What We’re Reading (Week Ending 20 March 2022) - 20 Mar 2022
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 March 2022):
1. The Tim Ferriss Show Transcripts: Morgan Housel — The Psychology of Money, Picking the Right Game, and the $6 Million Janitor (#576) – Tim Ferriss and Morgan Housel
Morgan Housel: And here’s what’s crazy about this, two weeks before that, maybe it was a week before it, it was a very short period of time before it, he went on CNBC. When it was starting to look like maybe the market was getting toppy and someone asks him like, “Warren, what would you do if the market starts falling?” He laughs and he says, “I’ll tell you what I’m not going to do. I’m not going to sell.” Two weeks later, he sold all of the airline stocks when this virus hit.
Now, you can say that that was actually not a mistake, even though the majority of them have regained almost all of their value. You can say that was not a mistake because the possibility of a complete catastrophic wipe out, particularly in airlines with COVID, was there. So you could say like, “It was actually the right thing to do.”
But even Buffett in this situation, when the world starting falling apart, he panicked and he did not buy anything of significant value with big numbers during that huge market decline. Even for him, I’m saying, it’s much easier said than done. I had my own story about this in the early days of COVID. Yes.
Tim Ferriss: Morgan, can I ask you to bookmark that, don’t lose your place. But I want to interject with a question and that is, do you think that earlier career Buffett would have also sold? And the reason I ask is that I saw an interview with Munger from — I don’t know a year or two ago? Maybe it was actually more like two or three years ago, and he said, “Too many people have their entire life savings and are depending on Berkshire.”
Morgan Housel: Yeah.
2. A History Of Invasions, Wars & Markets – Jamie Catherwood
During the American Revolution, for example, the British government attacked America’s currency (“continentals”) by launching a counterfeiting campaign designed to induce widespread inflation by flooding the market with paper money. Benjamin Franklin complained:
“Paper money was in those times our universal currency. But, it being the instrument with which we combatted our enemies, they resolved to deprive us of its use by depreciating it; and the most effectual means they could contrive was to counterfeit it. The artists they employed performed so well, that immense quantities of these counterfeits, which issued from the British government in New York, were circulated among the inhabitants of all the States, before the fraud was detected.
This operated considerably in depreciating the whole mass, first, by the vast additional quantity, and next by the uncertainty in distinguishing the true from the false; and the depreciation was a loss to all and the ruin of many.”
Fast forwarding to World War II, the United States conducted a similar operation against Japanese forces in places like Burma and the Philippines, in which Japan began issuing new “occupation currencies” after taking over. Working with Australia and Canada, the allied forces started printing counterfeit notes of Japan’s “invasion money” to destabilize the economies. Estimates show that allied forces printed over 70,000 pieces of counterfeit bills as part of this operation…
…This week has underscored just how damaging economic warfare can be. Regardless of whether you think America should send troops to Ukraine, the fact that there is even an argument about whether economic sanctions will be enough demonstrates the affect that sanctions can have. Again, the concept of restricting enemy’s access to financial markets and capital is nothing new. In fact, Russia endured this exact problem during the Bolshevik Revolution a century ago. The Bolshevik’s 1905 Financial Manifesto read:
“There is only one way out – to overthrow the government, to deprive it of its last forces. It is necessary to cut the government off from the last source of its existence: financial revenue. This is necessary not only for the country’s political and economic liberation, but also, more particularly, to restore order in government finances.”
Eventually, in 1917, the Bolshevik leaders intentionally defaulted on its debts after overthrowing the tsarist regime. Bloomberg’s Tracy Alloway discusses this fascinating case study in my latest financial history course. The parallels to today are obvious, with NATO countries agreeing to remove certain Russian banks from the global SWIFT network, and sanction specific Russian leaders. In turn, there are now reports that Russian companies have stated they will not pay out dividends to investors in countries that imposed sanctions on Russia. The economic aspect of this crisis is escalating quickly.
3. Say Less – Josh Brown
Sometime around 400 BC, Socrates was quoted as having said “The only true wisdom is in knowing you know nothing.”
Twenty five centuries later, give or take, Albert Einstein says “The more I learn, the more I realize I don’t know.”
And in between, during the thousands of years from Ancient Greece to mid-20th Century America, this insight has occurred to countless learned men and women. It can take a long time to get there, especially if everyone in your life and profession insists on treating you as though you’re the leading expert in this subject or that. You may well be – but expertise over a single subject matter – say, infectious disease or pandemics or investing in Russia – will not ever be enough to stave off the inevitable curveball thrown at you by the universe.
There’s always something you cannot anticipate. There’s always some wrinkle or nuance that becomes a lot more important than you might have originally thought. Change is constant. You might be in possession of knowledge that is no longer applicable to the current state of the world. And sometimes, no matter how smart you think you are, know matter how highly prized your judgment is to other people, you just f*** things up.
It happens! Experts are not Gods! Experience helps, it does not guarantee anything.
All of this is especially true when it comes to war, the ultimate exercise in unpredictability…
…Sam is among the world’s foremost authorities on investing in Russia and in understanding the situation in Eastern Europe. Remember, he studied international relations and history prior to his multi-decade experience allocating capital there. His knowledge stretches far beyond the bounds of mere stocks and bonds. And he still f***ed it up.
Bloomberg:
Russia was one of the biggest long bets for the hedge fund at the start of February, with 9% of its gross assets invested in the country’s shares, after a research trip to the country in January, the document shows. Sam Vecht, head of the team that manages the fund, told investors he raised the bet further when the invasion began, one of the people said. The fund currently has zero exposure to Russia, after writing down all its positions, two people said.
“We travelled to Russia at the end of January to assess the situation on the ground given our large net long position there,” the fund told clients in a letter, sent before the war began. The letter cited Russia’s large current account surplus, attractive bond returns, cheap stock valuations and undervalued currency as reasons for the bullish bets.
Despite Russian stocks losing the most for the fund in January, exposures were kept and later raised. “We believe the risk reward of being long Russian equities is favorable relative to the risk we see of conflict,” the team said in the letter. The Emerging Frontiers fund has never lost money in a full year since launching in Sept. 2011, according to the letter.
Sam’s long-short Emerging Europe fund hadn’t lost money in a single year going back to 2011. Not easy to do considering the experience most investors have had in emerging market funds these past ten years. Brutal. But this guy did it as good as anyone has ever done it.
And yet, when the big moment arrived, he got it wrong. BlackRock Emerging Europe writes down all of its positions to zero, just a month after adding to them. Based on all of his wisdom, experience, research, connections, contacts, reading, listening, studying, his conclusion was that the risk was overblown and Putin was bluffing.
Nope.
And if he wasn’t in a position to have gotten this right, what on earth could make you believe that anyone else could? Sam missed it but your financial advisor at Raymond James, who works in the strip mall next to PetSmart has a view on when this might all blow over? Do you have any idea how abjectly absurd it is for anyone managing money to have a fully formulated view of what’s to come during this crisis? I hear the theories and gambits and propositions in the financial media and I wince. Is no one capable of embarrassment anymore? Have we all been vaccinated against shame? You’re “putting on a Russia bet here”? Are you kidding me?
4. Of Ben Graham, Investing, and Eternity – Vishal Khandelwal
Marshall Weinberg, one of the students from Graham’s class said that the biggest lesson he drew out of that class was on long-term thinking. Here’s what he said –
One sentence changed my life…Ben Graham opened the course by saying: ‘If you want to make money in Wall Street you must have the proper psychological attitude. No one expresses it better than Spinoza the philosopher.’
When he said that, I nearly jumped out of my course. What? I suddenly look up, and he said, and I remember exactly what he said: ‘Spinoza said you must look at things in the aspect of eternity.’ And that’s what suddenly hooked me on Ben Graham.
Spinoza actually said, “Sub specie aeternitatis,” which translates to “under the aspect of eternity,” or “from the perspective of the eternal.”
Critics of this idea may believe that with such thinking, there is no reason to believe that anything matters. But where Spinoza may be coming from is the idea that, in the larger scheme of things, nothing matters, which leads us to put our pains and struggles – including, as investors – into perspective.
Much of the time, in life and in investing, we would be better off zooming out than zooming in. Rather than being ticker watchers of our own lives, and rather than zooming in and magnifying and thus worrying about the daily volatility in our stocks, we would be better off thinking about our lives and investments as pale dots that are just specks on the canvas of eternity.
5. Lessons from the Past for Today’s Tech Bear Market – Chin Hui Leong
Lesson #2: You don’t have to time the bottom
If you think that Buffett made a poor investment decision in October 2008, you may want to reconsider. For him, it was never about timing the bottom. In his op-ed, Buffett made it clear that he didn’t know where stock prices are headed over the next month or even a year. Not that it mattered.
Between 16 October 2008 and today, the NASDAQ has risen by almost 650%, a satisfying return despite missing the bottom. Individual stocks have done even better. For instance, shares of Amazon (NASDAQ: AMZN) and Apple (NASDAQ: AAPL) are up almost 57-fold and over 42-fold, respectively, over the same period The examples above send a clear message.
You don’t need to buy at the bottom to generate handsome returns…
…Lesson #5: Quality beats timing
Like Buffett, I have never timed any of my stock buys perfectly. Let me share two examples.
In February 2007, I bought shares of Chipotle Mexican Grill (NYSE: CMG), a Mexican restaurant chain. With the benefit of hindsight, my timing was terrible. In October 2007, less than 10 months after I bought the shares, the NASDAQ hit 2,860 points before proceeding to fall to below 1,270 points over the next one and half years. That’s a 56% fall. As it turns out, my timing didn’t matter in the long run. Today, 15 years later, those shares are up over 2,500%, a satisfying return by any account. And that’s not the only instance.
Here’s a different example.
In May 2010, I bought shares of Booking Holdings (NASDAQ: BNKG), more than a year after the stock market had bottomed out in March 2009. By then, the stock market was already up by 37% from its low. Again, the timing of my entry was off by a wide margin. But that didn’t matter in the end. Today, over a decade later, shares have risen by over 10-fold from the day I bought my first shares.
6. iPhone Production Site Locked Down, An Interview With Bill Bishop about China (and Substack) – Ben Thompson and Bill Bishop
That’s actually an interesting way to transition to what’s happening in Ukraine and the way China’s approaching and dealing with it. I was telling some friends when this first happened that because there’s sort of a conflicting messages, some Chinese banks were not forwarding financing for Chinese companies buying energy from Russia, for example, it’s like “Oh, yeah, China’s leaping on board”!, and then meanwhile, you would have diplomats being on the other side giving the talk about this territorial integrity and “NATO’s actually the real problem”, and it’s like territorial integrity seems to only apply to Russia, not to Ukraine. It does seem like that latter message is starting to really carry the day, you haven’t heard any real deviation from that. Is that your read too? They’re trying to straddle this line of not out and out endorsing Russia’s action, but at the same time, they also believe that big countries should be able to take territories that they believe are theirs, and that US encroachment is the real problem.
BB: That’s right. China is very clearly leaning towards the Russian side. You see it in the way they talk about the roots of the crisis. You see it in the way they don’t describe it as an invasion, they use the Russian term, I think is like “special military operation”. They are coordinating and amplifying Russian disinformation. The big thing in the last few days has been the biolabs in Ukraine, and this is all before the news today. This was leaked out of the White House, they were spreading it around DC yesterday, to multiple outlets and people this idea that the US has intelligence that the Russians have asked Beijing for military aid and China hasn’t said yes, so that’s not necessarily an indication of Beijing leaning to one side or the other. But clearly, governments in Europe, NATO, there is not a lot of doubt where China really is leaning, and you have to go back to the February 4th statement when Putin went to Beijing for the Olympics opening ceremony and before that in a summit with Xi Jinping and they put out this 5,000+ word document that was effectively a manifesto for a new international order that was basically a Sino-Russian-led order. I don’t know that Xi Jinping knew and I doubt he would have approved or not approved of what Putin was doing, but it’s not a coincidence that within a matter of weeks Putin went in and Beijing has not really done anything to criticize the Russians.
What do you think has been China’s view of the response of the West? Because I think even those of us in the West have been surprised and struck by the vigor of that response. Is that a similar sense in China too, where they expected the West to roll over and it be like a similar Crimea sort of situation or in China’s case, a South China Sea situation, and the degree of fervor in response has been a shock to them? Or is it like “The West is raising a big hissyfit and it’s not going to make any difference”?
BB: No, I think it’s been a bit of a shock, I also think it’s been useful to them.
First on the shock part, I do think that they’re especially surprised by the German and the EU reaction, not so much by the US reaction. And certainly, I think China in that February 4th statement with Russia, they called out NATO, China does not like NATO, and I think it is disturbing or distressing for them to see what looks like a strengthening NATO, as opposed to one that was kind of almost destroyed under the previous US president who might have pulled out.
From a utility perspective though, seeing this set of sanctions is incredibly useful to Beijing, as it has been working for several years on how to strengthen its financial system to be able to deal with what they expect to be US-led financial war against China at some point in the future. Xi Jinping over the last few years has been talking up self-sufficiency in all sorts of areas. Last year, he made a big point of talking up the importance of building up strategic reserves, and they’ve built up strategic reserves for a long time, but this signaled a much more concerted push and a much larger number of sectors. There was a joke going on from some Russian foreign policy guy about “The great thing for Beijing about Russia and the Soviet Union is they get to look at their big brother up north and learn from all the mistakes they make” because, obviously, Xi Jinping and the Communist party made a big deal about learning from why do the USSR fall and how do we avoid that here and the people’s Republic of China. So, there is a lot of value, I think, for Beijing in watching how these sanctions unfold, seeing what the US and EU can do, but also seeing who’s not participating. India’s not participating, a lot of the Middle East, the global South — it’s not the whole world. As much as here in say, DC or Brussels, maybe people talk about everyone’s united, in fact, not really.
When the UN vote happened, I saw a tweet and someone was like, “Oh, Russia stomped at the UN”. And I’m like, well, no, actually, if you go through and calculate by population, this is pretty close to 50/50. Particularly, since a lot of the largest countries in the world abstained.
I guess this is really the critical question about what China is going to do in response. To what extent are they really going to lean into building an alternative to the US dollar, US tech-dominated world? To what extent is that going to be a super explicit policy? Is this going to be “We’re going to do stuff on the edges” or is this going to really be a hardcore focus going forward? And how does that play into the Russia thing? Are they going to sell stuff to Russia? Are they going to allow a flourishing grey market that they can sort of pretend doesn’t exist but does? I mean, how do you see them responding to this in the long run?
BB: So, there are a few questions there. First, I think China already wants to build a tech ecosystem that is as independent as possible from US domination and risks in the US. I mean, that was the lesson they learned from a little bit from ZTE, but really from Huawei and the way the US government effectively destroyed that company. On the financial side, China has also been trying for a long time to move away from the dollar-based global financial system. It isn’t happening and it’s been far too slow and far too hard to do.
Are they really actually willing to go all the way to be what would be necessary to be a global reserve currency? I guess the question I have about China is they always tend to default towards what’s best for China, and there’s some extent where if you want to be a global hegemon, you have to do things that benefit the hegemon, the overall broadly, even if there’s some angles that hurt you specifically. The US, in some aspects they’re hurt by the deficits that they run, but running the deficits is critical to the dollar being dominant. Is China willing to actually go all the way?
BB: Not yet. A great question, it’s one of the great points. It’s one of the reasons why it hasn’t worked. You can put money in China, but you can’t get it out. There are a lot of reasons why most people or most countries, most big investors, don’t want to put a lot of their cash into Renminbi.
This is not something that happens overnight, but what’s happening though, and especially, under Xi Jinping and especially given the relationship with the US over the last several years, is all of these things have taken on a lot more urgency inside China and inside the Chinese leadership, and I think the Ukraine crisis and the sanctions against Russia will only add to that kind of urgency. China has to look at “If there’s certain things we want to do that involve taking territories that we see as key to our national rejuvenation, how will the rest of the world react and how do we harden our system to be able to withstand those shocks?”
To one of your earlier questions though, I think actually that the big Chinese banks, I would be very surprised if they flout the sanctions, because they have too much to lose globally. Sanctions on North Korea, the big banks have tended to actually go along because, again, they have too much to lose. The issue’s going to be in some of the smaller banks, some of the banks that are not as worried about losing access to the global financial system. And certainly, there’s going to be a lot of people trying to make money on the side, on arbitrage trades, where even if there’s some big deal where some state-owned company buys a bunch of oil from Russia at a discount, I can pretty much guarantee you that they’re going to be people who then take some of the oil and then try and probably resell it overseas for the markup. This actually opens up a whole bunch of business opportunities from the Chinese side to deal with these sanctions, because Russia does not have a lot of leverage or bargaining power right now when they’re selling all the things that China wants.
7. SONY, Season 10, Episode 3 – Benjamin Gilbert and David Rosenthal
Ben: And we are your hosts. Listeners, today we are telling the story of the company that Steve Jobs idolized and modeled Apple computer after, the Sony Corporation.
David: Literally modeled himself after. You know the story of the black turtlenecks and the Sony connection.
Ben: Enlighten us.
David: The story goes that Steve idolized Sony whenever he visited and saw that there was a uniform that Sony employees had. He was like, that’s a great idea. I want Apple to have a uniform. Where did you get that uniform? He bought a pack, he made a proposal to Apple, and people were like NFW.
Ben: Didn’t Sony employees have uniforms because the clothing was scarce after World War II?
David: Yeah, I think that was part of the origin. Steve decided, okay, if Apple can’t have a uniform, I’m going to have a uniform. And so he went to Issei Miyazaki, the famous Japanese designer who had made the Sony uniform, and got him to make him a hundred black turtlenecks…
…David: Interesting. Of course, Sony also does pretty well in the cassette industry with what you’re referring to, the Walkman. This is another thing I didn’t realize. The Walkman came out pretty concurrently with the rise of CDs, but as you were saying, it’s not like you could take a big honk in-home CD player on the road.
Ben: No. CDs were not portable for a long time. On the EA episode where we interviewed Trip Hawkins, we talked about how famously, Madden was Trip’s folly. Of course, he was vindicated and proven very right even though it cost a lot of money, took a lot of time, and ended up being an enormously powerful franchise.
That is the story with the Walkman. This is Morita’s folly. He single-handedly thought that, hey, we’ve got this cassette player, but really, it’s a cassette recorder and it doesn’t have speakers. It’s a little chunky, but people can take it out in the world, record stuff, and listen to it on the speakers. I think there’s a market for people who want a slimmer, sexier version of that where we throw away the recording capabilities, we get that right out, stop taking up space with the speaker, and attach headphones.
All of the marketing people at Sony are like, no, there’s no market for that. No one wants to walk around outside in their own little world listening to music and headphones. You concurrently have the engineering saying, but we need lots of power to produce all the sound. It’s not really technically viable because we need to produce all this audio so that it goes out into the world.
You have Morita going, no, it’s going to be low power because we’re going to make these amazing low-power headphones. We only need to produce a little bit of sound because it’s going to be right next to people’s ears.
This was a consumer behavior that did not exist in the world that Akio Morita just said, everybody, trust me, let’s invest in this. It completely changed human history forever and the way that humans walk around out in the world.
David: It’s amazing that it was Morita who did this. This is the kind of stuff that Ibuka usually does. The sentiment on the board and in the company against Morita—Morita at this point is that the CEO of Sony—was so strong that he had to make a promise that if the initial 30,000-unit production run didn’t sell by the end of the year, then he would resign from Sony.
Ben: I didn’t realize that.
David: Yeah. He had to literally lay his cards on the table.
Ben: The way Morita phrases it in the book is this quote that is “Steve Jobs before Steve Jobs.” I’m going to make that point 11 times in this episode because it’s not that Steve Jobs is a rip-off of Akio Morita. It’s that he so badly wanted to be Akio Morita. He was such a better marketer in his time of a lot of the concepts that a lot of us grasp on to Steve’s version of them, even though a lot of the concepts are actually Akio’s version of them.
There’s this one quote in particular, which is, “I do not believe any amount of market research could have told us that the Sony Walkman would be successful, not to say a sensational hit, that would spawn many imitators. And yet the Sony Walkman has literally changed the habits of millions of people around the world.” He said this in 1986. Steve Jobs would say things like this, “Apple doesn’t do focus groups.” “You have to invent something.” “People can’t tell you what they want.” These are all Morita-isms.
David: I know. It’s so amazing. Everybody really should go read the book, Made in Japan. It’s very, very good.
Ben: John Sculley, between Steve and Steve CEO at Apple who famously Steve convinced to come over from Pepsi so he didn’t have to sell sugar water for the rest of his life. His quote about Steve is that he was a freak about Sony and that it was nearly fetishistic. In fact, he even had a collection of Sony letterhead and marketing materials.
He talks a lot about how the Mac factory was designed to emulate the Sony factory, that super crisp, pristine look, the idea that the factories were spotless. John Sculley says this made a huge impression on him. While Apple didn’t have colored uniforms, it was every bit as elegant as the early Sony factories that we saw.
He goes on to say, which I thought was really interesting, Steve didn’t want to be Microsoft. He didn’t want to be IBM. He wanted to be Sony. Right around this time, Sculley and Steve even met with Akio Morita. He says, “I remember Morita gave Steve and me one of the first Sony Walkmans. None of us had ever seen anything like it before because there had never been a product like that.” This is 25 years ago. “Steve was fascinated by it. The first thing he did was take it apart and look at every single part, how the fit and finish was well-done, how it was built.”
This whole thing comes totally full circle when Morita eventually passes away. Steve Jobs in ’99 is giving the Macworld keynote. He starts the keynote by putting up a picture of Akio Morita, who they used in the Think Different campaign, and says—and this is a quote from Steve on stage—”While he was leading Sony, they invented the whole consumer electronics marketplace, the transistor radio, Trinitron television, first consumer VCR, Walkman audio CD.”
Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. Of all the companies mentioned, we currently have a vested interest in Amazon, Apple, and Chipotle Mexican Grill. Holdings are subject to change at any time.
