What We’re Reading (Week Ending 01 November 2020) - 01 Nov 2020
Reading helps us learn about the world and it is a really important aspect of investing. The legendary Charlie Munger even goes so far as to say that “I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading.” 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 01 November 2020):
1. The Fine Line Between Persistence and Insanity in the Markets – Ben Carlson
So people’s ears perked up when Einhorn said this week in a letter to his investors, “we are now in the midst of an enormous tech bubble.”
The problem with this statement is Einhorn has been saying the same thing for more than 6 years now. This is from a CNBC story in April of 2014:
“Now there is a clear consensus that we are witnessing our second tech bubble in 15 years,” Greenlight Capital said in an investor letter Tuesday. “What is uncertain is how much further the bubble can expand, and what might pop it.” The firm said there were several indications of the over-exuberance, including the rejection of conventional valuation methods; short sellers forced to cover their positions because of losses; and “huge” first-day stock appreciations after their initial public offerings. “The current bubble is an echo of the previous tech bubble, but with fewer large capitalization stocks and much less public enthusiasm,” the letter said. The firm said it was shorting a group of undisclosed “high-flying momentum stocks.”…
…Am I being disciplined in my long-term approach or blind to the fact that the world has changed is the single most difficult question to answer as an investor because no one is right all the time. The truth is the answer to this question is always unknown.
Sometimes you have to look like an idiot for a while before your investment thesis pans out. On the other hand, there’s the old saying that insanity is doing the same thing over and over again but expecting a different result.
What if continuously betting against tech stocks in a big way proves to be the definition of insanity? These stocks would have to see a spectacular crash to fall back to levels last seen in 2016 or 2014. Stranger things have happened, I guess, but I wonder what would cause Einhorn to change his mind.
The problem with bubble-spotting is no matter what happens you assume you’re right. If prices fall then you nailed it and if prices rise it simply makes you think the bubble is still inflating. I don’t know if this is a bubble or not but the answer will likely look obvious with the benefit of hindsight either way.
2. Lots of Overnight Tragedies, No Overnight Miracles – Morgan Housel
Dwight Eisenhower ate a hamburger for dinner on September 24th, 1955. Later that evening he told his wife the onions gave him heartburn. Then he began to panic. The president had a massive heart attack. It easily could have killed him. If it had, Eisenhower would have joined more than 700,000 Americans who died of heart disease that year.
What’s happened since has been extraordinary. But few paid attention.
The age-adjusted death rate per capita from heart disease has declined more than 70% since the 1950s, according to the National Institute of Health.
So many Americans die of heart disease that cutting the fatality rate by 70% leads to a number of lives saved that is hard to comprehend.
Had the rate had not declined over the last 65 years – if we hadn’t become better at treating heart disease and the mortality rate plateaued since the 1950s – 25 million more Americans would have died from heart disease over the last 65 years than actually did.
25 million!
Even in a single year the improvement is incredible: more than half a million fewer Americans now die of heart disease each year than would have if we hadn’t made any improvements since the 1950s. Picture the population of Atlanta saved every year. Or a full football stadium saved every month
How is this not a bigger story?
Why are we not shouting in the streets about how incredible this is and building statues for cardiologists?
I’ll tell you why: because the improvement happened too slowly for anyone to notice.
3. A Columnist Makes Sense of Wall Street Like None Other (See Footnote) – Emily Flitter
Each weekday, Mr. Levine, 42, wakes up at 5 in the morning. He looks at what’s going on in the markets, scrolls through emails from readers and plugs into the chatter of early-to-work traders. Then he starts to write. Roughly 5,000 words later on a long-winded day, he files Money Stuff to his editor, and it’s sent to subscribers around noon. (His column is currently on a parental leave hiatus, and will return this winter.)
Mr. Levine’s favorite subjects include insider trading statutes, bond-market liquidity and the ubiquity of securities fraud, but his columns are never boring. They may be the only entertaining words a financial markets professional reads all day.
Often, a significant chunk of the newsletter is devoted to a legal battle between sophisticated counterparties, or a complex financial product. Mr. Levine deconstructs the topics in a way that is less like a conventional business column and more like he is providing an introductory course on the subject.
If Mr. Levine’s column requires the use of a technical term, it is typically accompanied by not just a definition but a full-throated explanation, with practical examples, of how it works. There are footnotes — lots of footnotes. The tone, though, is anything but pedantic. Mr. Levine writes about Wall Street in a way that makes its denizens feel as if he is writing for them. Yet he gives the same impression of personalization to readers who know little about finance. He once took a term that appeared in a lawsuit — a “cash-settled forward purchase agreement for Citigroup shares with downside protection in the form of a put option at the same price as the forward” — and gave it the acronym CSFPAFCSWDPITFOAPOATSPATF. He makes readers feel in on the savage joke that is late capitalism.
4. Look Who’s Really Chasing Hot Stocks Like Zoom – Jason Zweig
Among this year’s hottest stocks, few are favorites of individual investors, and index funds aren’t their main buyers. Who’s driving them up? Professional stock pickers—the very people pointing the finger at everyone else.
Let’s look at Zoom Video Communications Inc., ZM -5.88% the teleconferencing company whose stock is up more than 660% so far this year. Given the popularity of its service and the stock’s scorching performance, you might expect Zoom is a darling among individual investors and traders.
Yet, on the Robinhood app used by millions of individual traders, Zoom was only the 49th widest-owned stock this week, according to the online broker’s tally of most-popular holdings.
In fact, of the 25 stocks with market values above $10 billion that have the hottest returns so far this year, only two— Moderna Inc. and Peloton Interactive Inc. —are among the 25 most-popular stocks on Robinhood. They are up 278% and 362%, respectively, in 2020.
The biggest performance chasers? Big institutions, whose ownership of scalding-hot stocks has boomed this year, even as these shares become wildly expensive by traditional yardsticks.
Some of that is natural; as a company’s market value grows, it becomes eligible for ownership at funds that can’t hold small stocks. Then again, professional investors, just like many amateurs, can’t resist a hot stock.
5. A Corporate Sleuth Claims Squarepoint Capital Took Her Content. The Hedge Fund Is Threatening Action. What Actually Happened? – Richard Teitelbaum
The news was potentially lethal. It was an inkling that Elbaze, a researcher at quantitative hedge fund Squarepoint Capital, might have been seeking improper access to Footnoted.com, the financial website Leder had started 14 years before and had turned into a thriving news and research service.
Elbaze had asked Leder a year earlier for, first, a trial subscription, and then a flat rate for full historical access to reports.
She had refused. Experience had shown her that Footnoted data is fiendishly difficult for quants to format. Firms like Two Sigma Investments, Point72 Asset Management’s Cubist Systematic Strategies, and AQR Capital Management had queried her about subscribing. Leder had even held informal talks with two funds to buy Footnoted outright so they could do the job themselves.
Reluctantly, however, just weeks before the email, she had agreed to provide London-based Squarepoint a trial. Then Elbaze seemed to have ramped up his activity.
“I was just, ‘Holy shit, what’s going on here?’” Leder recalls asking herself at the time. She emailed her developer. “He seems to have downloaded my entire database,” she wrote. “If he did do this, it’s a big BIG problem.”
In fact, Leder estimated that Elbaze had viewed more than 17,000 pages — some of which even paid subscribers couldn’t get a hold of. A forensic investigation commissioned by Leder backed up her assessment.
6. Failing to Plan: How Ayn Rand Destroyed Sears – Michal Rozworski and Leigh Phillips
Lampert, libertarian and fan of the laissez-faire egotism of Russian American novelist Ayn Rand, had made his way from working in warehouses as a teenager, via a spell with Goldman Sachs, to managing a $15 billion hedge fund by the age of 41. The wunderkind was hailed as the Steve Jobs of the investment world. In 2003, the fund he managed, ESL Investments, took over the bankrupt discount retail chain Kmart (launched the same year as Walmart). A year later, he parlayed this into a $12 billion buyout of a stagnating (but by no means troubled) Sears.
At first, the familiar strategy of merciless, life-destroying post-acquisition cost cutting and layoffs did manage to turn around the fortunes of the merged Kmart-Sears, now operating as Sears Holdings. But Lampert’s big wheeze went well beyond the usual corporate raider tales of asset stripping, consolidation and chopping-block use of operations as a vehicle to generate cash for investments elsewhere. Lampert intended to use Sears as a grand free market experiment to show that the invisible hand would outperform the central planning typical of any firm.
He radically restructured operations, splitting the company into thirty, and later forty, different units that were to compete against each other. Instead of cooperating, as in a normal firm, divisions such as apparel, tools, appliances, human resources, IT and branding were now in essence to operate as autonomous businesses, each with their own president, board of directors, chief marketing officer and statement of profit or loss. An eye-popping 2013 series of interviews by Bloomberg Businessweek investigative journalist Mina Kimes with some forty former executives described Lampert’s Randian calculus: “If the company’s leaders were told to act selfishly, he argued, they would run their divisions in a rational manner, boosting overall performance.”…
…And so if the apparel division wanted to use the services of IT or human resources, they had to sign contracts with them, or alternately to use outside contractors if it would improve the financial performance of the unit—regardless of whether it would improve the performance of the company as a whole. Kimes tells the story of how Sears’s widely trusted appliance brand, Kenmore, was divided between the appliance division and the branding division. The former had to pay fees to the latter for any transaction. But selling non-Sears-branded appliances was more profitable to the appliances division, so they began to offer more prominent in-store placement to rivals of Kenmore products, undermining overall profitability. Its in-house tool brand, Craftsman—so ubiquitous an American trademark that it plays a pivotal role in a Neal Stephenson science fiction bestseller, Seveneves, 5,000 years in the future—refused to pay extra royalties to the in-house battery brand DieHard, so they went with an external provider, again indifferent to what this meant for the company’s bottom line as a whole.
Executives would attach screen protectors to their laptops at meetings to prevent their colleagues from finding out what they were up to. Units would scrap over floor and shelf space for their products. Screaming matches between the chief marketing officers of the different divisions were common at meetings intended to agree on the content of the crucial weekly circular advertising specials. They would fight over key positioning, aiming to optimize their own unit’s profits, even at another unit’s expense, sometimes with grimly hilarious result. Kimes describes screwdrivers being advertised next to lingerie, and how the sporting goods division succeeded in getting the Doodle Bug mini-bike for young boys placed on the cover of the Mothers’ Day edition of the circular. As for different divisions swallowing lower profits, or losses, on discounted goods in order to attract customers for other items, forget about it. One executive quoted in the Bloomberg investigation described the situation as “dysfunctionality at the highest level.”
7. Shonda Rhimes Is Ready to “Own Her S***”: The Game-Changing Showrunner on Leaving ABC, “Culture Shock” at Netflix and Overcoming Her Fears – Lacey Rose
Shonda Rhimes was tired of the battles. She was producing some 70 hours of annual television in 256 territories; she was making tens of millions of dollars for herself and more than $2 billion for Disney, and still there were battles with ABC. They’d push, she’d push back. Over budget. Over content. Over an ad she and the stars of her series — Grey’s Anatomy, Scandal and How to Get Away With Murder — made for then-presidential nominee Hillary Clinton.
But by early 2017, her reps were back in discussions with the company about a new multiyear deal. They’d already made a hefty ask of her longtime home and were waiting as the TV group’s then leadership prolonged the process, with one briefly tenured ABC executive determined to drive down the price tag on their most valuable creator. Meanwhile, Rhimes was growing creatively restless. “I felt like I was dying,” she says now of the unforgiving pace and constraints of network TV. “Like I’d been pushing the same ball up the same hill in the exact same way for a really long time.”
She knew her breaking point would come, but what it would be she never could have predicted. As part of her ABC relationship, Rhimes had been given an all-inclusive pass to Disneyland — and without a partner, she’d negotiated a second for her nanny. But on this day, she needed one for her sister, too, as she’d be taking Rhimes’ teenage daughter while the nanny chaperoned her younger two. If the passes had been interchangeable, Rhimes would have been happy to give up hers — when would she have time to go to Disneyland anyway?
Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. Of all the companies mentioned in this article, we currently have a vested interest in Netflix and Zoom Video Communications. Holdings are subject to change at any time.
