What We’re Reading (Week Ending 06 September 2020) - 06 Sep 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 06 September 2020):
1. Modern Monetary Theory Finds an Embrace in an Unexpected Place: Wall Street – Patricia Cohen
Besides the risk of government deficits, M.M.T. throws out a drawerful of other venerable assumptions with Marie Kondo-esque ruthlessness. To start, it instructs you to erase that textbook drawing of a white-haired Uncle Sam collecting tax dollars from the public and then using them to pay for military weapons, highway repairs, federal workers’ wages and more.
Tax revenues are not what finance the government’s expenditures, argues Stephanie Kelton, an economist at Stony Brook University and one of the most influential modern monetary theorists. What actually happens in a country that controls its own currency, she says, is that the government first decides what it’s going to spend. In the United States, Congress agrees on a budget. Then government agencies start handing out dollars to the public to pay for those tanks, earth movers and salaries. Afterward, it takes a portion back in the form of taxes. If the government takes back less than it gave out, there will be a deficit.
“The national debt is nothing more than a historical record of all of the dollars that were spent into the economy and not taxed back, and are currently being saved in the form of Treasury securities,” Ms. Kelton said.
Ms. Kelton, a frequent speaker at business and financial conferences and the chief economic adviser to Mr. Sanders during his 2016 presidential campaign, points out that every dollar the government spends translates into a dollar of income for someone else. So a deficit in the public sector simultaneously produces a surplus outside the government.
The reverse is also true, Ms. Kelton maintains, and that can lead to trouble. The seven biggest American depressions or downturns going back 200 years, she said, were all preceded by government surpluses.
2. Save Like A Pessimist, Invest Like An Optimist – Morgan Housel
A 100-year event doesn’t mean it happens every 100 years. It means there’s about a 1% chance of it occurring in any given year. That seems low. But when there are hundreds of different independent 100-year events, what are the odds that any one of them will occur in a given year?
Pretty good, in fact.
If next year there’s a 1% chance of a new disastrous pandemic, a 1% chance of a crippling depression, a 1% chance of a catastrophic flood, a 1% chance of political collapse, and on and on, then the odds that something bad will happen next year – or any year – are … uncomfortably high.
Littlewood’s Law tells us to expect a miracle every month. The flip side is to expect a disaster roughly as often.
Which is what history tells us, isn’t it?
3. No, Robinhood Traders Aren’t Affecting the Stock Market – Nick Maggiulli
When combining the holdings data with pricing data from Yahoo Finance, I was able to look at the one-day change in number of Robinhood users holding a stock and see how well it correlated with the one-day price return of that stock.
I did this because I wanted to test whether an increase (or decrease) in Robinhood users holding a stock was met with a similar increase (or decrease) in that stock’s price. I understand that the number of Robinhood users holding a stock is not the same as the total dollar impact that Robinhood users have on a stock (that is, not all Robinhood traders have the same bankroll), but let’s assume that they are similar in size for now. Additionally, I created a subset of the data to start on February 19 (the day before the Covid-19-inspired sell-off began) to only capture the correlation from when Robinhood users started becoming more active on the platform.
After doing this exercise for the top 200 most popular stocks on Robintrack, I found that for most of these stocks, there was little to no correlation between the one-day change in stock price and the one-day change in the number of Robinhood users holding them:
4. The 2 Variables That Drive Stock Prices – Ben Carlson
If investing was a cocktail, it would essentially boil down to one part fundamentals and one part emotions. Fundamentals are easier than ever to capture because we now have access to more data in a single day than our ancestors would see in a lifetime.
The emotional component of investing will never be quantifiable because it’s impossible to predict how people will feel in the future.
The late Jack Bogle introduced this concept in his book Don’t Count On It by breaking down expected annual returns of the U.S. stock market into the following components:
Market Returns = Dividend Yield + Earnings Growth +/- Changes in the P/E Ratio
Dividends and earnings are the fundamental portion of stock market returns while the change in the price-to-earnings (P/E) ratio is the speculative portion of returns. The change in P/E represents how much people are willing to pay for corporate fundamentals and the reason it’s considered speculative is because it can vary widely over time.
5. Warren Buffett’s Japan Bet, Warren Buffett’s Gold Bet, etc – Joshua Brown
Warren Buffett is an investor who looks to buy future growth at reasonable valuations today. He prioritizes long-term cashflow generation, management quality, competitive position and return on capital when he buys a stock. He’s got two well-known investment lieutenants helping him make decisions, and they are also empowered with enough autonomy to make decisions of their own.
One thing you will not find throughout the annals of Berkshire Hathaway’s history is a lot of “thematic” investing. Buffett doesn’t do “themes.” He would not have been a big user of Motif Investments. He doesn’t use his stock purchases to tell a story about his macro forecasts. He may discuss his stock purchases in a broader sense (Buy American, I Am) to convey an opinion about the present market situation and where he’s finding value, but he doesn’t make an investment in order to express himself or signal something.
He makes investments in order to earn a profit. Not in order to tell you a story and put you to bed.
6. ‘I Can’t Believe I’m Saying This, But I’m Passing on Seth Klarman’ – Leanna Orr
Klarman’s firm runs one wide-open strategy, or product, via ten Baupost Value funds operating in parallel but raised at different times. When the firm invested in insurance claims against bankrupt utility Pacific Gas and Electric, for example, investors got equitable exposure across the various vehicles. The vintage-year structure resembles private equity funds; the deal sharing does not. Hedge funds typically divide their funds by strategy: one long-short equity, another long-only, one focused on China, etc.
Baupost prefers carte blanche.
Investing with the firm means allowing Klarman’s team to do mostly whatever it wants with the money. Since the financial crisis, that’s often meant buying private assets, such as real estate, that linger for a long time in portfolio. “I’m not a fan of people in the hedge fund world taking what would be a five- to seven year real estate strategy,” the head of an elite institution gripes. “That’s not what a hedge fund is.” Klarman, observers say, has been doing more and more of these types of deals — and returning less and less. Baupost has delivered double-digit gains just once since 2010, II previously reported. “The return-on-equity numbers don’t stand up to top-tier private equity,” according to the allocator who opted out. “I would prefer to just be in private equity that says what it is. At least then it’s a defined approach.”
The most controversial thing that Baupost does with its wide-open investment mandate is nothing at all. Cash amounts to about one third of the portfolio on average, or about $10 billion. “The last thing you want to do is pay a manager to hold a lot of cash,” says one hedge fund specialist. Baupost charges clients 1.25 percent in management fees, regardless of performance or what the money is invested in. Charities, schools, and other clients pay Baupost upwards of $120 million for one year of cash management, given an average holding. Allocators really don’t like that — or at least they really like to complain about it.
7. The Potentially Revolutionary Celera 500L Aircraft Officially Breaks Cover – Joseph Trevithick & Tyler Rogoway
Otto Aviation says the Celera 500L had a maximum cruising speed of at least 450 miles per hour and a range of over 4,500 miles. It also has impressive fuel economy, achieving 18 and 25 miles per gallon, according to Otto Aviation. A traditional business jet with similar capabilities to the Celera 500L, including its six-passenger capacity, typically burn a gallon of fuel for every two to three miles of flight, making Otto’s design dramatically more economical, as well as more environmentally friendly. The company says that the Celera 500L will have an unbelievably low per-hour flight cost of just $328.
This and aircraft’s other notable performance characteristics are made possible in large part due to its highly aerodynamic overall laminar flow shape, which produces approximately 59 percent less drag than existing similar-sized, more conventionally-shaped aircraft. Its high-efficiency Raikhlin Aircraft Engine Developments (RED) A03 V12 piston engine is another important part of the equation. The A03 has a multi-stage turbocharger and can run on Jet A1 fuel, as well as kerosene or biodiesel.
Germany-based RED touts the engine as a very high-efficiency design with low fuel consumption and very good reliability over existing piston engine designs with equivalent horsepower ratings. “The Celera 500L’s aerodynamic airframe requires significantly less horsepower to achieve take-off and cruise speeds, allowing for a more fuel-efficient power plant [the A03] to be utilized,” Otto’s website says.
