What We’re Reading (Week Ending 07 May 2023) - 07 May 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 07 May 2023):
1. I, Pencil – Leonard Read
I, Pencil, simple though I appear to be, merit your wonder and awe, a claim I shall attempt to prove. In fact, if you can understand me—no, that’s too much to ask of anyone—if you can become aware of the miraculousness which I symbolize, you can help save the freedom mankind is so unhappily losing. I have a profound lesson to teach. And I can teach this lesson better than can an automobile or an airplane or a mechanical dishwasher because—well, because I am seemingly so simple.
Simple? Yet, not a single person on the face of this earth knows how to make me. This sounds fantastic, doesn’t it? Especially when it is realized that there are about one and onehalf billion of my kind produced in the U.S.A. each year.
Pick me up and look me over. What do you see? Not much meets the eye—there’s some wood, lacquer, the printed labeling, graphite lead, a bit of metal, and an eraser…
…My family tree begins with what in fact is a tree, a cedar of straight grain that grows in Northern California and Oregon. Now contemplate all the saws and trucks and rope and the countless other gear used in harvesting and carting the cedar logs to the railroad siding. Think of all the persons and the numberless skills that went into their fabrication: the mining of ore, the making of steel and its refinement into saws, axes, motors; the growing of hemp and bringing it through all the stages to heavy and strong rope; the logging camps with their beds and mess halls, the cookery and the raising of all the foods. Why, untold thousands of persons had a hand in every cup of coffee the loggers drink!
The logs are shipped to a mill in San Leandro, California. Can you imagine the individuals who make flat cars and rails and railroad engines and who construct and install the communication systems incidental thereto? These legions are among my antecedents.
Consider the millwork in San Leandro. The cedar logs are cut into small, pencil-length slats less than one-fourth of an inch in thickness. These are kiln dried and then tinted for the same reason women put rouge on their faces. People prefer that I look pretty, not a pallid white. The slats are waxed and kiln dried again. How many skills went into the making of the tint and the kilns, into supplying the heat, the light and power, the belts, motors, and all the other things a mill requires? Sweepers in the mill among my ancestors? Yes, and included are the men who poured the concrete for the dam of a Pacific Gas & Electric Company hydroplant which supplies the mill’s power!
Don’t overlook the ancestors present and distant who have a hand in transporting sixty carloads of slats across the nation.
Once in the pencil factory—$4,000,000 in machinery and building, all capital accumulated by thrifty and saving parents of mine—each slat is given eight grooves by a complex machine, after which another machine lays leads in every other slat, applies glue, and places another slat atop—a lead sandwich, so to speak. Seven brothers and I are mechanically carved from this “woodclinched” sandwich.
My “lead” itself—it contains no lead at all—is complex. The graphite is mined in Ceylon [Sri Lanka]. Consider these miners and those who make their many tools and the makers of the paper sacks in which the graphite is shipped and those who make the string that ties the sacks and those who put them aboard ships and those who make the ships. Even the lighthouse keepers along the way assisted in my birth—and the harbor pilots.
The graphite is mixed with clay from Mississippi in which ammonium hydroxide is used in the refining process. Then wetting agents are added such as sulfonated tallow—animal fats chemically reacted with sulfuric acid. After passing through numerous machines, the mixture finally appears as endless extrusions—as from a sausage grinder—cut to size, dried, and baked for several hours at 1,850 degrees Fahrenheit. To increase their strength and smoothness the leads are then treated with a hot mixture which includes candelilla wax from Mexico, paraffin wax, and hydrogenated natural fats.
My cedar receives six coats of lacquer. Do you know all the ingredients of lacquer? Who would think that the growers of castor beans and the refiners of castor oil are a part of it? They are.
Observe the labeling. That’s a film formed by applying heat to carbon black mixed with resins. How do you make resins and what, pray, is carbon black? Why, even the processes by which the lacquer is made a beautiful yellow involve the skills of more persons than one can enumerate!
My bit of metal—the ferrule—is brass. Think of all the persons who mine zinc and copper and those who have the skills to make shiny sheet brass from these products of nature. Those black rings on my ferrule are black nickel. What is black nickel and how is it applied? The complete story of why the center of my ferrule has no black nickel on it would take pages to explain.
Then there’s my crowning glory, inelegantly referred to in the trade as “the plug,” the part man uses to erase the errors he makes with me. An ingredient called “factice” is what does the erasing. It is a rubber-like product made by reacting rapeseed oil from the Dutch East Indies [Indonesia] with sulfur chloride. Rubber, contrary to the common notion, is only for binding purposes. Then, too, there are numerous vulcanizing and accelerating agents. The pumice comes from Italy; and the pigment which gives “the plug” its color is cadmium sulfide.
Does anyone wish to challenge my earlier assertion that no single person on the face of this earth knows how to make me?
Actually, millions of human beings have had a hand in my creation, no one of whom even knows more than a very few of the others. Now, you may say that I go too far in relating the picker of a coffee berry in far-off Brazil and food growers elsewhere to my creation; that this is an extreme position. I shall stand by my claim. There isn’t a single person in all these millions, including the president of the pencil company, who contributes more than a tiny, infinitesimal bit of know-how. From the standpoint of know-how the only difference between the miner of graphite in Ceylon and the logger in Oregon is in the type of know-how. Neither the miner nor the logger can be dispensed with, any more than can the chemist at the factory or the worker in the oil field—paraffin being a by-product of petroleum…
…I, Pencil, am a complex combination of miracles: a tree, zinc, copper, graphite, and so on. But to these miracles which manifest themselves in Nature an even more extraordinary miracle has been added: the configuration of creative human energies—millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire and in the absence of any human masterminding! Since only God can make a tree, I insist that only God could make me. Man can no more direct these millions of know-hows to bring me into being than he can put molecules together to create a tree.
The above is what I meant when writing, “If you can become aware of the miraculousness which I symbolize, you can help save the freedom mankind is so unhappily losing.” For, if one is aware that these know-hows will naturally, yes, automatically, arrange themselves into creative and productive patterns in response to human necessity and demand— that is, in the absence of governmental or any other coercive master-minding—then one will possess an absolutely essential ingredient for freedom: a faith in free people. Freedom is impossible without this faith.
2. One Big Web: A Few Ways the World Works – Morgan Housel
Two MIT cognitive scientists interested in how cats learn to walk once showed something I’ve always found fascinating: The difference between firsthand experience and secondhand learning.
The scientists raised kittens in total darkness. Once the cats were old enough to walk, they were placed in a lighted box for three hours a day.
In the box was a kind of carousel, with each kitten placed in a harness.
One of the cat’s legs reached the floor, and its walking movements made the carousel move in a circle.
The other cat’s legs were restrained by the harness. It could see everything going on – the movement, the other cat walking around in circles – but its legs never touched the floor. It had no active control over the carousel.
After eight weeks of daily carousel walks the cats were brought into the real world to test what they had learned.
They were tested to see if they would automatically place their paws on a surface they were about to be set down on. And if they’d avoid a steep ledge, walking around to a gradual ramp instead. And whether they’d blink when an object was quickly brought close to their face.
The results were extraordinary.
100% of the cats whose legs had control over the carousel’s movements tested normal.
The cats who only watched, but never controlled, the carousel were functionally blind.
They fell off ledges. They didn’t put their paws out to land on a surface. They didn’t blink when an object accelerated toward their face.
It wasn’t that they couldn’t operate their bodies – they learned to do that in the dark room they were raised in.
But they couldn’t associate visual objects with what their bodies were supposed to do.
The two cats grew up seeing the same thing. But one experienced the real world while the other merely saw it. The result was that one mastered a topic; the other was effectively blind.
And don’t a lot of things work like that – with humans too, not just cats?
Nothing is more persuasive than what you’ve experienced firsthand. You can read about what it was like to have certain experiences – living through the Great Depression, fighting in World War II, or growing up in poverty. You can try to be open-minded and empathetic to those experiences.
But what about the people who actually experienced those things firsthand? They understand details that those who merely read about their experiences don’t, and never will. They will have opinions, skills, and emotions that outsiders can’t comprehend.
It’s just like the cats…
…Dollo’s Law (evolution): An organism can never re-evolve to a former state because the path that led to its former state was wildly complicated and the odds of retracing that exact path round to zero. Say an animal has horns, and then it evolves to lose its horns. The odds that it will ever evolve to regain its horns are nil, because the path that originally gave it horns was so complex. Lots of things work like that. Take brands, relationships, and reputation. There are things that, once lost, will likely never be regained, because the chain of events that created them in the first place can’t be replicated. If you realized how valuable those things are you’d be more careful about risking their loss.
3. Influencers are Not the Problem – Safal Niveshak
But then, Matt Haig wrote in his book Reasons to Stay Alive –
“The world is increasingly designed to depress us. Happiness isn’t very good for the economy. If we were happy with what we had, why would we need more? How do you sell an anti-ageing moisturiser? You make someone worry about ageing. How do you get people to vote for a political party? You make them worry about immigration. How do you get them to buy insurance? By making them worry about everything. How do you get them to have plastic surgery? By highlighting their physical flaws. How do you get them to watch a TV show? By making them worry about missing out. How do you get them to buy a new smartphone? By making them feel like they are being left behind.
To be calm becomes a kind of revolutionary act. To be happy with your own non-upgraded existence. To be comfortable with our messy, human selves, would not be good for business.”
Investing is not away from the reality Haig has talked about in his book. The things we read or watch in business and social media, or what we hear most advisors, experts, and influencers speak, are designed to depress us.
Happiness (of their customers, prospects, and viewers) isn’t very good thing for them, for how else would they peddle their bad, often toxic, financial advice?
We are sold insurance policies, mutual funds, stock ideas, and other get rich quick schemes, as if our lives depended on them. And that if we don’t buy those products or advice, we would end up in poverty and despair, even as our friends and all those friends we know on Twitter and Facebook would get rich.
People are led to make financial plans for 20-30 years ahead, while not many are taught to deal in the present with the behavioural aspects of taking care of their money, like simplicity, frugality, and patience.
But…but the problem is not ‘them.’ The problem is ‘us.’
Reinhold Niebuhr’s Serenity Prayer reads –
God, grant me the serenity to accept the things I cannot change,
the courage to change the things I can,
and the wisdom to know the difference.
What others advice me to do in life and investing is never in my control, and so I cannot change what they advise. But what advice I apply to my life and investing is in my control, and so I must ensure that I play just that part well.
So, the problem is not the advisor or influencer peddling wrong financial advice. The problem is ‘I’ not understanding what is wrong for me and what is not. Yes, that is the problem.
The more you are willing to get influenced with the idea of getting rich quick, the more there will be influencers telling you the secrets – and to millions of their other followers – of how to get rich quick.
My grandmother often advised me this – “सुनो सब की, करो मन की.” It means, I may listen to others, but must do what my mind tells me to do. She must have known about ‘confirmation bias’ in her own way, but what she meant was that even after listening to the advice of many others, I must do what I believe to be the right thing to do, after putting in careful thought behind my actions.
4. Have scientists found a “brake pedal” for aging? – James Kingsland
A new discovery suggests that a protein in the brain may be a switch for controlling inflammation and, with it, a host of symptoms of aging. If scientists can figure out how to safely target it in humans, it could slow down the aging process.
The inflamed brain: One promising technique to combat aging is reducing inflammation. Many diseases of old age are associated with chronic, low-level inflammation in the brain, organs, joints, and circulatory system — sometimes called “inflammageing.”
Inflammation in a part of the brain called the ventromedial hypothalamus, or VMH, seems to play a particularly important role in promoting aging throughout the body. That may be because the VMH has a wide range of functions, including control of appetite, body temperature, and glucose metabolism.
For the first time, research in mice has discovered that a protein in VMH cells acts like a brake pedal to reduce inflammation and slow the pace of aging.
High levels of the protein, called Menin, protected the mice against thinning skin, declining bone mass, and failing memory, whereas low levels accelerated aging. This may be because Menin is a “scaffold protein,” which regulates the activity of multiple enzymes and genes involved in inflammation and metabolism.
“We speculate that the decline of Menin expression in the hypothalamus with age may be one of the driving factors of aging, and Menin may be the key protein connecting the genetic, inflammatory, and metabolic factors of aging,” explained lead researcher Lige Leng from the Institute of Neuroscience at Xiamen University in China…
…Intriguingly, they found that Menin promoted the production of a neurotransmitter called D-serine, which in turn helped to slow cognitive decline. D-serine is an amino acid that can be taken as a dietary supplement and is also found naturally in soybeans, eggs, and fish.
“D-serine is a potentially promising therapeutic for cognitive decline,” Leng speculated.
5. How Interest Rates & Inflation Impact Stock Market Valuations – Ben Carlson
On Monday the S&P 500 closed at a little more than 4,100. That’s a level the index first hit in May 2021. A lot has changed in the intervening two years from a market perspective.
This is a snapshot of how things looked back in May 2021:
- Fed funds rate: 0% (on the floor)
- 10 year treasury yield: 1.6% (generationally low)
- Inflation rate: 4.2% (uncomfortable but still felt transitory)
- Mortgage rates: 3.0% (ridiculously low)
- S&P 500: 4,100 or so (felt pretty good)
And here’s how things look now:
- Fed funds rate: 4.75% (way higher)
- 10 year treasury yield: 3.6% (way higher)
- Inflation rate: 5.0% (higher but getting better)
- Mortgage rates: 6.7% (doesn’t feel great)
- S&P 500: 4,100 or so (depends on who you ask)
Interest rates are up a lot. Inflation is up even though it’s been trending down.You would assume, all else equal, that much higher interest rates and price levels would have had a far greater impact on the stock market.
Don’t get me wrong — we’ve had a nice little bear market. And this kind of snapshot approach to looking at market indicators can be misleading.
But if you were to tell investors two years ago that we were about to enter one of the most aggressive Fed hiking cycles in history combined with inflation reaching 9%, most would have assumed things would be a lot worse…
…There have been times in the past when interest rates or inflation were your North Star when it comes to valuations.
But there have also been times when valuations didn’t like up with interest rates or inflation rates.
The problem with trying to make sense of the market levels using one or two variables is the stock market is not that simple.
The stock market rarely follows an if-then framework. Just because A occurs does not guarantee B will automatically follow.
There is so much other stuff going on in terms of trends, the economy and how investors are positioned that sometimes the stock market doesn’t make much sense, especially in the short-run.
Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. We currently have no vested interest in any companies mentioned. Holdings are subject to change at any time.
