What We’re Reading (Week Ending 22 November 2020) - 22 Nov 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 22 November 2020):
1. The Magic of Mushrooms – Packy McCormick
Because of long-held negative or recreational associations, most people are unaware that psychedelics are the most promising treatment for a wide range of mental health issues — from depression to alcoholism to anorexia — that we’ve ever seen.
The psychedelic renaissance couldn’t have come at a better time. The world desperately needs innovative solutions to mental health disorders. The worldwide numbers are staggering…
…The total direct and indirect costs of the mental health epidemic are expected to reach $6 trillion by 2030, up from $2.5 trillion in 2010, according to the World Economic Forum. The Lancet Commission estimates that number to be as high as $16 trillion when you include the loss of productivity, and spending on social welfare, education, and law and order. Despite the huge need, the last real innovation in the fight against mental illness was the release of Prozac in 1988.
After fifty years in the dark, though, psychedelics are once again getting the chance to shine. Led by public figures like Michael Pollan, Tim Ferriss, and even Joe Rogan, and leading institutions like Johns Hopkins, NYU, Berkeley, and Imperial College London, therapeutic psychedelics are going mainstream again:
2. We Have No Idea What Happens Next – Morgan Housel
There’s a theory in evolutionary biology called Fisher’s Fundamental Theorem of Natural Selection.
It’s the idea that variance equals strength, because the more diverse a population is the more chances it has to come up with new traits that can be selected for. No one can know what traits will be useful; that’s not how evolution works. But if you create a lot of traits, the useful one – whatever it is – will be in there somewhere.
The same thing applies to the diversity of events a society faces.
It still feels hard, if not reckless, to imagine the upside of Covid-19. We may not have even seen the worst of it yet.
But everyone in the world has suddenly been exposed to problems they had never seen before. They’ve become aware of new risks. New constraints in how they live, work, and play. A whole new set of perspectives on how to keep your family safe, run a business, and use technology.
Some of the changes that will bring are obvious. We’re already better and faster at creating vaccines than we were a year ago. Doctors are more knowledgeable. Remote work is more efficient. Travel is less necessary.
Then there’s a second tier of change: perhaps using our new knowledge of mRNA vaccines to treat other diseases, like cancer. It seems likely, but who knows.
Then there’s the big unknown: the crazy, disconnected, counterintuitive change set in motion this year that we’ll only be able to piece together in hindsight. The kinds of things that only happen when seven billion people have their lives thrown upside down, experience a bunch of stuff they’d never imagined, and are either motivated or forced to do something completely different than they had considered in January.
3. What is the Future of Fiscal Policy Now That the Election is Over? – Nathan Tankus
Worse still, the third wave of Coronavirus is in full swing. New York City schools could be shut as early as Monday, and indoor dining should probably already be shut. This second wave of shutdowns will be more economically harmful than the first wave because any savings they had were exhausted by the first wave and it is most likely that most affected businesses have already exhausted their access to credit (and perhaps even their willingness to take on more debt).
It’s likely that the second wave of shutdowns will accelerate permanent job losses while the temporary job losses generate renewed drops in demand. In other words, the economic situation has still been deteriorating and it will likely get hammered at a time where fiscal support is, at best, months away.
4. Extra Buzz #19: Ant Group: The Biggest IPO That Wasn’t – Rui Ma
And now we come to the biggest riddle of this all. I hope I’ve given you enough context on why the regulators wanted to step in, and why the citizens were in support.
But that still doesn’t explain why the IPO was halted literally two days before the listing. As Reuters reported, there are folks with knowledge of the deal who say that it was due to outrage at Jack Ma’s comments. The regulators were personally offended and retaliated because they were thin-skinned. I can believe that. Jack wasn’t kind. More importantly, as I quoted in my article for Tortoise, Western experts thought this was an indication of the government’s capriciousness and unreliability. China doesn’t know what it’s doing, as one oped columnist wrote, in the provocatively titled “Ant’s Suspended IPO Turns Jack Ma Into Ray Dalio’s Worst Nightmare.” (Ray Dalio, by the way, has since responded .. nope.)
But was that how it was actually perceived on the ground in China and by those seeking to do business in China? I turned to the many China-focused investors I’ve now come to know as part of doing Tech Buzz, as well as some old friends from venture, and asked them if they felt the same. Nope. Hmmm, interesting, I thought. How about Chinese entrepreneurs and engineers? Normal everyday folk? Nope.
No matter who I asked, no one thought it was to upstage Jack Ma specifically, and everyone thought this was a good move. Many thought his speech was made out of desperation, a last ditch attempt to sway public opinion which failed. No one gets to Jack’s level in China without having some major cunning, they explained. The regulators would be people he knew well, not ones he was still feeling out. The hotheadedness isn’t indiscriminate … it was strategic. If it put him in the line of fire, that was because he knew which buttons he was pressing. A few even believed this was a stunt, fully coordinated* by Jack and the regulators in order to legitimize Ant while crushing the rest of industry. (That seems too “5D chess” for me.)
Either way, it didn’t matter, because there was every reason the government should step in, to stop the greed. On the part of Ant, and on the part of everyone in that microlending business. “Thank goodness the government did so before the public bore the losses,” they said, pretty uniformly. Kind of true. Even if you weren’t planning to buy Ant shares, you could’ve been an indirect shareholder of sorts — as Chairman Eric Jing noted at the beginning of the Bund Summit speech, “hello to our big shareholder, the Social Security Fund, sitting in the audience.”
Furthermore, every single Chinese person said, why would the government need to go to such lengths to punish Jack Ma? Couldn’t they just say he had an issue with his taxes or something like that? As for why the last-minute halt, that’s simple enough — there are so many competing and conflicting interests among these agencies — it’s embarrassing that it got down to the wire as it did, but better to have reversed course than to have the public holding the bag for the sake of saving face and trying to get the Biggest IPO in the bag.
Isn’t that interesting? You could use the concept of “saving face” in these two directly opposing ways, and yet explain the situation to your satisfaction.
5. Twitter thread on the real story behind the infamous Tulip Mania in the 1600s – Sahil Bloom
In 1637, the Dutch Republic erupted into a speculative fever over an unlikely item…the tulip. Tulip Mania has become a legend synonymous with market euphoria and bubbles. But is this tale all it’s cracked up to be?
1/ The tulip is a spring-blooming flower native to the valleys of the Tien Shan Mountains in Central Asia. It is believed to have been introduced to Europe in 1554, when an ambassador of the Holy Roman Emperor sent tulip bulbs and seeds to Vienna from the Ottoman Empire.
2/ Tulips gained in popularity as people were attracted to their rich color and ability to grow in sub-optimal conditions. They soon became a coveted status symbol for the wealthy. The Semper Augustus, with its colorful, flame-like streaks, was the most desired of them all.
3/ By the early 1600s, the Dutch Republic was entering a golden age. Many financial innovations popped up during this time – the first stock exchange, for example. But it was another financial innovation that would propel tulips into historical lore: the futures contract.
4/ As tulips grow slowly and may take several years to bloom, paper contracts were written that entitled the buyer to the future tulips. These contracts were freely-traded. So in addition to the physical market for tulip bulbs, a thriving paper market was established.
5/ By 1634, the prices of tulip bulbs were rising sharply. Traders would meet in special taverns. In these taverns, no bulbs ever changed hands, just the paper contracts. Speculative buying (buying on the expectation of further price increases) took hold. The frenzy was on.
6. Cederberg Capital Investor Day Fireside Chat – November 2020 – Cederberg Capital and Tao Ye
So the corona virus, if you’re standing in February of this year, it’s very scary because we would literally have to plan out for zero revenue – not zero profit – for how many years and for how many months that we can sustain as a company, without selling and servicing a car. So, our HR department (I was in the US with my family at the time). My HR director in our emergency business meeting, proposed something to me that truly reflected our culture. She said, now that we know as a company that we could sustain ourselves for quite a long time without selling anything, can I propose that we pay full bonus and salary for employees for February.
Now that was a very profound statement, if you put yourself in the shoes of February… Scary time. And the local government actually does not mandate you pay full salary anymore. They basically said you could just pay a bare minimum, like 20% of your base salary, and then you’re legally okay. But we’re not only paying the base, we’re paying the full bonus as if people are hitting all the KPIs.
Now I will say that we don’t really publicise it internally, but over time people understand it. And they’ve learned to appreciate that. So coupled with the fact that they live in a very simple and direct culture environment, and also coupled with the fact that we’re a fast growing company, which creates a lot of opportunities for people. Those couple of things probably enable us to manage to keep and retain and grow a group of very, very good managers out of the industry that is very, very loyal and very, very effective and very, very productive. I could talk about this…
7. Twitter thread on how to detect financial fraud using Benford’s Law – Nick Maggiulli
\1 Tweetstorm on How to Detect Financial Fraud Using Simple Math (aka Benford’s Law or the Leading Digit law)
If you haven’t heard of this, it will BLOW YOUR MIND.
First, let’s consider something mundane: The revenue of every company in the S&P 500 in 2017.
\2 For example, Walmart had 2017 revenue of $485 billion, Exxon Mobile had $237 billion, and Amazon had $177 billion. Now, let’s take the LEADING DIGITS of these numbers. So, the leading digit for Walmart’s revenue is 4, for Exxon is 2, and for Amazon is 1.
\3 Question: If we took the leading digits for revenue for ALL the companies in the S&P 500 would you expect the distribution of leading digits to be equal? For example, is a leading digit of 8 more likely than 5? Is 2 more likely than 3?
\4 This may sound silly to you because they should be equally likely, right?
NOPE.
In fact, over 30% of the revenue numbers will have a leading digit of 1, while 5% will have a leading digit of 9. More of the numbers will start with 1 than 2, 2 than 3, and so on to 9.
Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. Of all the companies mentioned in this article, we currently have a vested interest in Amazon. Holdings are subject to change at any time.
