What We’re Reading (Week Ending 13 December 2020) - 13 Dec 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 13 December 2020):
1. The Secret Wisdom of Nature: Trees, Animals, and the Extraordinary Balance of All Living Things by Peter Wohlleben – The Rabbit Hole
1. Nature is like the mechanism in an enormous clock. Everything is neatly arranged and interconnected. Every entity has its place and its function.
2. It’s important for us to realize that even small interventions can have huge consequences, and we’d do better to keep our hands off everything in nature that we do not absolutely have to touch…
…4. In undisturbed ancient forests, youngsters have to spend their first two hundred years waiting patiently in their mothers’ shade. As they struggle to put on a few feet, they develop wood that is incredibly dense. In modern managed forests today, seedlings grow without any parental shade to slow them down. They shoot up and form large growth rings even without a nutrient boost from added nitrogen. Consequently, their woody cells are much larger than normal and contain much more air, which makes them susceptible to fungi—after all, fungi like to breathe, too. A tree that grows quickly rots quickly and therefore never has a chance to grow old…
…19. Researchers from the United States suspect that there are definite disadvantages to our powerful brain. They compared the self-destructive programming of human cells with a similar program run by ape cells. This program destroys and dismantles old and defective cells. Their comparison showed that the cleanup mechanism is a lot more effective in apes than it is in people, and the researchers believe that the reduced rate at which cells are broken down in people allows for larger brain growth and a higher rate of connections between cells. This improvement in intelligence probably comes at a high price, because the self-cleansing mechanism also gets rids of cancer cells. Whereas apes hardly ever get cancer, this disease is one of the top causes of death in people. Is the price for our intellectual capacities too high? If our current level of intelligence is not suited to the survival of humankind, it must either be increased or lowered. The latter is probably unacceptable thanks to our ideas about self-worth.
20. There’s a simple reason these treeless landscapes delight us so much. We are, from a biological perspective, animals of the plains, and we feel secure in landscapes with extensive views where we can move around easily.
2. Everything We’ve Learned About Modern Economic Theory Is Wrong – Brandon Kochkodin
His beef is that all too often, economic models assume something called “ergodicity.” That is, the average of all possible outcomes of a given situation informs how any one person might experience it. But that’s often not the case, which Peters says renders much of the field’s predictions irrelevant in real life. In those instances, his solution is to borrow math commonly used in thermodynamics to model outcomes using the correct average.
If Peters is right — and it’s a pretty ginormous if — the consequences are hard to overstate. Simply put, his “fix” would upend three centuries of economic thought, and reshape our understanding of the field as well as everything it touches, from risk management to income inequality to how central banks set interest rates and even the use of behavioral economics to fight Covid-19…
…Peters takes aim at expected utility theory, the bedrock that modern economics is built on. It explains that when we make decisions, we conduct a cost-benefit analysis and try to choose the option that maximizes our wealth.
The problem, Peters says, is the model fails to predict how humans actually behave because the math is flawed. Expected utility is calculated as an average of all possible outcomes for a given event. What this misses is how a single outlier can, in effect, skew perceptions. Or put another way, what you might expect on average has little resemblance to what most people experience.
Consider a simple coin-flip game, which Peters uses to illustrate his point.
Starting with $100, your bankroll increases 50% every time you flip heads. But if the coin lands on tails, you lose 40% of your total. Since you’re just as likely to flip heads as tails, it would appear that you should, on average, come out ahead if you played enough times because your potential payoff each time is greater than your potential loss. In economics jargon, the expected utility is positive, so one might assume that taking the bet is a no-brainer…
…Suppose in the same game, heads came up half the time. Instead of getting fatter, your $100 bankroll would actually be down to $59 after 10 coin flips. It doesn’t matter whether you land on heads the first five times, the last five times or any other combination in between.
The “likeliest” outcome of the 50-50 proposition would still leave you with $41 less in your pocket.
Now, say 10,000 people played 100 times each, without assuming all players land on heads exactly 50% of the time. (This mimics what happens in real life, where outcomes often diverge dramatically from the mean.)
Well, in that case, one lucky gambler would end up with $117 million and accrue more than 70% of the group’s wealth, according to a natural simulation run by Jason Collins, the former head of behavioral economics for PwC in Australia who has written extensively about Peters’ research. The average expected payout, pulled up by a lucky few, would still be a hefty $16,000.
But tellingly, over half the players wind up with less than a dollar.
“For most people, the series of bets is a disaster,” Collins wrote. “It looks good only on average, propped up by the extreme good luck” of a just a handful of players.
3. Company Offering Pandemic Stock Tips Accused of $137M Fraud – Michael Kunzelman
The founders of a company called Raging Bull tout themselves as expert stock traders who teach customers how they, too, can become millionaires…
…Federal regulators say the company operators have defrauded consumers out of more than $137 million over the past three years. And the coronavirus-fueled economic crisis hasn’t tempered their “reckless” efforts to dupe vulnerable investors, government lawyers wrote in a court filing Monday.
The Federal Trade Commission sued RagingBull.com LLC and the company’s co-founders, Jeffrey Bishop and Jason Bond, in Maryland. FTC attorneys are seeking federal court orders freezing company assets, halting the alleged fraud scheme and awarding relief to consumers, including refunds and restitution…
…Ads for Bishop’s services call him a “genius trader who has made millions in the stock market.” The company’s website says Bond is a former gym teacher who taught himself to trade stocks and rid himself of $250,000 in debt.
The company’s marketing materials don’t tell consumers that Bishop and Bond primarily derive their incomes from Raging Bull customers’ subscription fees, not from stock and options trades. The suit says they have incurred “substantial and persistent losses” from their own stock and options trading activities.
In 2017, Raging Bull emailed subscribers that Bond was invited to speak at Harvard Business School and posted video of the speech. But the FTC says the school never invited him. Instead, the agency says Bond paid a third-party promoter to stage the event at the Harvard Faculty Club using a fake Harvard insignia.
4. The Reasonable Optimist – Morgan Housel
Germany’s GDP fell by more than half in 1945, when the end of World War II left a pile of bombed-out buildings and starving citizens.
No one a few years prior was predicting a 50% economic collapse, but it’s what happened.
Then came an equal surprise in the other direction: West Germany’s economy recovered all its lost ground and exceeded its pre-war GDP by 1950…
…One prominent medical study begins: “The incidence of pathological gambling in Parkinson’s patients is significantly greater than in the general population.”
Dozens of studies have confirmed this. Even among people with no history of poor financial decisions, a typical Parkinson’s drug regimen increases the likelihood of compulsive gambling.
It’s a big deal. Doctors have been sued. Casinos have been sued. Pharmaceutical companies have been sued – all linked to compulsive gambling after taking Parkinson’s medications. A Louisiana lawmaker once raided his campaign account to go on a gambling spree. He claimed his addiction started soon after he began treatment for Parkinson’s. “The drugs involved, I’m sure they had something to do with it,” he said.
Other Parkinson’s patients suffer cheaper but similar side effects: superstitious beliefs and delusions.
The suspect drugs – dopamine agonists – help reduce Parkinson’s tremors. But as a nasty side effect they can fool patients into believing the world is giving them concrete signals: that there are patterns to exploit at casinos, that conspiracy theories are real, that a person obviously loves or hates you, or that a full moon portends disaster.
That’s what dopamine does: it reduces skepticism and pushes the signal-to-noise ratio heavily towards signal, offering a rewarding brain buzz for finding patterns in the world whether they’re real or not. It’s gullibility and overconfidence’s best friend.
5. Bill Gates Just Predicted the Pandemic Will Change the World in These 7 Dramatic Ways – Jessica Stillman
Before the pandemic you would probably worry a client might feel slighted if you opted to meet with them virtually rather than in person, but after Covid the calculus of when to go and when to Zoom will be very different, according to Gates.
“Just like World War II brought women into the workforce and a lot of that stayed, this idea of, ‘Do I need to go there physically?’ We’re now allowed to ask that,” he says. That will be true of work meetings, but also of other previously in-person interactions.
“The idea of learning or having a doctor’s appointment or a sales call where it’s just screen-based with something like Zoom or Microsoft Teams will change dramatically,” Gates predicts…
…The knock-on effects of more remote work won’t end there. They’ll also reshape our communities, Gates believes. Downtowns will be less important, bedroom communities will be more important (and we may even rethink the design of our homes).
“In the cities that are very successful, just take Seattle and San Francisco … even for the person who’s well-paid, they’re spending an insane amount of their money on their rent,” he points out. Without the anchor of an office you have to visit every day, staying in such expensive places becomes less appealing, and a bigger house in a smaller community with less traffic much more so.
6. I Started Trading Hot Stocks on Robinhood. Then I Couldn’t Stop. – Jason Zweig
You’ve probably heard of it, even if you aren’t among the 13 million people already using it. Robinhood makes trading stocks, options and cryptocurrencies fun and exciting, and analysts have attributed some of this year’s skyrocketing stock prices to novice Robinhood traders.
My editor and I decided that I should see what the fuss is all about. I started trading on Robinhood on Oct. 27, expensing my $100 investment. Any profits I made would go to charity; any losses would go toward public humiliation. I closed all my positions on Nov. 17…
…Signing up was fun and easy. Three mystery cards emblazoned with question marks popped up. I scrubbed to reveal which free stock I had won, like in a scratch-off lottery game. Confetti showered my phone screen: I’d gotten one free share of Sirius XM Holdings Inc., at $5.76.
The next morning, my phone lit up: “Your free share of SIRI is up 1.05% today. Check on your portfolio now.” Two hours later, Robinhood nudged me again: “Start Trading Today.” An email from Robinhood proclaimed “You’re Ready To Begin Trading!”
Still, I didn’t start for a few days. Then I was swept away.
Whenever a stock’s price changes, Robinhood updates it not just by showing an uptick in green and a downtick in red, but also by spinning the digits up and down like a slot machine. This flux of direction and color quickly becomes hypnotic…
…Robinhood doesn’t think my experience is typical. “We’re proud to have made investing relevant to a new generation and to help first-time investors become long-term investors,” the firm said in a statement.
In the end, after three hectic weeks, I finished with $95.01. I’d lost 5% of what I’d put in. Counting the free stock I’d gotten, I was down 10.2%.
Over the same period, the S&P 500 went up 7%.
The lesson?
You can’t invest without trading, but you can trade without investing. Even the most patient and meticulous buy-and-hold investor has to buy in the first place.
A short-term trader, however, can make money—for a while, by sheer luck—without knowing anything. And thinking you’re investing when all you’re doing is trading is like trying to run a marathon by doing 26 one-mile sprints right after the other.
To invest means, literally, to clothe yourself in an asset. That gives a stock the chance to work for you over the years it may take for a company to prosper. It also minimizes your tax bills—and your stress.
7. How an Energy Startup’s Plan to Disrupt the Power Grid Got Disrupted – Rebecca Davis O’Brien & Katherine Blunt
Bloom Energy Corp. became a hot startup more than a decade ago by promising to upset the utility industry with devices that could power the nation’s buildings. Today, it’s a reminder of how a rapidly changing industry can foil even the most driven entrepreneurs.
Bloom’s founder, KR Sridhar, helped develop fuel cells for NASA before forming the company in 2001. The next year, he packed his technology into three U-Hauls and headed to California.
Fuel cells use chemical reactions to generate electricity, and proponents hold they will go mainstream one day as a clean, reliable energy source. They have defied broad commercialization, but Mr. Sridhar told a powerful story: Bloom would sell the technology in “Bloom Boxes” running on natural gas and providing power more cheaply than the utilities on the electric grid…
…As with many Silicon Valley startups, Bloom presented the kind of bold technological and revenue prospects that persuade investors to look beyond profitability. Mr. Sridhar’s vision: a Bloom Box in every American home. “It’s about seeing the world as what it can be,” he told “60 Minutes” in 2010, “and not what it is.”
The world Mr. Sridhar foresaw hasn’t arrived. His San Jose, Calif., startup hasn’t put fuel cells in homes and instead has a niche clientele among companies willing to pay a premium for a continuous on-site energy source. In 2009, it projected profits by 2010, according to board materials reviewed by The Wall Street Journal; but it has never reported a profit, losing over $3 billion since inception.
Mr. Sridhar’s proposition to disrupt the energy market came as the world was trying to figure out how to wean off fossil fuels. Instead, the energy industry has disrupted Mr. Sridhar’s strategy, turning to wind and solar power, which have lower costs and deliver cleaner energy than Bloom’s cells, which emit carbon dioxide. Grid power is still less expensive than Bloom’s in most places.
Along the way, Bloom ran into supply issues, its cells remained expensive and it fell short of its projections for how many customers it would win, according to former executives and employees, board materials and public filings.
After Bloom’s auditor raised concerns about how the company had reported revenue, it restated results in March for the two years since its $270 million initial public offering, cutting its reported revenue by 15%. Bloom’s growth is sometimes difficult to assess because of its accounting practices.
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 the shares of any companies mentioned. Holdings are subject to change at any time.
