What We’re Reading (Week Ending 21 June 2020) - 21 Jun 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 21 June 2020):
1. The Age of We Need Each Other – Charles Eisenstein
It was a painful yet beautiful clarifying experience that asked me, “Why are you doing this work? Is it because you hope to become a celebrated intellectual? Or do you really care about serving the healing of the world?” The experience of failure revealed my secret hopes and motivations.
I had to admit there was some of both motivations, self and service. OK, well, a lot of both. I realized I had to let go of the first motive, or it would occlude the second. Around that time I had a vision of a spiritual being that came to me and said, “Charles, is it really your wish that the work you do fulfill its potential and exercise its right role in the evolution of all things?”
“Yes,” I said, “that is my wish.”
“OK then,” said the being. “I can make that happen, but you will have to pay a price. The price is that you will never be recognized for your role. The story you are speaking will change the world, but you will never get credit for it. You will never get wealth, fame, or prestige. Do you agree to pay that price?”
I tried to worm my way out of it, but the being was unyielding. If it was going to be either-or, how could I live with myself knowing in my heart of hearts I’d betrayed my purpose? So I consented to its offer.
2. John Collison – Growing the Internet Economy – [Invest Like the Best, EP.178] – Patrick O’Shaughnessy and John Collison
Yeah, again, just like people kind of had a hard time believing that we weren’t done with the payment systems that we had at the time. Similarly, I think people don’t really intuit this. I mean, if you look at the raw numbers, the internet economy is a very small fraction of the overall economy depending on who you believe, five, 6%, something like that, but the vast majority of internet, of the economic activity is not internet enabled. I think it’s fairly clear to all of us that that is going to flip. We’re going to end up with actually a majority that’s internet enabled, but that means we’re really at a shockingly early point in that Sigmoid growth curve.
The thing that gets me excited, and one of the things that we spent a lot of time thinking about at Stripe and trying to drive is what the second order effects are of that shift, and I think people spend lots of time thinking about first order effects of technology changes and so if you were an analyst looking at the growth of computers in the fifties and sixties, you might be wondering what are the effects going to be of computers getting faster? Presumably you’d say, well, banks are going to be able to run their calculations faster and airlines are going to be able to handle even more routes in the route calculation computers.
You’d look as what computers were already used for and just kind of project that forward more and faster. You would never forecast video games. I mean, to someone in the fifties, it would seem absurd, the notion that you could have so much excess computing power and it’s so cheap that we’re just going to use this for this wildly wasteful rendering of triangles. I don’t know if you saw the Unreal Five demo, but imagine showing that to somebody in the 1950s. It really, I think their brain might have exploded, or similarly with smartphones…
… I mean, I still find technology some of the most interesting, one of the most interesting places to look, because what I find so exciting about technology is from a business point of view, it’s positive-sum, right? So many other businesses are essentially, I mean, they learn not to talk about them this way, but there’s all these like business euphemisms for the fact that, there’s a fixed amount of supply in this industry and we’re getting really good price discipline. That’s one of these like investor-y euphemisms and for not competing too much on price or revenue optimization and things like that, as you look at something like real estate, in many kinds of parts of the world, barriers to building mean that part of what makes it a good business is the fact that there’s a fixed number of assets that can be monetized.
3. We Can Protect the Economy From Pandemics. Why Didn’t We? – Evan Ratliff
Kraut, however, had an even more ambitious idea in mind. What if, instead of simply hedging its own life insurance business in the case of a pandemic, Munich Re could use the same concept to insure other businesses against them? Business interruption insurance, the policies that protect companies against income losses from disasters like fires or hurricanes, often explicitly excluded disease. (And when it didn’t, insurers could still use the ambiguity to deny claims.) The risk was thought to be too large, too unpredictable to quantify. But Munich Re had already proven it could cover its own life insurance risk in pandemics, and now it had a partner in Metabiota that specialized in seemingly unpredictable outbreaks. What if they could create and sell a business interruption insurance policy that covered epidemics, starting with acutely vulnerable industries like travel and hospitality? They could then pass on the payout risk from those policies to the same types of investors who had bought their life risk. “There is a bit of financial alchemy to the whole thing,” Wolfe told me later. “You really are creating something from nothing.”
At the same time, Wolfe had been working to operate Metabiota more like a technology company. In 2015, he hired Nita Madhav, an epidemiologist who’d spent 10 years modeling catastrophes at a company called AIR Worldwide, one of a handful of firms the insurance industry relies on to compute extreme risks. (Munich Re, in fact, had worked with AIR epidemiological models in its life insurance calculations.) Madhav’s mandate at Metabiota was to build the industry’s most comprehensive pandemic model. Her team, which eventually grew to include data scientists, epidemiologists, programmers, actuaries, and social scientists, began by painstakingly gathering historical data on thousands of major disease outbreaks dating back to the 1918 flu. Her colleagues had recently created what they called the Epidemic Preparedness Index, an assessment of 188 countries’ capacity to respond to outbreaks. Together, the two efforts informed an infectious disease model and software platform. A user could begin with a set of parameters around a hypothetical virus—its geographic origin point, how easily it was transmitted, its virulence—and then run scenarios exploring how the disease spread around the world. The goal was a model that could, for example, help a manufacturer understand how a disease might impact its supply chain or a drug company plan for how a treatment would need to be distributed.
4. The Observer Effect: Marc Andreessen– Sriram Krishan
Well, I will pick three! It’s kind of the holy trinity of our modern dilemma. It’s health care, it’s education and it’s housing. It’s the big three. So basically, what’s happened is the industries in which we build like crazy, they have crashing prices. And so we build TVs like crazy, we build cars like crazy, we make food like crazy. The price on all that stuff has really fallen dramatically over the last 20 years which is an incredibly good thing for ordinary people. Falling prices are really, really good for people because you can buy more for every dollar.
There are two ways here: you get paid more or everything you buy is cheaper. And people always really underestimate, I think, the benefits of everything getting cheaper. And so the stuff that we actually build is getting cheaper all the time. And that’s fantastic. The stuff we *don’t* build, and very specifically, we don’t have housing, we’re not building schools, and we’re not building anything close to the health care system that we should have – for those things the prices just are skyrocketing. That’s where you get this zero sum politics.I think people have a very keen level of awareness. They can’t put it into formal economic terms but they have a keen awareness of the markers of a modern western lifestyle. It’s things like – I want to be able to own a house, I want to live in a nice neighborhood and I want to be able to send my kids to a really good school and I want to have really good health care.
And those are the three things where the price levels are increasingly out of reach. However we built those systems in the past, it’s failing us. And so we need to rethink. Quite literally, it’s like, okay, where are the schools? Where are the hospitals? Where are the houses?
5. The Resilience Of Markets – Jamie Catherwood
Wall Street and American markets have endured the tests of many challenging episodes in history. The Buttonwood Agreement was signed in 1792, and since then the United States of America has experienced its fair share of wars, recessions, political upheaval, Presidential assassinations, natural disasters, disease, terrorist attacks, and more. Despite all these adversities, however, the institution of Wall Street and US markets have held firm as a bastion of American finance. Take a moment to really consider this feat, as it’s truly remarkable. Much has changed in the centuries since the Buttonwood Agreement was signed by 24 stockbrokers outside of 68 Wall Street on May 17th, 1792. Yet, much has stayed the same. If you read any archival document from the years between 1792 and 2020, it is quickly evident that investors have always found reasons to fear the continued function of American markets due to some new policy or action by an institution.
However, New York is still considered the global capital of financial markets, and Wall Street continues to be revered by investors worldwide. So, this week’s Sunday Reads will focus on the first decades of financial markets in the United States, and the groundwork that our predecessors laid for investors today.
6. Five Tips for Recovering From Covid-19 Panic Selling – Barry Ritholtz
No. 1. Recognize what happened: What motivated you to sell? Was it something you heard on the news? An emotional impulse? Did you give any thought to how selling fit in your broader investment strategy? Or was it merely an itch that had to be scratched?
Figuring out what goes into your own decision-making is the key to reducing mistakes. Analyze your process: Determine what factors should have an impact when making buy and sell decisions. Then, face up to what actually drives those decisions. If there is a mismatch between those two, recognize it and make adjustments.
If you don’t know how you got lost, what is to stop you from getting lost the next time this happens? Remember, there always is a next time.
7. Same As It Ever Was – Morgan Housel
The nuclear bomb was developed to end World War II. Within a decade, America and the Soviets had bombs capable of ending the world – all of it.
But there was a weird silver lining to how deadly these bombs were: countries were unlikely to use them in battle because they raised the stakes so high. Wipe out an enemy’s capital city and they’ll do the same to you 60 seconds later – so why bother? John F. Kennedy said neither country wanted “a war that would leave not one Rome intact but two Carthages destroyed.”
By 1960 we got around this predicament by going the other way. We built smaller, less deadly nuclear bombs. One, called Davy Crocket, was 650 times less powerful than the bomb dropped on Hiroshima, and could be fired by one person like a bazooka. We built nuclear landmines that could fit in a backpack, with a warhead the size of a shoebox.
These tiny nukes felt more responsible, less risky. We could use them without ending the world.
But they backfired.
Small nuclear bombs were more likely to actually be used in combat. That was their whole purpose. They lowered the bar of justified use.
It changed the game, all for the worse.
