What We’re Reading (Week Ending 09 August 2020) - 09 Aug 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.” Jeremy and myself 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 August 2020):
1. Why Markets Don’t Seem to Care If the Economy Stinks – Barry Ritholtz
Start with some of 2020’s worst-performing industries: Year-to-date (as of the end of July), these include department stores, down 62.6%; airlines, off 55%; travel services, down 51.4%; oil and gas equipment and services, down 50.5%; resorts and casinos, down 45.4%; and hotel and motel real estate investment trusts, off 41.9%. The next 15 industry sectors in the index are down between 30.5% and 41.7%. And that’s four months after the market rebounded from the lows of late March.
These are highly visible industries, with companies that are well-covered by the news media with household names known to many consumers. Retailers are everywhere we go. Gas stations, chain restaurants and hotels are ubiquitous in cities and suburbs across the country.
So although high visibility industries may be of considerable significance to the economy, they are not very significant to the capitalization-weighted stock market indexes.
Consider how little these beaten-up sectors mentioned above affect the indexes. Department stores may have fallen 62.3%, but on a market-cap basis they are a mere 0.01% of the S&P 500. Airlines are larger, but not much: They weigh in at 0.18% of the index. The story is the same for travel services, hotel and motel REITs, and resorts and casinos.
The market is telling us that these industries just don’t matter very much to stock market performance. And the sectors that do matter? Consider just four industry group — internet content, software infrastructure, consumer electronics and internet retailers — account for more than $8 trillion in market value, or almost a quarter of total U.S. stock market value of about $35 trillion. Take the 10 biggest technology companies in the S&P 500 and weight them equally, and they would be up more than 37% for the year. Do the same for the next 490 names in the index, and they are down about 7.7%. That shows just how much a few giants matter to the index.
2. Open Secrets – Malcolm Gladwell
The national-security expert Gregory Treverton has famously made a distinction between puzzles and mysteries. Osama bin Laden’s whereabouts are a puzzle. We can’t find him because we don’t have enough information. The key to the puzzle will probably come from someone close to bin Laden, and until we can find that source bin Laden will remain at large.
The problem of what would happen in Iraq after the toppling of Saddam Hussein was, by contrast, a mystery. It wasn’t a question that had a simple, factual answer. Mysteries require judgments and the assessment of uncertainty, and the hard part is not that we have too little information but that we have too much. The C.I.A. had a position on what a post-invasion Iraq would look like, and so did the Pentagon and the State Department and Colin Powell and Dick Cheney and any number of political scientists and journalists and think-tank fellows. For that matter, so did every cabdriver in Baghdad.
The distinction is not trivial. If you consider the motivation and methods behind the attacks of September 11th to be mainly a puzzle, for instance, then the logical response is to increase the collection of intelligence, recruit more spies, add to the volume of information we have about Al Qaeda. If you consider September 11th a mystery, though, you’d have to wonder whether adding to the volume of information will only make things worse. You’d want to improve the analysis within the intelligence community; you’d want more thoughtful and skeptical people with the skills to look more closely at what we already know about Al Qaeda. You’d want to send the counterterrorism team from the C.I.A. on a golfing trip twice a month with the counterterrorism teams from the F.B.I. and the N.S.A. and the Defense Department, so they could get to know one another and compare notes.
3. How to Understand COVID-19 Numbers – Caroline Chen and Ash Ngu
“Cases going up or down tells you a fair bit about what’s going on at the moment in terms of transmission of the virus — but it’s only valid if we’re testing enough people,” Fox said.
When there aren’t enough tests available, as was the case in New York in March, the number of cases reported will be an undercount, perhaps by a lot. That’s where case positivity rates come in: that measures the percentage of total tests conducted that are coming back positive. It helps you get a sense of how much testing is being done overall in a region.
“WHO guidelines say we want that to be below 5%,” Fox noted. When a positivity rate is higher, epidemiologists start worrying that means only sicker people have access to tests and a city or region is missing mild or asymptomatic cases. When almost all of the tests come back negative, on the other hand, it’s a good indicator that a locality has enough tests available for everyone who wants one, and public health officials have an accurate picture of all the infections, Fox said.
4. How to Outrun a Dinosaur – Cody Cassidy
The incredibly powerful, long-legged Tyrannosaurus was slow for the same mathematical reason its demise in the mine shaft was so eruptive. Like surface area, bone strength only squares in strength as volume cubes. The result is that as an animal increases in size, it requires proportionally more muscle and leg bone to stand, move, and run. Beyond a certain size, the latter becomes physically impossible. For all its muscular bulk, the Tyrannosaurus rex’s leg bones would have shattered under anything more than the stress of a brisk jog. Judging by its mass, muscle, and bones, Snively doesn’t believe an adult Tyrannosaurus rex could have moved faster than 12 or 13 miles per hour. (Though 12 miles per hour approaches the top speed of a typical human, depending on conditioning—it equates to a 20-second 100 meter dash or a 5-minute mile—the T. rex’s slow acceleration and inspiring teeth would give the average runner a reasonable chance of outsprinting or outmaneuvering the lumbering predator.)1
5. Robinhood Has Lured Young Traders, Sometimes With Devastating Results – Nathaniel Popper
But at least part of Robinhood’s success appears to have been built on a Silicon Valley playbook of behavioral nudges and push notifications, which has drawn inexperienced investors into the riskiest trading, according to an analysis of industry data and legal filings, as well as interviews with nine current and former Robinhood employees and more than a dozen customers. And the more that customers engaged in such behavior, the better it was for the company, the data shows.
More than at any other retail brokerage firm, Robinhood’s users trade the riskiest products and at the fastest pace, according to an analysis of new filings from nine brokerage firms by the research firm Alphacution for The New York Times.
In the first three months of 2020, Robinhood users traded nine times as many shares as E-Trade customers, and 40 times as many shares as Charles Schwab customers, per dollar in the average customer account in the most recent quarter. They also bought and sold 88 times as many risky options contracts as Schwab customers, relative to the average account size, according to the analysis.
6. Do You Know the Difference Between Being Rich and Being Wealthy? – Jason Zweig
Mr. Housel begins with a shocking anecdote he witnessed himself: A technology multimillionaire handed a hotel valet thousands of dollars in cash to go buy fistfuls of gold coins at a nearby jewelry store. The executive then flung the coins, worth about $1,000 apiece, into the Pacific Ocean one at a time, skipping them across the water like flat rocks, “just for fun.”
To that man, money was a plaything. (He later went broke, Mr. Housel writes.) To Ronald Read, however, money was possibility. Mr. Read spent decades pumping gas and working as a janitor in Brattleboro, Vt. After he died in 2014 at the age of 92, his estate was able to give more than $6 million to local charities—because he had scrimped and put every spare penny into stocks that he held for decades.
How, asks Mr. Housel, did a janitor “with no college degree, no training, no background, no formal experience and no connections massively outperform” many professional investors?
7. Those Astronomical Returns Aren’t What They Seem – Aaron Brown
Every so often there are news reports of someone generating seemingly impossible returns in the financial markets. Several media outlets reported recently that hedge fund manager Bill Ackman made a 9,530% return in March, turning $27 million into $2.6 billion. So-called tail-risk hedge fund Universa Investments LP posted a 4,144% return that same month.
Most people probably can’t easily process these numbers or relate them to more normal performance like earning 2% on a bond or 9% in an equity mutual fund. It feels like lottery-ticket territory, which breeds doubts that the results are true. This is unfortunate, because there is useful information in the reports, but it’s presented in a highly misleading way.
The best way to think about these gains is that they were essentially insurance payouts divided by a premium payment. For example, suppose you pay $100 per month for homeowner’s insurance on a house valued at $250,000. One day the house burns down and you collect $250,000. Would you call that a 249,900% return on the $100 monthly premium? No, you’d say you recouped 100% of the $250,000 pre-fire value of the house. You weren’t trying to make a good trade with your monthly premium payment, you were trying to protect the value of your housing investment.
