What We’re Reading (Week Ending 09 April 2023) - 09 Apr 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 09 April 2023):
1. Xi Jinping Says He Is Preparing China for War – John Pomfret and Matt Pottinger
Chinese leader Xi Jinping says he is preparing for war. At the annual meeting of China’s parliament and its top political advisory body in March, Xi wove the theme of war readiness through four separate speeches, in one instance telling his generals to “dare to fight.” His government also announced a 7.2 percent increase in China’s defense budget, which has doubled over the last decade, as well as plans to make the country less dependent on foreign grain imports. And in recent months, Beijing has unveiled new military readiness laws, new air-raid shelters in cities across the strait from Taiwan, and new “National Defense Mobilization” offices countrywide.
It is too early to say for certain what these developments mean. Conflict is not certain or imminent. But something has changed in Beijing that policymakers and business leaders worldwide cannot afford to ignore. If Xi says he is readying for war, it would be foolish not to take him at his word…
…If these developments hint at a shift in Beijing’s thinking, the two-sessions meetings in early March all but confirmed one. Among the proposals discussed by the Chinese People’s Political Consultative Conference—the advisory body—was a plan to create a blacklist of pro-independence activists and political leaders in Taiwan. Tabled by the popular ultranationalist blogger Zhou Xiaoping, the plan would authorize the assassination of blacklisted individuals—including Taiwan’s vice president, William Lai Ching-te—if they do not reform their ways. Zhou later told the Hong Kong newspaper Ming Pao that his proposal had been accepted by the conference and “relayed to relevant authorities for evaluation and consideration.” Proposals like Zhou’s do not come by accident. In 2014, Xi praised Zhou for the “positive energy” of his jeremiads against Taiwan and the United States.
Also at the two-sessions meetings, outgoing Premier Li Keqiang announced a military budget of 1.55 trillion yuan (roughly $224.8 billion) for 2023, a 7.2 percent increase from last year. Li, too, called for heightened “preparations for war.” Western experts have long believed that China underreports its defense expenditures. In 2021, for instance, Beijing claimed it spent $209 billion on defense, but the Stockholm International Peace Research Institute put the true figure at $293.4 billion. Even the official Chinese figure exceeds the military spending of all the Pacific treaty allies of the United States combined (Australia, Japan, the Philippines, South Korea, and Thailand), and it is a safe bet China is spending substantially more than it says…
…In his first speech on March 6, Xi appeared to be girding China’s industrial base for struggle and conflict. “In the coming period, the risks and challenges we face will only increase and become more severe,” he warned. “Only when all the people think in one place, work hard in one place, help each other in the same boat, unite as one, dare to fight, and be good at fighting, can they continue to win new and greater victories.” To help the CCP achieve these “greater victories,” he vowed to “correctly guide” private businesses to invest in projects that the state has prioritized.
Xi also blasted the United States directly in his speech, breaking his practice of not naming Washington as an adversary except in historical contexts. He described the United States and its allies as leading causes of China’s current problems. “Western countries headed by the United States have implemented containment from all directions, encirclement and suppression against us, which has brought unprecedented severe challenges to our country’s development,” he said. Whereas U.S. President Joe Biden’s administration has emphasized “guardrails” and other means of slowing the deterioration of U.S.-China relations, Beijing is clearly preparing for a new, more confrontational era…
…Xi is now intensifying a decadelong campaign to break key economic and technological dependencies on the U.S.-led democratic world. He is doing so in anticipation of a new phase of ideological and geostrategic “struggle,” as he puts it. His messaging about war preparation and his equating of national rejuvenation with unification mark a new phase in his political warfare campaign to intimidate Taiwan. He is clearly willing to use force to take the island. What remains unclear is whether he thinks he can do so without risking uncontrolled escalation with the United States.
2. TikTok and Amazon Bet on China’s Ecommerce Model. It’s a Dud – Tracy Wen Liu
American social media is full of people selling things—TikTok influencers hawking their own branded products and Instagrammers pushing their followers to sponsored links. But true livestream ecommerce of the kind pioneered by Chinese retail giants—which is not unlike old-school television sales, where a host hawks products live over the internet, sweetening the deal with discounts and promotions—has never quite reached critical mass in the US. Now, lured by the vast scale of the business in China, companies including Amazon, YouTube, Shopify, and TikTok have invested heavily in live selling. But they’re struggling for traction. Facebook and Instagram have already bowed out. And experts from China say that the American market may just not be ready for livestream ecommerce.
“I haven’t seen one success case,” says Marina Jiang, an expert in cross-border ecommerce and founder of The Unoeuf Creative Consulting, a social marketing agency. “If there is one proof of concept in the United States, I would be willing to try it myself.”
Livestreaming—without the selling—has been huge in China for a decade. By June 2016, 325 million people—46 percent of all internet users in China—were regularly watching livestreams, according to the China Internet Network Information Center, a government agency. That year, companies began to integrate sales channels into their livestream offerings, and vice versa, led by fashion retailer Mogujie and Taobao, the country’s biggest e-tailer, which launched their services in March and April 2016, respectively…
…Chinese experts say the reason for the slow takeoff of livestream ecommerce in the US is that there are significant differences in consumer behavior between the American and Chinese markets. In China, livestream ecommerce is as much an entertainment product as a retail one, with viewers tuning in for hours at a time to interact with hosts as well as to get access to discounts and deals.
“American consumers shop online to save time. If they want to shop around, they would go to department stores,” says Souffle Li, who recruits livestreamers for the industry. “They value their time differently than Chinese consumers, so they wouldn’t watch hours of livestreaming to purchase discounted products.”
Amazon’s own statistics show that 28 percent of purchases on the company’s platform are completed in three minutes or less, and half of all purchases are finished in less than 15 minutes. The company has focused on offering further time savings, from shorter shipping times to prefilling orders on items that customers purchase regularly.
American customers are also more likely to return the products than Chinese customers, according to Li. Influencers are often paid as a percentage of their total sales, and product returns add a lot of complexity to this process. “It’s really difficult to profit in the livestreaming sale market in the United States,” Li says…
…TCG’s Goad also thinks it is hard to change consumer behavior. “The reality is our broader US commerce culture is very different from the rest of the world—a lot of Americans simply don’t want to be sold to and instead look for content that is adding value and educating them, or tells a personal story,” she says.”
There are also structural differences between the two markets. “In China, livestreaming emerged at a time when the number of shopping malls was still far lower than those of the US; there are about 24 square feet of retail space for every American, compared to just 2.8 square feet in China,” Howard Yu, Lego Professor of Management and Innovation at IMD Business School. “What livestreaming did was to step into the void in China, especially in rural parts of the country. Such an unmet need simply doesn’t exist in the US.”
This means that conditions in the US just don’t add up to the moment that China was in when its own livestreaming boom began.
Influencers using TikTok Shop say they haven’t had much success so far. “The traffic isn’t great,” says Yu Lu, a UK-based influencer who works for an MCN in Shenzhen, and uses a VPN to sell on TikTok in the US. Her record audience was 280 people—her manager was really impressed by the number, she says. On March 1, she held a two-hour long session without a single person watching. “It is good if you can have like five people watching,” she says.
3. Why a Brics currency is a flawed idea – Paul McNamara
Within the Brics countries of Brazil, Russia, India, China and South Africa, there is a growing clamour to challenge the dollar’s hegemony.
Russian leader Vladimir Putin said last June that the Brics were working on developing a new reserve currency based on a basket of currencies for its member countries. Russia’s foreign minister Sergei Lavrov said in January the issue would be discussed at the Brics summit in South Africa at the end of August…
…The problem is that Brics is not an especially useful economic term. It marries an economic superpower in China with a potential one in India with three essentially stagnant commodity exporters.
Far from being a remotely sensible optimal currency area, the economies are dramatically different in terms of trade, growth, and financial openness. While Russia’s economic performance was clearly the weakest of the five Brics last year, Brazil and South Africa have struggled to prosper without strong commodity prices underpinning low interest rates and rising domestic credit…
…In the original 2001 Goldman Sachs paper that coined the term, China accounted for half the original four-country bloc’s gross domestic product measured at market rates (South Africa was added in 2010).
The most recent IMF data puts China’s share at 73 per cent (72 per cent if South Africa is wedged in). Since 2003, the Brics share of global output at market prices has risen from 8.4 to 25.5 per cent. Of this 17.1 percentage point rise, China accounts for 14 points…
…China’s dominance is underlined further by the fact that it is a key trade partner for the commodity exporters, which have industrial cycles that clearly track the ebb and flow of the Chinese credit cycle. And after the attack on Ukraine, China’s financial influence over isolated Russia has risen further.
It is obvious but Chinese strategic interests are not especially aligned with those of the other countries. One of China’s priorities is finding somewhere to park its external surpluses beyond the reach of the US Office of Foreign Assets Control and finding stores of value other than US Treasuries. While none of the other four Brics members can provide liquid assets, they can provide investment opportunities especially in raw materials. As with the Belt and Road Initiative, Chinese authorities prefer to have control in such matters.
4. Charlie Munger fireside chat with Todd Combs – Thomas Chua
Todd Combs and Charlie Munger had a fireside chat last year… Here are my notes:…
…“But the world that Henry was in, it was not at all common for the guy who was the C.E.O. to say, “Get out of the way.” Because he did it way better than them. However, because they had so many rules and conventions. He paid no attention to those. Nothing he did was, and Berkshire’s done the same thing. He was loyal to them. And he was quite comfortable when he walked into things. Many C.E.O.s can’t stand having anything around they haven’t dominated. But that’s not Henry, and that’s not Warren Buffett.”…
…“The thing that’s interesting about it is, when Henry was buying stock in gobs, that was a very uncommon thing to do. And now, of course, it’s very common. You could say Henry has triumphed. But Henry wouldn’t be buying in a lot of the stock. A lot of people are buying stock now, but after it’s selling for more than it’s worth. They like growing their stock, no matter what its value. And people like Henry and Berkshire would buy their stock on the cheap. It’s amazing, we haven’t had another Henry in a long time.”…
…“My Berkshire stock has gone down 50% three times in my lifetime. That’s one of the most successful gambles — you can find something that works, but it still… And of course, can you imagine an ordinary investment management firm saying, “We don’t mind going down 30%”? They’d be in terror or they’ll be fired. And that means that 95% of the big-time national investing, they’re closet indexers.”
5. Generative vs. Genuine: Why Today’s Generative AI Isn’t Tuned for B2B – Gordon Ritter and Jake Saper
Generative AI today is just mimicking the trillions of words that it has consumed. Because models are trained to match the distribution of text on the entire internet—and not everything on the internet can be trusted as accurate—not everything generated by generative AI can be trusted…
…Current business applications of generative AI are mostly tuned for marketing (copywriting/cold emails) and advertising purposes, use cases in which occasional factual inaccuracies are typically tolerable. But for most business use cases, accuracy is critical. In order for businesses to feel confident in using generative AI for most use cases, more context and human assistance will be required…
…Generative AI is output-oriented, not outcome-oriented, which works well for consumers but not for businesses. In other words, ChatGPT can spit out taglines for a new beverage brand, but it can’t tell you which one performs better. This is because the interaction with the model is a one-way street; it lacks the ability to continuously learn based on outcomes. When it comes to B2B, businesses need more than a generator; they need AI that is iterative and driven by outcomes specific to their industry.
Promising generative AI apps for B2B will anchor on ROI-based outcomes. For example, our portfolio company Ironclad is using AI to help draft and edit contracts more efficiently. This not only helps lawyers move more quickly; it helps them improve business outcomes. Their platform is being built to coach drafters on which clause formulations will drive faster deal close rates. By marrying LLM suggestions with their own proprietary data, Ironclad is building a defensible, outcome-focused product…
…In order for generative AI to move the needle in many business use cases, the AI needs to be trained on company-specific data. While off-the-shelf language models are mostly trained on publicly available data, today, they lack broad access to the context and IP needed to be effective for B2B. E.g., without the context-specific data created within Ironclad’s workflow software, an LLM can’t ascertain which clause is likely to close a contract the fastest.
6. Jim Chanos: A Short Thesis on Data Centers – Compound248 and Jim Chanos
Jim: [00:04:06] There’s really three ways for an enterprise to maintain its data. One, you do it yourself on-site and you have your own IT department. They keep the servers running, maintain the software and the cybersecurity. Second, and that which the legacy data centers that we short epitomizes the colocation data centers, whereby you keep your server at a third-party location. The third-party maintains the servers, keeps the air conditioning on, does whatever routine maintenance is needed to do, and provides the network connections.
And those are the so-called legacy data centers. That is the focus of our big short. And then the third way, which is the way that is garnering the most market share now is the so-called cloud providers. These would be what we call and others call the hyperscalers. Amazon AWS, Microsoft Azure, Google Cloud, et cetera. Oracle has one. And this is just simply you keeping your data on their servers and they maintain them, try to sell you add-on services on top of just a hosting fee. So that’s the three ways in which data is kept for enterprises.
The problem with the colocation legacy data centers is it’s just really a bad business and that underlines a lot of what we do on the short side. We’re looking for flawed business models first and foremost. And if they have questionable accounting and bad balance sheets and management that doesn’t tell the truth, all the better. But at the end of the day, return on capital junkies and we look for businesses where the true economic returns on capital are below the cost of capital. And that applies to the legacy data centers really in a major way, and it’s getting worse.
On top of that, the data centers, represented by the big REITs, are some of the priciest stocks we see in the entire marketplace. So there’s a real dichotomy between what we think is a really, really poor business and just towering valuations, no pun intended, in the legacy data center REITs…
…Compound248: [00:09:34] And I presume 2016 is sort of an interesting starting point. I’m guessing from your perspective if I’m thinking about this right, that probably correlates pretty well with when the hyperscalers really started ramping their own spend. And maybe you could talk about how these partners may, in fact, be competitors.
Jim: [00:09:54] One of the interesting little aspects of the story is that the hyperscalers themselves represent incredibly large tenancy for the legacy guys. And that’s going to continue, we think, for a while because it doesn’t make sense, even though the hyperscalers can build out a new center cheaper than the legacy guys, it doesn’t make sense if it’s in a locale where they don’t need an entire new data center on their own. They can take 20% of the capacity of a data center in Milwaukee or St. Louis or something like that.
So you do have this bad dynamic where your largest competitors are also your largest tenants. That’s never a position you want to be in as a landlord, but be that as it may, that’s the position they find themselves in. But you’re right, the CapEx really began to pick up at AWS and Azure and Google in this space in 2016, 2017, and you see it in the numbers.
And so on top of that, you saw lots of private equity activity, which became another part of the bull case that we think is changing. And that is private equity discovered this and began buying up data centers at really, really pricy levels peaking out at DigitalBridge’s purchase of Switch, which just closed a month or 2 ago at 40x EBITDA. And a number of deals were done around 25 to 30x EBITDA in 2020 and 2021.
But part of our thesis last summer was that there was going to be indigestion in the private space that a lot of these purchases were going to be regretful and that private equity buyers, in a rising rate environment, we’re increasingly going to realize this is a capital-intensive business, and we haven’t gotten to that part yet. Servicing the debt and the CapEx requirements was more than the cash flow, maybe buying them at 25 to 30x that cash flow wasn’t so smart.
So part of our thesis was as 2022 turned into 2023, we thought that private equity would become a seller of data centers. And that’s exactly what is turning out to be the case right now, which is why I think we have this latest bout of weakness here in March. Increasingly, data centers are being put up for sale at cap rates in high single digits. That’s just disastrous for the valuation for the big guys…
…Compound248: [00:12:14] We’ll maybe make a little bit more sense of this when we do start to put in place some of these pieces around unit economics. So just generically, if Digital Realty wants to build a new tier force at the top end, their core type of data center that they build in the U.S., and Northern Virginia is the data center capital of the world and Digital Realty has a big footprint there. What might it cost them to build it? And I guess there’s a campus element to this too, which might add confusion. But if you just kind of give us some generic numbers so that we can use that as a starting point to figure out unit economics.
Jim: [00:12:51] First, you have to start with the issue of depreciation because now for years and years and years, the data center guys have had CapEx at 150% to 175% of their depreciation and amortization. We don’t think that the unit economics worked at all here in terms of the capital per square foot, and I’m not going to bore you with all the dollars per square foot cost. The thing you have to focus and your listeners have to focus on is the returns on investment. And that’s where, on an EBIT basis, the numbers are just laughably low.
They’re 2% at DLR, and they’re 5%, 6% at EQIX. And even if you add back the depreciation, the numbers are still single digits for DLR and low double digits for EQIX. But if CapEx is 150% to 175% of your depreciation, then your EBIT is overstated. In our view, if you’re not growing on a real basis, and we don’t think they’re growing on a real basis, in fact, DLR is shrinking on a real basis, it gets back to one of the real cruxes of our story, which is that depreciation is not only a real extent, it may be understated for these companies.
Compound248: [00:14:14] And most of them sort of guide to a pretty low “maintenance CapEx number.” Is that right?
Jim: [00:14:20] Yes. So here’s how that works. The maintenance CapEx number, the company saves roughly 10% of their total CapEx. So they’re on a 15-year life on average if you look at just total depreciation to capital employed. So that means that they’re telling you with a straight face that the maintenance CapEx for the air conditioning, the HVAC, the forklifts, the rack is 150 years. And 150 years is, of course, absurd.
It was finally explained to us by an insider a year or so ago, what was going on here. And what was going on was simply the fact that if you tell your auditors and your internal audit people — say the air conditioning goes out at a data center and you’ve got to replace the air conditioning. You have no choice. You have to replace the air conditioning. If you replace the air conditioning and you can say that you will bring in one new tenant or you will be able to raise rents on any kind of meaningful number of existing tenants, you can call the entire ticket growth CapEx.
So even though the HVAC has to be replaced, no matter what, it’s now considered growth CapEx because it will add to the economics of the data center. And that’s, of course, absurd. That’s just an accounting joke.
Compound248: [00:15:33] I presume the fact these are campuses where they build them in phases, probably also allows them to muddy the water between what’s being maintained and what’s being expanded.
Jim: [00:15:44] I think that’s right. Again, if you just look at the returns on incremental investment, you’ll see that there have been, in some cases, negative, but certainly way below the cost of capital. And then, of course, you have the problem of Digital Realty, which is now trying to sell data centers and telling you with a straight face that $2.5 billion, $2.7 billion of CapEx is all growth. Well, wait a minute. If you strap for cash and you’re trying to sell assets, why don’t you just cut back on your growth CapEx? And we haven’t gotten a good answer to that…
…Compound248: [00:36:16] Well, on that ominous note, it’s a perfect way to wrap up discussion on shorting. Before we do, would love to seek advice from the people who are sharing wisdom with us. And so I was wondering if maybe I could get two questions of advice. The first, I’ve seen over time that when a short thesis comes out on a company, so many CEOs lash out at the short seller, et cetera. It almost turns into its own sort of flag for other short sellers to come take a look. If you were a non-fraud CEO and you found yourself the focus of a thoughtful short thesis, what do you say is the most effective way for them to handle that?
Jim: [00:36:59] One of the gold standards was what Reed Hastings did a number of years ago to a bear thesis where he just rebutted it point by point thoughtfully without recrimination and said, well, we think he’s wrong because of this. And I had that happen to me years and years ago, as a young analyst when I had put a short recommendation on a well-known company back when I was on the sell side.
And the company actually invited — very rarely do companies invite short sellers to come to see their operations. And the CEO invited me out to where they were and spent the day with me and with the CFO and thoughtfully rebutted what I believe. I think I was right at about half of it, and I think they ended up being right on about half of it.
But that is always a far better approach than saying these are outrageous lies and then you don’t address them because at the end of the day if you have this sort of [indiscernible] nondenial denial and companies are very good about that, they’ll say, well, this is a gross exaggeration or this isn’t — and yet they won’t address the actual points of what the short seller is alleging, then you’re opening yourself up to further scrutiny, I think.
And having opinions about facts is what makes markets. We don’t put out big reports, that’s not our business model. I’m happy to post things from time to time if we have observations, but we don’t put out 40-page reports on short candidates, but I defend the right of any short seller to do that as long as you are basing your opinions on facts and you’re not knowingly misstating the facts. And that standard applies to both bulls and bears.
People get exercised about short sellers doing this. And I keep saying, well, you should see the 48 buy recommendations I get in my portfolio every morning in my inbox. No one says, boo, about that. And yet if a short seller puts something out, they’re held to a much higher standard. And that’s, by the way, how it’s always been. And any professional short seller knows that. As they say in the Godfather too, this is the business we’ve chosen. You’ve known this.
But on the other hand, I don’t think short seller should be held to any higher or lower standard than anyone else. You cannot trade on or induce others to trade on information you know to be false. And that’s the bright line. And as long as you are on the right side of that line, your opinion that is based on the facts is worth hearing, then the market should hear it.
7. RWH024: Wealth, Wisdom & Happiness w/ Tom Gayner – William Green and Tom Gayner
[00:13:18] William Green: And you’ve also said that your grandmother was one of your great investment teachers because she never did anything with the portfolio that she inherited from her late husband. Can you talk about that? Cause again it gets at this idea of hanging on to good stuff for a long time.
[00:13:35] Tom Gayner: Well, yes. In fact, the facts of the matter are, that my grandfather died in 1966 and he was a small-town businessman, and small-town businessmen of that era often would gather at the local diner and drink coffee and talk about their portfolios.
[00:13:49] Tom Gayner: And it was a pretty common thing for people to own individual stocks among that crowd of people that would drink coffee at the diner. And so when he died, that portfolio was left to my grandmother. It was a modest portfolio. It was nothing fancy or large, but she was the type of widow who essentially never made another decision in her life.
[00:14:08] Tom Gayner: And his suits hung in the closet, his shoes were on the floor, she stayed in the same home and she held on to those 12 or 13 stocks that were in this modest portfolio at the time. And what I observed from that is that among those 12 or 13 stocks were Lockheed Martin and Pepsi. And those two, because they did so well, made the others irrelevant.
[00:14:34] Tom Gayner: The rest of them all could have gone to zero and it just didn’t matter. The compounding of the winners mathematically, the weighted average becomes bigger and bigger and she lived a modest but pleasant life for the rest of her life because essentially Pepsi and Lockheed Martin increased their dividend every year for the 25 or 30 years that she lived after he died.
[00:14:54] Tom Gayner: So again, that lesson wasn’t taught to me in a formal text, let’s sit down and talk about this. It was observation and I can remember talking to her and she would watch Wall Street Week with Louis Rukeyser on Friday night. Sometimes I would watch that with her. She was always a woman of keen interest in what was going on in the world, but either she had some self-confidence issues or doubt or wisdom.
[00:15:16] Tom Gayner: I can’t say which parts it was or which that these things that were working well. She left them alone and they compounded in such a way that it took care of her personal needs…
…[00:17:53] Tom Gayner: So, and just sort of naturally fell into the notion of, you can call it an endurance contest if you want. And then to morph that a little bit towards a financial world, think about the idea of duration. So you can talk about Markel in 15% for 37 years. Not only is that record long in terms of its duration, but that’s actually also a pretty good percentage rate too.
[00:18:16] Tom Gayner: So both of those factors are in play but the endurance of it and the durability and the idea of continuing to be able to do it for a long period of time, that’s what’s special about it. Someone else recently was asking me about this particular idea and the thought that occurred to me was that if I was going to race, Usain Bolt is the fastest man in the world and that race was going to be a hundred yards, you should take all the money you have and bet it on Usain. He’s going to win that race 110 times out of a 100. I am never ever going to beat Usain Bolt at a 100-yard race. If you make the race 200 yards, you probably should still bet all your money on the same bull. If you make it a mile, I would still make a heavy back on Usain. If you make it a marathon, I don’t know what Usain Bolt’s marathon endurance would be and probably you don’t know what mine is either. So there’s at least a hint of uncertainty that is different than the hundred-yard race. Well then, make it a foot race from Key West Florida to Seattle. Well, now I think I have a chance, I think it’s still better than Usain but it’s no longer a race about speed.
[00:19:29] Tom Gayner: It’s a race about endurance. It’s a race about willpower and just the ability to somehow or another, to will yourself to continue to put one foot in front of the other no matter how you feel. No matter how you might be doing, and no matter where your splits times are. So those are the kind of races that I at least have a chance in…
…[00:25:20] William Green: And there was a great piece of advice from Stephen King to another famous novelist who was starting to be successful and he said, don’t forget to enjoy it. And I feel like I sometimes forget that. And when I look at you, I’m kind of reminded that you have fun doing this. And it’s actually, it’s built into the value system of Markel.
[00:25:37] William Green: This idea of having a sense of humor.
[00:25:40] Tom Gayner: Absolutely and I think there are several key points to keep in mind there. One, I think such a humor is a sign of intelligence because it shows that you’re able to look at something and think about it from a different point of view, or see the absurdity of things but if you don’t have that, life will beat you down. Cause there are just so many things that you encounter in life that are just absurd. For me anyway, having a sense of humor is a way of reframing things and laughing. It is an aspect of humility and not taking yourself too seriously.
[00:26:10] Tom Gayner: Because if you take yourself too seriously, that can easily slip over into thinking you’re right and if you think you’re right, you know, then you’re setting yourself up for a fall. I can’t remember his, Mark Twain or Will Rogers said something like it’s not the things that you don’t know, it’s the things that you know that aren’t so, get you in trouble.
[00:26:28] Tom Gayner: So a sense of humor acts as a break on that sort of thing and that is important. And then the last thing, humor/fun. And again, these are words that they’re not the same words, but they sort of touch one another and have some overlap. So, I wrote about Cal Ripken in the annual report this year, and I had the great pleasure of seeing him give a talk quite recently in the context of his talk and the questions that people asked as to how that streak came to be.
[00:26:53] Tom Gayner: One of the things he talked about was that as he was a rookie in his first or second or third year, he would talk to some of the older players on the club who had been there. They made a special point of sort of acknowledging that they were at the end of their career or had just finished.
[00:27:09] Tom Gayner: And it was so much fun and they had forgotten how to have some of the joy that they should have had while playing the. So that was one of the things that kept Cal Ripken motivated and dedicated to showing up every single day and continuing to play, is that he knew it was not going to last forever. So as a consequence, that helped him frame it in such a way that he appreciated each day at the ballpark. That’s joy…
…[00:35:41] William Green: There was something you said to me when I first interviewed you, I think probably back in 2014 or 15, that I was very struck by that. I’ll read back to you where you said, sometimes people can build great careers and enjoy great successes for a period of time through bluster and bullying and intimidation and slipperiness but that always comes unraveled, always. Sometimes it takes a while, but it does. The people you find that are successful and just keep being successful year after year, I think you find those are people of deep integrity. I thought that’s a really interesting insight, and I’ve struggled with it for a while.
[00:36:15] William Green: I think partly because I had kind of lost a political battle at a company where I had worked and I was like, well, actually, I think kind of in some ways the snakes won. Maybe that was self-deluding, and I was a snake myself. And then I would look at kind of the political situation. I would see you know, the corruption of politics by business and big money and the like.
[00:36:34] William Green: And there’s a part of me and then also, I mean, look, Charlie Munger has talked about how Sumner Redstone was always his example of what I don’t want to be in life. And he was like, look, this guy made much more money than me but even his kids and his wives hated him and I’ve never met Sumner Redstone.
[00:36:49] William Green: I’m not trying to badmouth him but you know what I mean? This question of whether it’s actually better to live your life this way or to do business this way or to look at the counter-example of these people who are tremendously successful while having very sharp elbows and leaving a trail of lawsuits in their wake.
[00:37:08] William Green: Can you talk about that? Cause I feel like some people just assume that capitalism is kind of vicious and nasty and self-seeking and that’s the way it goes. And I think you are pointing us toward actually a different system that may actually work better in the long run.
[00:37:23] Tom Gayner: Right and I do think that capitalism is a much better system than what it’s given credit for. And I think businessmen oftentimes do a horrible job of communicating the positives of a capitalist system. So Adam Smith is given credit for being sort of the father and the intellectual creator of the system of capitalism. I believe his title was Professor of Moral Philosophy at University of Edinburgh or Glasgow or wherever he was at the time.
[00:37:52] Tom Gayner: So he approached the idea of capitalism from a moral lens and thought it was his superior system and wrote books about it in, in that way. Secondly, success, I think, is something that you shouldn’t do along only one variable at a complicated equation. There are a lot of things that go into the idea of success.
[00:38:14] Tom Gayner: So if you were, again, in the realm of athletics, Cause things just pop into my head from athletics stuff. And so if you look at Muhammad Ali and his career as a boxer and his probably reputation well deserved for being the greatest fighter ever. Well, that’s probably true, but if Muhammad Ali needed to be a tennis player or a chess player, he might not have been so successful.
[00:38:38] Tom Gayner: So if you’re going to define success, make sure you define what arena you are talking about. So just to say the word success in and of itself is too limited. It’s not enough. So I do not know the family structures of Sumner Redstone or Charlie Munger for that matter. I’m guessing that Charlie Munger’s success probably has more dimensions to it.
[00:39:01] Tom Gayner: But that is just a pure guess on my part and two points about Charlie Munger was the notion of you know, if you want to be a success, the best way to do that is to deserve it. So he operated with the idea of trying to be someone who deserved the success that he has earned and I think that’s a fundamentally important way of doing these.
[00:39:22] Tom Gayner: And there’s a business practice, there’s a life practice that flows from that. So if I just met you and we were talking about a deal or a project or some commercial transaction, and I said, William, trust me, you can’t help but if, again, if we don’t know one another, that is going to cause 99 times out of a hundred, just the tint of doubt can you? Because if I say, trust me, trust me. Your natural human reaction is, I can’t trust this guy and the notion of trust is not going to flow immediately if I started that way but if instead I say, William, I’m going to trust you and I’ve done some work and some basis for saying I trust you, I trust you, and I trust you. I trust you. And offer the gesture of trust first without demanding reciprocation or equality. I just do that in an unconditional way. What I have observed is that either you will do one of two things. You will either honor that trust or you’ll violate it.
[00:40:22] Tom Gayner: And if you’re going to violate the trust, you’ll probably do it sooner rather than later. And in so doing, you’ll have sorted yourself and we’re just not going to do business again. But if you honor that, trust and start to trust back, what happens is that starts to cascade, and it’s another element of compounding that takes place in your relationships with people.
[00:40:41] Tom Gayner: If you trust first, if you offer that service that value first, and you initiate that the world will sift and sort itself and orient and give you an enough people, enough opportunities where we have these compounding trust relationships that it just becomes marvelous over time. The same thing would be said in the word of love.
[00:41:02] Tom Gayner: If I say, love me and you try to meet somebody, you’re trying to develop a relationship. You say, love me. I don’t think that’s going to work. But if you offer love and you offer it unconditionally, is everybody going to love you back? No. But a lot of people will and they’ll do it in enduring, consistent, systemic ways. So just to orient yourself to be the initiator of trust and be the initiator of love. And then don’t be stupid, reciprocate and compound and grow the trust, relationships, and the love relationships, and filter out the ones where you’re not getting reciprocity. If you stay at the game long enough, and I’ve been at it 40-some years, you’ll find you have a wonderful group of people that are enjoyable, fun relationships that keep you coming in the office and doing what you’re doing as opposed to wanting to go play golf instead, That’s working now for me.
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