What We’re Reading (Week Ending 20 December 2020) - 20 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 20 December 2020):
1. Last Man Standing – Morgan Housel
Let me propose the equivalent for individual investors. It might push you away trying to earn the highest returns because returns, like margins, don’t matter; generating wealth does.
Everything worthwhile in investing comes from compounding. Compounding is the whole secret sauce, the rocket fuel, that creates fortunes.
And compounding is just returns leveraged with time.
Earning a 20% return in one year is neat. Doing it for three years is cool. Earning 20% per year for 30 years creates something so extraordinary it’s hard to fathom. Time is the investing factor that separates, “Hey, nice work,” from “Wait, what? Are you serious?”
The time component of compounding is why 99% of Warren Buffett’s net worth came after his 50th birthday, and 97% came after he turned 65.
Yes, he’s a good investor.
But a lot of people are good investors.
Buffett’s secret is that he’s been a good investor for 80 years. His secret is time. Most investing secrets are.
Once you accept that compounding is where the magic happens, and realize how critical time is to compounding, the most important question to answer as an investor is not, “How can I earn the highest returns?” It’s, “What are the best returns I can sustain for the longest period of time?”
That’s how you maximize wealth.
2. The Essex Boys: How Nine Traders Hit a Gusher With Negative Oil – Liam Vaughan, Kit Chellel, and Benjamin Bain
Among the many previously unthinkable moments of 2020, one of the strangest occurred on April 20, when the price of crude oil fell below zero. West Texas Intermediate futures, the most popular instrument used to trade the commodity, had started the day at $18 a barrel. That was already low, but prices kept tumbling until, at 2:08 p.m. New York time, they went negative.
Amazingly, that meant anyone selling oil had to pay someone else to take it off their hands. Then the crude market collapsed completely, falling almost $40 in 20 minutes, to close at –$38. It was the lowest price for oil in the 138-year history of the New York Mercantile Exchange—and in all likelihood the lowest price in the millennia since humans first began burning the stuff for heat and light…
…U.S. authorities and investigators from Nymex trawled through trading data for insights into who exactly was driving the action on April 20. According to people familiar with their thinking, they were shocked to discover that the firm that appeared to have had the biggest impact on prices that afternoon wasn’t a Wall Street bank or a big oil company, but a tiny outfit called Vega Capital London Ltd. A group of nine independent traders affiliated with Vega and operating out of their homes in Essex, the county just northeast of London, had made $660 million among them in just a few hours. Now the authorities must decide whether anyone at Vega breached market rules by joining forces to push down prices—or if they simply pulled off one of the greatest trades in history. A lawyer for a number of the Vega traders vehemently denies wrongdoing by his clients and says they each traded based on “blaring” market signals…
…The pits were collegial and freewheeling, a place of ethical and regulatory gray areas. If a local overheard news about a big trade that some oil major had in the works, he might try to jump ahead of it, a prohibited but pervasive practice known as front-running. The cavernous trading floor had cameras, but there were blind spots where people went to share information. A former executive struggles to remember a single meeting of the exchange’s compliance committee.
One trick involved an instrument called Trade at Settlement, or TAS, an agreement to buy or sell a future at wherever the price ends up at the closing bell. The contract was aimed at investment funds, whose mandate it was to track the price of oil over the long term. But some traders figured out that they could take the other side of these TAS trades, then work together at the end of the day to push the closing price as low as possible so they could pocket a profit. The practice, while officially against the rules, was so common and effective it had a nickname: “Grab a Grand.”
3. Terry Smith talks big tech, fraud and ESG – Dave Baxter
[Question to Terry Smith] On Facebook (US:FB), what are your thoughts on the risks of it being broken up or more heavily regulated? More generally, is the quality of Facebook’s service deteriorating for advertisers? We ask this in light of this year’s hate speech ad boycott and recent news that the company overestimated the reach of some ad campaigns.
[Terry Smith’s response] Regulation doesn’t concern me much. Increased regulation tends to cement incumbents in place as newcomers find it hard to comply. The tobacco industry flourished for decades with tighter regulation.
I am not saying a break-up couldn’t occur, but I believe the last break-up of a company in the US forced by antitrust action was AT&T in 1984. It produced the so called Baby Bells (the offspring of ‘Ma Bell’-AT&T), which by 2018 had merged to form…AT&T. Also as an investor it’s by no means clear that a break up into its constituent parts would destroy value.
Again let’s look at the facts. The hate speech ad boycott was a non-event. Most advertisers did not participate, those who did only ‘paused’ their advertising rather than cancelling it indefinitely, and some of those who said they would boycott Facebook were, shall we say, misleading. Moreover, it is quite likely that other advertisers took advantage of the absence of their virtue signalling competitors to up their advertising spend. In its last quarter, Facebook’s revenue was up 22 per cent and ad impressions were up 35 per cent. It’s important to understand that Facebook’s advertising is more about enabling small businesses to advertise effectively than it is about the large corporate advertisers who were the ones who publicly announced their boycott, which was temporary if it happened at all. Facebook’s top 100 advertisers only account for 16 per cent of Facebook’s revenues. I regard the recent news about Facebook overestimating the time viewers spent watching videos in the same light. Try to bear in mind when you read news about Facebook that most of the conventional media loathes and fears it in equal proportions…
…[Question to Terry Smith] Nowadays how widespread (or not) is creative accounting, and outright fraud, compared with when you wrote Accounting for Growth?
[Terry Smith’s response] I think Wirecard answers that in a single word.
4. The Daughter of a Slave Who Did the Unthinkable: Build a Bank – Jason Zweig
If Ms. Fraser has finally cracked the glass ceiling, it was Maggie Lena Walker who first battered down the walls.
The daughter of a former slave, Walker became the first Black woman ever to head a U.S. bank when she founded the St. Luke Penny Savings Bank in Richmond, Va., in 1903. Her success came from doing what great entrepreneurs do: Walker zeroed in on an underserved market and focused her prodigious energy on meeting its needs. But her story is all the more remarkable because it played out on a stage of such intense bigotry.
Her mother, Elizabeth Draper, was an illiterate teenager when Walker was born. Her father was a white Confederate soldier who, historians believe, raped Elizabeth. When Walker finished high school, her father, who still lived nearby, sent her a dress as a graduation gift. Her mother burned it.
As a girl, Walker helped her mother work as a washerwoman and soon joined her as a member of the Independent Order of St. Luke. This was a mutual-benefit society originally set up by a free woman in Baltimore that provided insurance, educational funding and other financial services to Black people after the Civil War.
After graduating high school and working three years as a teacher, Walker quickly advanced at St. Luke. She became the organization’s head in 1899, when it was on the brink of failure. Under her leadership, it blossomed to 100,000 members across 24 states.
Having grown up in a network of mothers who had to manage family finances to the penny, Walker saw the economic independence of Black women as an ethical imperative.
“Who is so helpless as the Negro woman?” she asked in a speech in 1901. “Who is so circumscribed and hemmed in, in the race of life, in the struggle for bread, meat and clothing, as the Negro woman?”
She called for St. Luke to create a department store and a newspaper—but, above all, a bank. That, she believed, was the way to uplift Black women. “Let us put our moneys together; let us use our moneys; let us put our money out…and reap the benefit ourselves,” she proclaimed. “Let us have a bank that will take the nickels and turn them into dollars.”
5. Penis Thieves & Asset Bubbles – Ben Carlson
In 2005, a man was sitting on a bus in Nigeria minding his own business when all of the sudden he let out an ear-piercing scream.
Wasiu Karimu began shouting that his genitalia had magically disappeared into his own body.
He immediately grabbed the woman seated next to him and demanded that she restore his stolen manhood at once.
Karimu continued shouting at the woman as they got off the bus which caused a commotion. The police eventually brought them down to the station to settle their dispute.
When asked to prove his claim of penis theft, the man told the police commissioner his organ had gradually returned to its rightful place.
This may sound like a case of a mentally unstable person making an outlandish claim. But thousands of people in places like Nigeria, Singapore and parts of China have experienced the phenomenon known in medical literature as koro or magical penis theft.
It’s a situation where people, mostly men, have the feeling their genitals are being sucked into their bodies. When doctors examine these patients, the men often look down and claim it had magically reappeared.
Magic penis theft is what is referred to as a culture-bound syndrome which are diseases that are more prevalent in certain societies or cultures…
…I believe culture-bound syndrome exists in the markets as well.
One of the simplest explanations offered for the continued strength of the U.S. stock market in recent years is generationally low interest rates. If there are no safe yield alternatives, investors are forced to go out further on the risk curve.
And this makes sense in theory until you realize the fact that rates are even lower in places like Europe and Japan yet they haven’t seen the same level of euphoria in their markets.
Yields for 10 year government bonds in Japan have been under 3% since 1996 and less than 1% since 2010:
Yet there hasn’t been a whiff of speculation in Japanese markets in that time.
6. Twitter thread on quotes from Charlie Munger from a recent interview – Tren Griffin
2/ “All successful investment involves trying to get into something where it’s worth more than you’re paying. That’s what successful investment is. There are a lot of different ways to find something worth more than you’re paying. You can do what Sequoia does [e.g, in VC].”
3/ “Good investing requires a weird combination of patience and aggression and not many people have it. It also requires a big amount of self-awareness about how much you know and how much you don’t know. You have to know the edge of your own competency.”
4/ “A lot of brilliant people are no good knowing the edge of their own competency. They think they’re way smarter than they are. Of course, that’s dangerous and causes trouble.” Charlie Munger…
…6/ “I don’t think we want the whole world trying to get rich by outsmarting the rest of the world. But that’s what’s happened. There’s been frenzies of speculation and so on. It’s been very interesting, but it’s not been all good.” ..
…20/ “Early innovation by Giannini’s Bank of America helped immigrants by giving them loans. He kind of knew which ones were good for it and which ones weren’t. I think that was all for the good. That brought banking to a lot of people who deserved it.”
21/ “Bank of America helped the economy and helped everybody. Once banking got so they wanted to have soft hands and make zillions as speculators, those developments haven’t been a plus. In other words, I like banking when they’re trying to avoid losses prudently.”
7. How to Revive the Economy, and When to Worry About All That Debt – Corinne Purtill
Maya MacGuineas is head of an organization called Campaign to Fix the Debt, which is dedicated to the thesis that “America’s growing national debt profoundly threatens our economic future.” But even she says that now is not the time to worry about borrowing.
“Responsible fiscal policy is borrowing like crazy right now,” Ms. MacGuineas said. There will come a time, she said, to re-evaluate the trade-offs. In the meantime, it’s time to spend, but be aware that a pivot will be necessary at some point:
“No matter which party is in power, it’s nice to be able to enact your agenda without having to pay for it. We saw that in the four years leading up to this downturn, and I’m concerned there will be lots of voices saying we shouldn’t pay for things down the road. But I think responsible fiscal policy is borrowing like crazy right now. Things that are targeted, things that are smart, to goose the economy. But once we stabilize the economy, be willing to bring that debt back down so it’s not growing faster than the economy.”
The urgency of economic aid can’t be an excuse for programs that worsen inequality.
Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. We currently have a vested interest in the shares of Facebook. Holdings are subject to change at any time.
