth. He would go to an oil company, get it to sign a long-term charter to ship so much oil on a regular basis, take the charter to a bank and using as collateral, obtain a loan to build or renovate a ship to haul the oil to fill the charter. The plan was legal, logical, and ingenious. He was able to start his climb towards being the world’s biggest shipper mainly because he was now hauling oil for the Rockefeller Empire…
…During the depths of the depression, Ludwig was mired deep in debt. He was saddled with do-nothing partners, desperately pressed to keep the Shipping Board and the banks from foreclosing on his few ships, and burden with an unhappy marriage. Now 5 years later, DK was in good financial shape, the owner of a growing fleet of ships and corporations out of debt and enjoying a profitable relationship with the government, the banks, and the oil companies. Moreover, he was building a reliable staff and had a happier marriage…
…This is how he starts the largest salt company in the world. And in the middle of the story is my favorite sentence in this entire book. So it’s this project that’s going to happen. It says it’s on Mexico’s Pacific Coast about halfway down the Baja Peninsula. Located there were huge underground deposits of brine. Concentration of salt in the water were around 30%, nearly 10x that of seawater by the simple process of pumping this brine to the surface and letting it stand in pools where the hot sun could evaporate the water, one could produce millions of tons of salt.
[00:42:04] This is what Ludwig is doing, produce millions of tons of salt, which could be gathered and exported. The economy of the procedure appealed to Ludwig. All he had to do is bring up the brine and nature would do the processing. The main problem was the labor. This part of Mexico was nearly unpopulated, and he would have to import workers and build places for them to live. He has to build essentially a small town for this to happen. The Baja cost was so remote that he would have to build an entire town if he was going to develop the salt deposits. This is my favorite sentence of the book, but he had learned something by now.
“Opportunities exist on the frontiers where most men dare not venture, and it is often the case that the farther the frontier, the greater the opportunity.” I love that line. The majority of businessmen are tied to cities where the ingredients of development already exists, labor, energy, supplies, building, transportation, and so on. Competition also exists there. And the way to escape it is to either do something no one else is doing or do it where no one else is doing it. Much of Ludwig’s success was due to his willingness to venture where more timid entrepreneurs dare not go. This business is unbelievably successful. He winds up selling it a few years later, but the output, the salt output increased to as much as 4 million tons a year, making the largest producer of solar salt in the world.
And that’s just one of these giant projects that he takes on. This is one of my favorite stories in the book too because sometimes you have to do it yourself. He’s already a billionaire at this point in the story. When he’s about to do what I’m going to describe to you now. He was embarking on an ambitious project in Panama, the building of a 55,000 barrel-a-day refinery in an adjoining petrochemical complex. Before starting construction, however, Ludwig had a little tour to perform, one that he intended to do personally. Twice, he had trusted the word of specialists and twice he had been burned. He had believed them when they told him he could bring fully loaded 60,000-ton ore carriers down the Orinoco River, this is in South America without running them aground. They were wrong about that, by the way.
[00:43:59] And his geologists had failed to discover until after considerable work was done that the coral rock underlying Grand Bahama Island was too fragile to support giant supertankers. So these are giant previous projects that he was working on. He got bad information and that cost him a ton of money. So he’s not going let that happen again. These episodes have cost Ludwig considerable time and expense. So before building a refinery in Panama, he decided to check out the site himself. Dressed in baggy workloads, he caught a night flight out of New York to Panama City and arrived just before dawn. He went into a little village store at the Bays Edge and pulled out a quarter out of his pocket.
He paid for his purchases, a heavy bolt and a $0.20 ball of string. He unwound the string, measured it out in 6-foot lengths, and tie a knot at each interval. He went outside and rented a motor boat and spent the rest of the morning. Remember, he is already a billionaire when he was doing this, and spend the rest of the morning and afternoon puttering around the bay checking with his weighted line, the accuracy of every sounding marked on a nautical chart that he had brought along. Only when he had satisfied himself that the water was as deep as the chart said, did he fly back to New York and give the signal to begin construction.
6. Infinite Games – Jack Raines
This idea of finite and infinite games doesn’t just apply to sports such as basketball. In fact, it is much more applicable to the biggest game of them all: life.
We humans have created quite the scoring system, haven’t we?
Are you single? Married? Do you have kids? What do you do for a living? Who do you work for? How much money do you make? Where do you live? How many languages do you speak?
We ask, “Who are you?” but we mean, “Which boxes have you checked?”
And the definition of you, whoever “you” are, is the sum of your boxes. Of course, we don’t consciously analyze our lives in this way. That would seem so vain! But we do it all the same.
Let me give you an example.
What is “prestige?” Well, that’s a broad question. Let’s get more specific. What makes “prestigious” careers prestigious?
You might say exclusivity. Thousands of individuals apply for a limited number of positions, and the ones who successfully land those limited positions become part of the “in-group.” And sure, exclusivity plays a role. But prestige runs deeper than exclusivity alone: prestige represents victory.
You had to beat countless other applicants to land that competitive position. You won, they lost, and your prize includes the prestige that ensues. I’ve won some prestige games myself over the years, like getting accepted to Columbia Business School, for example.
Prestige is a finite game. You play the prestige game for the sake of winning it. But do you know what happens after you win this game? Sure, there’s a moment of dopamine-induced satisfaction as you climb the proverbial mountain, look across the horizon, and scream, “I DID IT! LOOK AT ME!”
But what happens next?
You return from the peak and think, “Damn. I need that rush again. I need to climb another mountain.” But here’s the thing about that next mountain: it has to be greater than the previous one. If not, you’ll only feel underwhelmed as you look out from its peak and see your taller, greater feat from the past taunting you.
And another finite game begins…
…Here’s the problem with treating life as a series of finite games that must be won: No one remains the winner forever…
…Taken to its furthest extreme, the focus on outcome over everything leads to us discounting 99% of our lives for the sake of a few, small, fleeting moments that might provide some sense of satisfaction before the cycle begins anew.
And, I don’t know man, it seems pretty insane to live your life this way, but we do it all the time. You see it among the most successful folks alive, who, despite their billions of dollars and fame and fortune can’t stop chasing that next mountain. That next achievement. Because the last one, which took years to accomplish, lost its luster in minutes.
7. China’s Xi Jinping Shrugs Off Criticism in Push for Even More Control – Chun Han Wong and Keith Zai
Mr. Xi and senior Chinese officials this week agreed to plans to give the party more direct command in an array of areas they see as critical, including security, finance, technology and culture, while further diluting the government’s role in policy-making, according to people familiar with the discussions.
The National People’s Congress is expected to rubber-stamp parts of the plan during its annual session, which starts in Beijing this Sunday. The Chinese legislature will also sign off on senior government appointments, including a new economic team that has already begun trying to rev up growth in the world’s second-largest economy. The new team is expected to try to address concerns among business leaders about the government’s support for the slumping property market and tech industry, which has come under pressure from a regulatory clampdown…
…Mr. Xi faced tough tests of his leadership last year. His insistence on zero-Covid lockdowns in the face of fast-spreading Omicron variants decimated economic activity and eroded trust in the party across many of China’s wealthiest cities. His abrupt and chaotic pivot from zero-Covid in December caught many officials and citizens off-guard. His assertive diplomacy and continued support for Moscow despite Russia’s invasion of Ukraine, meanwhile, damaged China’s standing in the developed world.
Even so, Mr. Xi has continued to exert firm control while pursuing his agenda, seemingly unshaken by what critics describe as some of the biggest policy missteps of his 10-year rule—a demonstration, analysts say, of the practical dynamics of power in China.
“Xi Jinping’s authority has been affected in the eyes of the masses and ordinary cadres, but he still has the gun barrel, the knife handle and the pen shaft in his hands,” said Wang Hsin-hsien, a politics professor at Taiwan’s National Chengchi University, referring to party parlance for the military, security forces and the propaganda apparatus—all key levers of power.
Given the political climate in China, “suffering damage to one’s authority doesn’t represent facing a challenge to one’s power,” but rather suggests that the ruler will seek to tighten his grip on power, Mr. Wang said…
…Mr. Xi seems to believe that policy missteps stem from poor local execution of Beijing’s directives, and thus is trying to ensure that lower-level officials can deliver better governance while the central leadership exerts overall control, said Ryan Manuel, managing director of Bilby, a Hong Kong-based artificial intelligence firm that analyzes Chinese government documents.
The focus on local failings also brings political benefits for Mr. Xi, said Mr. Manuel. “By having local governments take the blame for failing to implement policy adequately, Xi’s not going to take all the heat.”
In recent months, Mr. Xi has reiterated demands for political loyalty, such as by ordering party inspectors to ensure compliance with the central leadership’s edicts, while making efforts to regain public trust.
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