What We’re Reading (Week Ending 24 January 2021) - 24 Jan 2021
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 24 January 2021):
1. The Best Investors of All Time – Chris Mayer
Who are the best investors of all time?
You probably thought of Warren Buffett or Peter Lynch or John Templeton or other renowned money managers, past and present.
But did you think of the Walton family, the Rales brothers or Jeff Bezos?
Why not?
Yes, we tend to think of them as entrepreneurs. But they do own stakes in public companies just like any of those other investors. In this case, the public companies are Walmart, Danaher and Amazon, respectively. The returns on these stocks have been, well… let’s just say they would be the envy of nearly any traditional money manager you care to name…
…Pabrai mentioned how Sleep told him the best investors were entrepreneurs who kept stock in their businesses. If we want the best returns, why don’t we adopt the same approach as these people? Why bother with economists, Fed watching, sell-side analysts, quarterly earnings, etc. etc.? Why bother with “taking profits” “trimming the position” and the like?
I love this message and I have talked and written about it before myself. In my book 100 Baggers, I note how many of these great stocks also have a person’s name attached to them that is almost synonymous with the business — so much so that all I have to do is drop the name and you can think of the company. (I say “Bill Gates” and you say…)
As Pabrai said, no professional investor held Walmart from the IPO to, say, even 1985. We don’t know for sure, perhaps somebody did. But the point is the vast majority clearly did not. Many investors bought and sold Walmart over that time frame. Surely they would’ve been better off just sitting on the stock — as the Waltons did.
2. The Debt Question Facing Janet Yellen: How Much Is Too Much? – Kate Davidson and Jon Hilsenrath
A big question hangs over Janet Yellen this week at her confirmation hearing to become U.S. Treasury secretary: How much debt is too much?
In the past four years, U.S. government debt held by the public has increased by $7 trillion to $21.6 trillion. President-elect Joe Biden has committed to a spending program that could add trillions more in the year ahead. At 100.1% of gross domestic product, the debt already exceeds the annual output of the economy, putting the U.S. in company with economies including Greece, Italy and Japan.
When Ms. Yellen served in the Clinton administration as Chairwoman of the White House Council of Economic Advisers, she was among those who pushed for a balanced budget. Today, she has joined, cautiously, an emerging consensus concentrated on the left that more short-term borrowing is needed to help the economy, even without concrete plans to pay it back.
Central to the view is the expectation that interest rates will remain low for the foreseeable future, making it more affordable to finance the borrowing.
The Biden administration will now contend with progressives who want even more spending, and conservatives who say the government is tempting fate by adding to its swollen balance sheet. Ms. Yellen’s challenge, if confirmed, will be to keep Democrats together and persuade some Republicans to come along.
Ms. Yellen, who will be a top economic adviser to Mr. Biden, is scheduled to testify Tuesday before the Senate Finance Committee, which will vote on her nomination. She served as top White House economist in the 1990s and Federal Reserve chairwoman in the 2010s. Confirmation of Ms. Yellen as Treasury secretary would make her the first person to achieve such a trifecta of economic leadership roles.
Ms. Yellen would be managing the nation’s debt when the economic consensus has flipped. In the 1990s, economists argued that surpluses would push down long-term interest rates and encourage private-sector borrowing and investment. Government borrowing, this view held, crowded out the private sector. The strategy seemed to work. The U.S. saw an economic boom, with the longest expansion on record at the time, fueled by technology investment.
After years of low inflation and interest rates near zero, more economists say the government should be borrowing to keep the economy going because the private sector isn’t. With borrowing costs expected to remain low and the pandemic-stricken economy still weak, temporary increases in deficits aren’t only tolerable but desirable if they help strengthen the recovery, the thinking goes.
3. Anti-Usage Products: The Next Generation of SaaS Products – Gabriel Lim
“Hey Gabriel, why did you fill in N/A for Weekly Active Users in your investor report?” “Oh, we are not tracking it.” “Wait, what? Why?”
“You are a SaaS company, and you are not tracking how many of your users are logging into your platform and using it actively?”
“Yeah… here’s the thing – I don’t want people to log into my software.”
“Wait, what?”…
…Josh Elman said that the only metric that matters is how many people are using the product – https://news.greylock.com/the-only-metric-that-matters-now-with-fancy-slides-232474cf414c
This is an old paradigm from 2010 – 2019. It presupposes that if users keep logging in, and performing a certain action, then they are gaining something of value from the product. However, we wanted to break this paradigm.
The paradigm of retention = product engagement.
You see – When a product is able to work fully autonomously, and yet, able to deliver outcomes, user engagement is an anti-pattern. It’s not something that we want to optimize for.
On the contrary, I tell my product team: if our users are logging in too often, it means that our software isn’t autonomous enough, and we have to work harder to sand down the product. This is counterintuitive, and requires a leap of faith. But internalizing this logic helps us to build a better product. A product that is laser focused on solving our customers’ problems, and not faux-engagement.
4. The Bit Short: Inside Crypto’s Doomsday Machine – Crypto Anonymous
There are things in crypto right now called Tethers. To simplify a bit, Tethers are issued by a crypto company called Tether Ltd. — meaning that if Tether Ltd. says you own a Tether, then you do.
Tether Ltd. also says one Tether is worth exactly one US dollar. Can they do that? Well they say they can, because they hold $1 worth of assets for each Tether. But are those assets actual dollars? No, they are not. So what if the assets go down in value? Don’t worry; they will not. Okay, but can we at least see the assets? No, you may not.
Who in their right mind would use something like Tether? Well, the short answer is that many people use Tethers to buy Bitcoin and other cryptocurrencies. The long answer, though, is astounding — but more on that later.
Because Tether sounds exactly like a currency fraud, it may not surprise you to learn that Tether Ltd. is currently under investigation by the Office of the Attorney General for the Southern District of New York. That investigation was announced to the public on April 25th, 2019….
…On January 8th, I saw this post on Hacker News about Tether manipulating the price of Bitcoin. That shook me: I’d assumed Tether had been purged from the crypto markets, yet apparently it was still around. But how much Tether could there really be in the crypto markets? Surely not that much.
Still, I took a look. The answer, I was surprised to see, was a lot.
5. Twitter thread on the top of the oil bubble in 2008 – Sankey Research
Here’s a story about the top of the oil bubble. We were hosting our energy conference in Miami May 2008 with oil at $140/bbl and rising in a four year bull run, with oils crushing the market. I was standing at the bar in the evening speaking to Valero CEO Bill Klesse…
Looking across the bar, I could see there was a fight. Then I could see that it was adjacent to our E&P analyst Shannon Nome, a statuesque Texan blonde, so there was an issue for me directly; my colleague was stepping back on high heels in shock from a major kerfuffle.
Then I could see that two of our clients were fighting, and one staggered away from the other clutching his bleeding face saying “he eye-gouged me!”
Being as we were in a Miami Beach Hotel, one that hosted a week before a “Rap Weekend”, the security was there almost instantly…
…The argument? It was over the then-cult natgas stock, EQT.
Here’s the punchline. They were both bullish.
But Boston long only was not bullish enough for drunk NY Hedge fund guy, and it turns out, at first drunk HF guy was pushing cash into Boston’s top pocket, saying “you don’t know how to run money, here I will give you money” as Boston was nothing like bullish enough on EQT.
6. Twitter thread on useful rules of thumb to help us make decisions – George Mack
Bezos’ Razors:
• If unsure what action to take, let your 80-year-old self make it. • If unsure who to work with, pick the person that has the best chances of breaking you out of a 3rd world prison…
…Luck Razor:
• If stuck with 2 equal options, pick the one that feels like it will produce the most luck later down the line.
I used this razor to go for drinks with a stranger rather than watch Netflix.
In hindsight, it was the highest ROI decision I’ve ever made…
…Naval’s Razors:
• If you have 2 choices to make and it’s 50/50, take the path that’s more painful in the short term. • If a task is worth less than your ambitious hourly rate – outsource it, automate it or delete it….
…Taleb’s Surgeon:
• If presented with two seemingly equal candidates for a role, pick the one with the least amount of charisma.
The uncharismatic one has got there despite their lack of charisma.
The charismatic one has got there with the aid of their charisma.
7. The Stock Market is Causing the Bubbles – Michael Batnick
This morning I was thinking about the environment we’re in. As a relatively young person, I’ve never experienced anything like it. So how can I say with a straight face that the stock market isn’t in a bubble? First of all, Tesla isn’t the market. Neither are SPACs. The market is the S&P 500.
The S&P 500 is rising, but not at the level that would normally be associated with “bubble,” a word that gets used way too frequently. A bubble is when investor behavior and fundamentals become completely detached from reality, all but ensuring the bubble’s popping.
Let’s look at behavior, or price. The stock market is not going parabolic. The S&P 500 is up 3.6% over the last 30 days, which is in the 76th percentile going back to 1950. Warm? Sure. Hot? Not really.
A quick look at fundamentals also doesn’t support the bubble argument. At 33x earnings, you could make the case that there is froth in the top 10 stocks. I wouldn’t argue.
But what about the other 490 companies whose stocks trade at 19.7x earnings? Cheap? No. Bubble? Come on.
There is exuberance in certain areas of the market. There can be no denying it. So the question is, how long can this go on before it infects the overall market? Actually, this might be backwards. I think some of the froth in the top 10 names, given their size, are causing all of the exuberance that we’re seeing. There is reflexivity at work, circular relationships that are causing a feedback loop.
In my opinion, there is not a bubble in the index, but there are bubbles inside of it and around it, which are being caused by froth at the top of the index itself.
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 the shares of Amazon. Holdings are subject to change at any time.
