What We’re Reading (Week Ending 22 June 2025)

What We’re Reading (Week Ending 22 June 2025) - 22 Jun 2025

Reading helps us learn about the world and it is a really important aspect of investing. The late Charlie Munger even went 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 22 June 2025):

1. Message from CEO Andy Jassy: Some thoughts on Generative AI – Andy Jassy

Today, in virtually every corner of the company, we’re using Generative AI to make customers lives better and easier. What started as deep conviction that every customer experience would be reinvented using AI, and that altogether new experiences we’ve only dreamed of would become possible, is rapidly becoming reality. Technologies like Generative AI are rare; they come about once-in-a-lifetime, and completely change what’s possible for customers and businesses…

…You can see it in Advertising where we’ve built a suite of AI tools that make it easier for brands to plan, onboard, create and optimize campaigns. In Q1 alone, over 50K advertisers used these capabilities…

…We’re also using Generative AI broadly across our internal operations. In our fulfillment network, we’re using AI to improve inventory placement, demand forecasting, and the efficiency of our robots—all of which have improved cost to serve and delivery speed. We’ve rebuilt our Customer Service Chatbot with GenAI, providing an even better experience than we’d had before. And, we’re assembling more intelligent and compelling product detail pages from leveraging GenAI…

…First, we have strong conviction that AI agents will change how we all work and live. Think of agents as software systems that use AI to perform tasks on behalf of users or other systems. Agents let you tell them what you want (often in natural language), and do things like scour the web (and various data sources) and summarize results, engage in deep research, write code, find anomalies, highlight interesting insights, translate language and code into other variants, and automate a lot of tasks that consume our time. There will be billions of these agents, across every company and in every imaginable field. There will also be agents that routinely do things for you outside of work, from shopping to travel to daily chores and tasks. Many of these agents have yet to be built, but make no mistake, they’re coming, and coming fast.

Second, and what makes this agentic future so compelling for Amazon, is that these agents are going to change the scope and speed at which we can innovate for customers. Agents will allow us to start almost everything from a more advanced starting point…

…Today, we have over 1,000 Generative AI services and applications in progress or built, but at our scale, that’s a small fraction of what we will ultimately build. We’re going to lean in further in the coming months. We’re going to make it much easier to build agents, and then build (or partner) on several new agents across all of our business units and G&A areas.

As we roll out more Generative AI and agents, it should change the way our work is done. We will need fewer people doing some of the jobs that are being done today, and more people doing other types of jobs. It’s hard to know exactly where this nets out over time, but in the next few years, we expect that this will reduce our total corporate workforce as we get efficiency gains from using AI extensively across the company.

2. Experiencing the Real “Belt and Road” – Nina Chen

In early June, I traveled in Central Asia for 9 days, visiting two countries. I spent 2 days in Almaty, Kazakhstan, and 7 days in Uzbekistan, covering Tashkent, Samarkand, and Bukhara…

…We flew from Almaty, Kazakhstan, to Tashkent, the capital of Uzbekistan. Even before landing, it was clear that Uzbekistan and China have a close partnership. On the flight, there were many Chinese merchants and workers traveling in groups…

…When we arrived at the airport, the sense of close cooperation was even stronger. The airport signs had Chinese translations, and there was a billboard in the walkway advertising the “UZ-China Silk Road Free Trade Special Zone.”…

…While we didn’t meet any locals in Uzbekistan who’d been to China, in Kazakhstan, we met a Kazakh girl with fluent Chinese. We joined a day tour to the lakes and canyons near Almaty. With many Chinese tourists in our group, she translated for us when we couldn’t understand the guide. She studied in Chongqing(*) and worked in Yiwu, Zhejiang province (*), where her Chinese boss ran a company exporting goods from China to former Soviet countries like Moscow, Azerbaijan, and Central Asian cities.

This made me feel that trade between China and Central Asia is largely a one-way flow, from China to Central Asia, with China’s economic influence in the region being substantial…

…At the Tashkent City Mall, the premier shopping destination in Uzbekistan’s capital, I was surprised to find stores for well-known Chinese sportswear brands Anta, Li-Ning, and Xtep all located in close proximity.

I decided to explore the Anta store first. Picking up a pair of PG 7 running shoes (the PG 7 refers to the midsole technology), I noticed the price tag read 1,103,000 Uzbekistani som (approximately 612 Chinese yuan, US$87), which is significantly higher than the price in China (where it’s around 200-300 yuan, US$29–43 on Tmall). However, the store currently has a promotion: buy one pair and get the second at 50% off (effectively 459 yuan per pair, US$66) or buy two pairs and get the third free (bringing the cost down to 408 yuan per pair, US$58). Even with the discounts, the price is still higher than in China. When I asked the store manager if Anta is considered a premium brand in Uzbekistan, he confirmed it is. Surprised, I inquired if only the wealthy can afford it. He explained that due to the popularity of digital payments, many people, especially the youth, opt for installment plans…

… Central Asia has many Chinese-made beauty and skincare products that aren’t available in China.

An example is “Shanghai Song,” with packaging featuring a classic Chinese vintage design. The brand’s slogan states: “Inspired by myths and legends, it’s about Shanghai in the Song period, which ruled one of China’s most glorious cultural eras in the long-flowing Eastern cultural river.”

I found this puzzling. First, the specific myths or legends that served as inspiration aren’t clear, giving it a mysterious and abstract feel. Second, to the best of my knowledge, during the Song Dynasty, the economic and cultural centers of the Northern Song were in Kaifeng, and those of the Southern Song were in Hangzhou, not in Shanghai. Perhaps “Shanghai Song” represents a blend of the modern and the classical, or maybe the company behind the brand has a special affection for Shanghai.

When I picked up a bottle of cream and examined it closely, I found that the company is based in Guangzhou. Well, it’s likely that “Shanghai Song” is a brand from Guangzhou that embodies what Chinese people think Central Asians imagine about China and the East.

3. The Capital Cycle Way – Omar Malik

The capital cycle best explains how changes in the amount of capital employed within an industry will impact profits and future returns on capital.

Central to the capital cycle approach is the observation that an industry with high returns on capital tends to attract new entrants. For incumbents, high profitability loosens discipline because management incentives often align with growth. Therefore, both groups will increase spending to capture those high returns. The behavioural pattern of herding often means all the players in an industry invest simultaneously…

…A key characteristic of this cycle is the delay between the investment decision and the new supply coming online. By the time the new supply arrives, historical demand forecasts are often shown to have been overly optimistic, creating an overhang. This causes returns on capital to fall below the cost of capital. As profits collapse, management teams are changed, spending is slashed, and the industry begins to consolidate. That contraction in supply eventually paves the way for a recovery in returns…

…Supply dynamics are more certain than demand and therefore easier to forecast. This is because increases in industry supply are often well-flagged by management teams. In certain industries, such as aircraft manufacturing and shipbuilding, the supply pipelines are well-known. New entrants will noisily announce their arrival into an industry…

… Studying the supply side can help you identify companies that are likely to sustain their high returns for decades to come. The lack of competition due to a competitive moat prevents the supply side from shifting in response to high profitability and defies the typical mean revision in returns…

…Buffett’s investment cases are often predicated on a supply-side focus, and his acquisition of BNSF Railway is a good example. In his own words, the railroad industry had a ‘terrible century’ leading up to his investment. But after following the industry from a young age, he became interested in 2006, why?

The industry had rationalised from over 100 players in the 1960s to just five. In the 1990s, a final wave of consolidation led to the formation of today’s giants. The relative competitive position of railroads versus trucking had improved as oil prices rose, making the railroads the lowest-cost way to move heavy freight. No new capacity was being built. And after consolidating, driving efficiency became the focus, with the labour force falling by 90% and the introduction of new innovations, such as double stacking.

Putting that all together, as long as you believed that the US economy would grow over the coming decades, the structurally improved supply-side dynamics would lead to higher returns on capital in the future. He was not focused on demand because he acquired BNSF during the global financial crisis (GFC), the worst economic crisis since the Great Depression…

…We have held TSMC since Hosking Partners’ inception in 2013 — in fact, it dates back even earlier, if you include the years at Marathon.

The semiconductor industry is highly cyclical, and the news flow around the cycle is immense. Analysts are obsessed with questions such as: Are we at a peak or trough earnings cycle? Was that the last cut or the last beat? How many quarters will the trough last?

Our thesis for the last 15 years has been based on a simple insight: the foundry business would consolidate over time, given the ever-rising cost of advancing Moore’s law. And that TSMC had the superior model, as a pure-play foundry, creating a true alignment with the customer, completely agnostic to the end market. Today, we feel that insight still holds. The scale advantage of TSMC’s model has only grown as the industry has gone from over 20 players to just three…

…How a management team responds to the capital cycle in their industry is critical. If they can act counter-cyclically, pull back when others are adding supply, and take advantage of downturns, they can create significant value.

The way I think about it is if you find one of these outlier teams, you can subcontract the capital allocation decisions to them. You can trust them to navigate the cycles instead of trying to time the buy and sell decisions…

…Even if you have a fix on the supply side for the next decade and you trust management to allocate capital well, you still need to buy at the right price! That brings me to the fourth tenet – remember replacement value.

It is a simple concept: how much would it cost to reproduce or replicate this asset? It is the driving force of the capital cycle. When companies are valued at a premium to replacement cost in the equity market, it creates an incentive to invest and capture that arbitrage. That is why venture capital and private equity funding is tied to equity market valuations.

It is far easier to calculate replacement value in asset-intensive industries with readily available data. But it is more of an art in other sectors, where the model is asset-light with a greater share of intangibles. In such cases, a question I often think about is, “Should we compete with this business instead of buying it?”…

…The final point I’ll leave you with is that we are all guilty, including myself today, of singling out the parts of Buffett’s approach that appeal to us. It is natural, as we all look for confirmation in the tough pursuit of outperforming. I am convinced that the capital cycle lens is one of Buffett’s big mental models for the world.

But my ultimate takeaway from studying Buffett and attending these annual meetings is that he is the Swiss Army Knife of investing. Over his long career, Buffett has successfully invested in great compounders across a wide range of industries (i.e., Coke, Amex, Apple); deep value (i.e., PetroChina on a 3x P/E, as well as all the early partnership investments); activism (i.e., Sanborn maps, Berkshire Hathaway); baskets (i.e., Korean stocks, railroads, airlines, Japanese trading houses); merger arbitrage (i.e. Activision Blizzard); bonds (i.e., high-yield bonds in the fallout of the tech bubble); commodities (i.e., oil futures, silver, and more recently Occidental), among others.

4. A Moody’s Ratings Downgrade for the US: What now? – Aswath Damodaran

Through time, governments have often been dependent on debt to finance themselves, some in the local currency and much in a foreign currency. A large proportion of sovereign defaults have occurred with foreign currency sovereign borrowing, as the borrowing country finds itself short of the foreign currency to meet its obligations. However, those defaults, and especially so in recent years, have been supplemented by countries that have chosen to default on local currency borrowings. I use the word “chosen” because most countries have the capacity to avoid default on local currency debt, being able to print money in that currency to pay off debt, but chose not to do so, because they feared the consequences of the inflation that would follow more than the consequences of default…

…Researchers who have examined the aftermath of default have come to the following conclusions about the short-term and long-term effects of defaulting on debt:

1. Default has a negative impact on the economy, with real GDP dropping between 0.5% and 2%, but the bulk of the decline is in the first year after the default and seems to be short lived.
2. Default does affect a country’s long-term sovereign rating and borrowing costs. One study of credit ratings in 1995 found that the ratings for countries that had defaulted at least once since 1970 were one to two notches lower than otherwise similar countries that had not defaulted. In the same vein, defaulting countries have borrowing costs that are about 0.5 to 1% higher than countries that have not defaulted. Here again, though, the effects of default dissipate over time.
3. Sovereign default can cause trade retaliation. One study indicates a drop of 8% in bilateral trade after default, with the effects lasting for up to 15 years, and another one that uses industry level data finds that export-oriented industries are particularly hurt by sovereign default.
4. Sovereign default can make banking systems more fragile. A study of 149 countries between 1975 and 2000 indicates that the probability of a banking crisis is 14% in countries that have defaulted, an eleven percentage-point increase over non-defaulting countries…

…If sovereign ratings are designed to measure exposure to default risk, how well do they do? The answer depends on how you evaluate their performance…

…In sum, the evidence suggests that while sovereign ratings are good measures of country default risk, changes in ratings often lag changes on the ground, making them less useful to lenders and investors.

If the key limitation of sovereign ratings is that they are not timely assessors of country default risk, that failure is alleviated by the development of the sovereign CDS market, a market where investors can buy insurance against country default risk by paying an (annualized) price. While that market still has issues in terms of counterparty risk and legal questions about what comprises default, it has expanded in the last two decades, and at the start of 2025, there were about 80 countries with sovereign CDS available on them…

…At the start of 2025, the market was drawing a distinction between the safest Aaa-rated countries (Scandinavia, Switzerland, Australia and New Zealand), all with sovereign CDS spreads of 0.20% or below, and more risky Aaa-rated countries (US, Germany, Canada). During 2025, the market shocks from tariff and trade wars have had an effect, with sovereign CDS spreads increasing, especially in April. The US, which started 2025 with a sovereign CDS spread of 0.41%, saw a widening of the spread to 0.62% in late April, before dropping back a bit in May, with the Moody’s downgrade having almost no effect on the US sovereign CDS spread…

…The ramping up of US debt since 2008 is reflected in total federal debt rising from 80% of GDP in 2008 to more than 120% in 2024. While some of the surge in debt can be attributed to the exigencies caused by crises (the 2008 banking crisis and the 2020 COVID bailouts), the troubling truth is that the debt has outlasted the crises and blaming the crises for the debt levels today is disingenuous.

The problem with the debt-to-GDP measure of sovereign fiscal standing is that it is an imperfect indicator…

…Many of the countries with the highest debt to GDP ratios would be classified as safe and some have Aaa ratings, whereas very few of the countries on the lowest debt to GDP list would qualify as safe. Even if it is the high debt to GDP ratio for the US that triggered the Moody’s downgrade, the question is why Moody’s chose to do this in 2025 rather than a year or two or even a decade ago, and the answer to that lies, I think, in the political component. A sovereign default has both economic and political roots, since a government that is intent on preserving its credit standing will often find ways to pay its debt and avoid default. For decades now, the US has enjoyed special status with markets and institutions (like ratings agencies), built as much on its institutional stability (legal and regulatory) as it was on its economic power. The Moody’s downgrade seems to me a signal that those days might be winding down, and that the United States, like the rest of the world, will face more accountability for lack of discipline in its fiscal and monetary policy…

…The ratings downgrade was after close of trading on Friday, May 16, and there was concern about how it would play out in markets, when they opened on Monday, May 19. US equities were actually up on that day, though they lost ground in the subsequent days…

…If equity markets were relatively unscathed in the two weeks after the downgrade, what about bond markets, and specially, the US treasury market? After all, an issuer downgrade for any bond is bad news, and rates should be expected to rise to reflect higher default risk…

…While rates did go up in the the first few days after the downgrade, the effect was muddled by the passage of a reconciliation bill in the house that potentially could add to the deficit in future years. In fact, by the May 29, 2025, almost all of the downgrade effect had faded, with rates close to where they were at the start of the year…

…The expected return on the S&P 500 as of May 30, 2025, reflecting the index level then and the expected cash flows, is 8.64%. Incorporating the effects of the downgrade changes the composition of that expected return, resulting in a lower riskfree rate (4.01% instead of 4.41%) and a higher equity risk premium (4.63% instead of 4.23%). Thus, while the expected return for the average stock remains at 8.64%, the expected return increases slightly for riskier stocks and decreases slightly for safer stocks, but the effects are so small that investors will hardly notice. If there is a lesson for analysts here, it is that the downgrade’s effects on the discount rates (costs of equity and capital) are minimal, and that staying with the conventional approach (of using the ten-year US treasury bond rate as the riskfree rate and using that rate to compute the equity risk premium) will continue to work.

5. Contrary Research Rundown #140 – Contrary Research

Tesla has taken a fundamentally different approach. It does not use lidar or radar and instead relies entirely on eight cameras to make driving decisions. In contrast, Waymo’s fifth-generation car has 29 cameras, six radar sensors, and five lidar sensors…

…As early as 2013, Elon expressed skepticism about the need for lidar in autonomous vehicles. Elon framed the reason in a rather intuitive way in 2021: if humans can rely on their eyes and brain, then self-driving cars can rely on cameras and AI…

…Another reason Tesla has avoided using lidar is the cost. One 2024 report estimated Tesla’s sensor suite costs just $400 per vehicle, compared to an estimated $12.7K per vehicle for Waymo’s sensors on its fifth-generation Jaguar SUVs…

…Companies like Waymo follow a multi-step process where they first deploy vehicles with safety drivers to record and map the area, which can take months for each new city and requires continuous updates. Waymo and companies like it then use these predefined maps to complement their real-time sensor data from lidar/radar about the surrounding area. Tesla, by contrast, claims its software can operate anywhere without pre-mapped data, relying entirely on real-time camera input to understand road conditions…

…At Google I/O in May 2025, Waymo showed a few examples where its full suite of sensors successfully avoided pedestrians and where it claims a camera-only approach would have struggled.

In one example, Waymo’s lidar picked up the presence of a pedestrian in a Phoenix dust storm that was not visible on the camera…

…In another example, Waymo’s sensors were able to detect a pedestrian who was behind a bus and avoid a collision:

“We are detecting a pedestrian on the other side of the bus. That would be completely occluded to a human driver. So what’s happening here is that our sensors are able to pick up the movement of the person’s feet under the bus. And just that little bit of noisy and sparse signal is enough for the Waymo Driver to detect that there’s a pedestrian there and, furthermore, to predict what they’re going to do in the future, allowing us to take a defensive action early.”…

…Waymo has only had one fatal accident in its history, and not due to a Waymo error. In January 2025, a Tesla struck an unoccupied Waymo and other cars at a red light, killing one person. As we wrote in our last piece, one study by Swiss Re shows Waymo saw an 88% reduction in property damage claims and a 92% reduction in bodily injury claims when compared to human-driven vehicles…

…In 2023, a Tesla in Full Self Driving mode (FSD) hit a 71-year-old woman at highway speed, killing her. Video of the crash shows a sun glare appearing to blind the camera, and the National Highway Traffic Safety Administration (NHTSA) opened an investigation into Tesla in October 2024 for four total FSD collisions that occurred in low visibility situations…

…When Elon first called lidar too expensive in the early 2010s, it cost ~$75K per unit. Since then, costs have fallen dramatically, and some lidar units sold for personal vehicles (not robotaxis) are being priced in the hundreds of dollars…

…By one estimate, lidar costs have fallen by 99% since 2014.

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Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. We currently have a vested interest in Alphabet (parent of Google), Amazon (company where Andy Jassy is the CEO), Apple, Tesla, and TSMC. Holdings are subject to change at any time.