What We’re Reading (Week Ending 27 December 2020) - 27 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 27 December 2020):
1. The Airbnbs – Paul Graham
What was special about the Airbnbs was how earnest they were. They did nothing half-way, and we could sense this even in the interview. Sometimes after we interviewed a startup we’d be uncertain what to do, and have to talk it over. Other times we’d just look at one another and smile. The Airbnbs’ interview was that kind. We didn’t even like the idea that much. Nor did users, at that stage; they had no growth. But the founders seemed so full of energy that it was impossible not to like them.
That first impression was not misleading. During the batch our nickname for Brian Chesky was The Tasmanian Devil, because like the cartoon character he seemed a tornado of energy. All three of them were like that. No one ever worked harder during YC than the Airbnbs did. When you talked to the Airbnbs, they took notes. If you suggested an idea to them in office hours, the next time you talked to them they’d not only have implemented it, but also implemented two new ideas they had in the process. “They probably have the best attitude of any startup we’ve funded” I wrote to Mike Arrington during the batch…
…What we didn’t realize when we first met Brian and Joe and Nate was that Airbnb was on its last legs. After working on the company for a year and getting no growth, they’d agreed to give it one last shot. They’d try this Y Combinator thing, and if the company still didn’t take off, they’d give up.
Any normal person would have given up already. They’d been funding the company with credit cards. They had a binder full of credit cards they’d maxed out. Investors didn’t think much of the idea. One investor they met in a cafe walked out in the middle of meeting with them. They thought he was going to the bathroom, but he never came back. “He didn’t even finish his smoothie,” Brian said. And now, in late 2008, it was the worst recession in decades. The stock market was in free fall and wouldn’t hit bottom for another four months.
Why hadn’t they given up? This is a useful question to ask. People, like matter, reveal their nature under extreme conditions. One thing that’s clear is that they weren’t doing this just for the money. As a money-making scheme, this was pretty lousy: a year’s work and all they had to show for it was a binder full of maxed-out credit cards. So why were they still working on this startup? Because of the experience they’d had as the first hosts.
When they first tried renting out airbeds on their floor during a design convention, all they were hoping for was to make enough money to pay their rent that month. But something surprising happened: they enjoyed having those first three guests staying with them. And the guests enjoyed it too. Both they and the guests had done it because they were in a sense forced to, and yet they’d all had a great experience. Clearly there was something new here: for hosts, a new way to make money that had literally been right under their noses, and for guests, a new way to travel that was in many ways better than hotels.
That experience was why the Airbnbs didn’t give up. They knew they’d discovered something. They’d seen a glimpse of the future, and they couldn’t let it go.
2. How Pfizer Delivered a Covid Vaccine in Record Time: Crazy Deadlines, a Pushy CEO – Jared S. Hopkins
Even for jaded pharmaceutical scientists, what happened next was little short of miraculous. U.S. health regulators Friday night authorized the Covid-19 vaccine developed by Pfizer and its German partner BioNTech SE. The shot is already in U.K. use and will be the first given in the U.S., capping the fastest vaccine development ever in the West.
How the drugmakers pulled off the feat, cutting the typical time from more than 10 years to under one, partly stems from their bet on the gene-based technology.
As the inside story shows, it was also the product of demanding leadership, which bordered on the unreasonable. From urging vaccine researchers to move fast to pressing the manufacturing staff to ramp up, Mr. Bourla pushed employees to go beyond even their own ambitious goals to meet Covid-19’s challenge…
…BioNTech wanted to make vaccines out of messenger RNA, or mRNA, the molecules that carry genetic instructions telling cells what proteins to make.
The German company’s researchers thought they could use the genetic sequence of the coronavirus, which had recently been published, to synthesize mRNA that would instruct cells to make a harmless version of the spike protein that protrudes from the surface of the virus.
The defanged spike proteins would prompt a person’s immune system to produce antibodies that could fight off the real virus.
Unlike the months it takes to cultivate a vaccine in test tubes, designing an mRNA vaccine would be quick. BioNTech simply plugged the genetic code for the spike protein into its software. On Jan. 25, BioNTech Chief Executive Ugur Sahin designed 10 candidates himself.
The company’s researchers would create 10 more different potential coronavirus vaccines for a total of 20, each slightly different in the event one design worked better and more safely than the others.
But BioNTech, founded in 2008 and with just 1,000 employees when the pandemic hit, needed a big partner to manufacture the vaccines for human trials and potentially for people around the world.
During a March 1 phone call, Dr. Sahin proposed a coronavirus vaccine collaboration with Kathrin Jansen, Pfizer’s vaccine-research chief.
Many in pharma were skeptical of mRNA, which had been long in the making but never the basis for an approved product. Dr. Jansen, known in the industry for helping develop Merck & Co’s cervical-cancer shot Gardasil, saw promise, in large part because mRNA vaccines appeared to produce stronger immune responses than older shots.
“This is a disaster, and it’s getting worse,” Dr. Jansen told Dr. Sahin. “Happy to work with you.”
Mr. Bourla gave his go-ahead a week later, at one of Pfizer’s first leadership meetings on the program. When vaccine researchers at a follow-up meeting in mid-March forecast a coronavirus vaccine in the middle of 2021, Mr. Bourla spoke up.
“Sorry, this will not work,” he said. “People are dying.”
3. What If You Only Invested at Market Peaks? – Ben Carlson
In 2014 I wrote a piece called What If You Only Invested at Market Peaks?
It’s hard to believe it now, but many investors assumed after a massive 30%+ run-up in the S&P 500 in 2013 that a peak was imminent.
So I decided to simply run the numbers as a thought exercise on the results of an investor who only invested their money at market peaks, just before a market crash.
I was more curious than anything and unsure about what the results would show. They were surprisingly better than expected.
I didn’t put much thought into this piece but it has become by far the most widely read piece of content I’ve ever written. It’s been read nearly a million times.
It still gets tens of thousands of page views a year.
I used this example in my book A Wealth of Common Sense but have always thought this story would be even better with visuals.
So with the help of our producer, Duncan Hill, I found an illustrator1 who could turn my story about the world’s worst market timer into a cartoon.
I updated some of the numbers, did some voiceover work, got the illustration just how we wanted it and had Duncan put it all together…
…There were some lean times in there, especially in the aftermath of the Great Depression. But by and large, the long-term returns even from the height of market peaks look pretty decent.
I’m not suggesting investors are owed anything over the long-run. The stock market is and always has been a risky proposition, especially in the short-to-intermediate-term.
But if you have a long enough time horizon and are willing to be patient, the long-run remains a good place to be when investing in the stock market.
4. Barry Ritholtz and Josh Brown Won’t Predict The Market, But They’ll Talk About Anything Else. – Leslie P. Norton
Barron’s: You’re bloggers and money managers. How does that work?
Barry Ritholtz: The blogging was an attempt to correct broader errors from Wall Street and the press—that people understood what was actually going on in the world, and that their process wasn’t completely damaged by their own cognitive errors and behavioral biases. That led to optimist bias, where people think, “Hey, I could pick stocks, I can market-time.” I also recognized the academic research that [showed] it’s much, much harder to be a successful stockpicker, a market timer, or trader than it appears, and you’re better off owning the globe and trying not to get in your own way.
As the world gets more complicated, you have to be really selective with how you use technology. Sometimes, it’s a boon to investors, and other times, the gamification of trading, apps like Robinhood, are encouraging not the greatest behavior.
Josh Brown: Barry doesn’t get enough credit. We all wanted to start blogs like Barry’s. He was first to write about behavioral investing in a popular format. I worked as a retail broker at a succession of firms; I had a front-row seat for 10 years of everything not to do. I saw every horrendous mistake and swindle, and as a 20-something, I’d say, “I’m not going to do that—or that, either.”
It didn’t feel fortunate at the time, because my career was going nowhere. I was 30 years old, with a negative bank account, a mortgage, a 2-year-old daughter, and a pregnant wife. When I met Barry, I said, “Whatever you’re doing, I want to be part of it.” He said, “I don’t deal with clients. That will be your role.” In my blog, I share what I’m learning in real time. There’s always a new topic—cryptocurrency, tariffs, interest rates, the intersection of elections with markets. I try to share my own process…
…Has the pandemic altered the way you think about investing?
Brown: The thing is how outrageous the response in asset prices has been. There’s an argument to be made that the stock market is higher because of the pandemic than if 2020 had been a more routine year. It’s an affirmation of why we’re rules-based investors.
Ritholtz: Not only did you have to predict that a pandemic would occur, but you would have had to take it to the second level, which is that the Federal Reserve’s going to take rates to zero, and that Congress, which cannot agree on renaming a library, would panic and pass a $3 trillion stimulus. That’s how you get to a positive year, despite all the terrible news. We never try to guess what’s going to happen. If we’re not making forecasts, we’re not marrying forecasts.
Josh, you published a book that included 25 people’s portfolios. What was the most useful advice?
Brown: We gave people a blank sheet of paper and were very surprised that none of the chapters read like anyone else’s. Bob Seawright wrote something very poignant about an investment in a summer cottage for the family. It was a terrible investment financially, but it was one of the best investments of all time because of the memories it created. It was important for me to hear, because I work 18 to 20 hour days, and I work on Saturdays and Sundays, and I’m reading, and I’m blogging, and I’m doing podcasts. I don’t really smell the roses that much.
5. It’s the index, stupid! Our New Not-So-Neutral Financial Market Arbiters – Johannes Petry, Jan Fichtner and Eelke Heemskerk
Historically, index providers were primarily providers of information. Indices were ‘news items’, helpful for investment decisions — but arguably not essential. Actively managed funds merely used them as baselines to compare their performance, they were not expected to direct financial markets. As previously noted, the hallmark of active investors was to be different from the index — rather than being reliable, the index was there to be beaten. Hence, index providers’ decisions over the composition of their indices had relatively limited impact on financial flows — deviation from the index was a worthy risk metric. But their exact composition was not yet crucial to investors, listed companies or countries.
This changed fundamentally with the global financial crisis, which triggered two reinforcing trends: concentration, and the rise of passive investment. Together, these transformed index providers from merely supplying information to exerting power over asset allocation in capital markets.
First, the index industry concentrated — not least because banks sold non-core businesses to raise cash, as they tried to stay afloat during the financial meltdown that engulfed their industry. By 2017, the three indices S&P DJI, MSCI and FTSE Russell accounted for 27%, 26% and 25% of global revenues in the index industry, respectively.
This market concentration led to a growing power position of the few index providers that had historically positioned themselves and their brands in financial markets. With profit margins averaging between 60-70%, they operate in a quasi-oligopolistic market structure. This is because their indices are not easily substitutable, due to unique brand recognition and network externalities, e.g. through liquid futures markets based on their indices. The S&P 500, for instance, represents US blue chips like no other index. It is also the most widely tracked index globally, and S&P 500 index futures are the most traded futures contract in the world.
Second, and more importantly, the money mass-migration towards passive investments significantly increased the authority of index providers. They came to influence asset allocation in unprecedented ways, as more and more funds directly tracked the indices they own, construct and maintain. ETFs indexed to FTSE Russell indices more than doubled from US$315 billion in 2013 to US$765 billion in 2019. Meanwhile passive funds tracking MSCI indices even increased more than sevenfold between 2008 and 2020, from $132 billion to more than $1 trillion. ETFs and index mutual funds that follow S&P DJI indices increased from $1.7 trillion in 2011 to staggering $6.3 trillion in 2019. Whereas in the past indices only loosely anchored fund holdings around a baseline, now they have an instant, ‘mechanic’ effect on the holdings of passive funds.
As passive funds simply replicate an index, index providers’ decisions to change index compositions lead to quasi-automatic asset reallocations. Index providers now effectively ‘steer’ financial flows.
6. Managers at Major Index Provider, Sushi Restaurant Charged With Insider Trading – Alicia McElhaney
A senior index manager at S&P Dow Jones Indices has been charged the U.S. Securities and Exchange Commission and the Justice Department for insider trading.
According to complaints filed Monday by both entities, Yinghang “James” Yang allegedly used information that he learned on the job to help his friend Yuanbiao Chen, a manager at a sushi restaurant, trade options on companies before they were added to or removed from S&P indices…
…The scheme allegedly began in April 2019, when Yang wrote a check for $3,000 to his co-conspirator, who then deposited it in his personal bank account. Roughly a month later, the co-conspirator opened a brokerage account, the Justice Department’s complaint shows. (Chen was not named in the Justice Department complaint.)
Between June and October, Yang and Chen allegedly used the account to buy call or put options on publicly-traded companies, according to the SEC complaint. On the days of the trades, S&P would announce after hours that the same companies would be added to or removed from its indices, according to the Justice Department. The positions would then be liquidated, the Justice Department said.
Yang and Chen started small: Each of the early transactions was worth roughly $2,000 or so. For instance, on July 9, they bought T-Mobile call options at 1:25 p.m, according to the SEC complaint. At 5:15 p.m., just after markets closed, S&P announced that T-Mobile would be added to one of its indices. The next morning, Chen and Yang reportedly sold the call options, making $1,096, the SEC said…
…But in the middle of September, the trades ramped up. Just before 2 p.m. on September 26, for example, Chen bought call options for Las Vegas Sands, the SEC said. At 5:15, S&P announced the addition of the company to its indices. The reported profit? $325,956.
During that period, Chen and Yang made these types of trades on 14 occasions, the SEC said.
Then came the payout. On October 4, Chen allegedly wrote Yang three checks totaling $100,000 from the brokerage account, the complaint said. The Justice Department said Yang used this money to make credit card payments, pay off student loans, and fund his own trading activity.
In total, the duo made $912,082 on the options trading, returning 136 percent on their investments, according to the complaints.
7. The Down Under Scammer You’ve Probably Never Heard of – David Wilson
As such, it’s worth revisiting Australia’s singularly tragic version of both men: the bipolar insider trader Rene Rivkin, who after being sentenced to just nine months of weekend detention stints, sparking national gloating, killed himself in 2005.
“Cell, cell, cell,” the lead story in The Sydney Morning Herald crowed.
If he had lived, however, Rivkin might have served more time. For one thing, he was also a suspect in a seamy murder case and the recipient of a lavish insurance payout under suspicious circumstances. And he allegedly offloaded stocks that his newsletter, the Rivkin Report, tipped. Last, despite having untold wealth hidden in the Swiss banking system, Rivkin owed the taxman millions.
His memory still casts a tailored shadow across the Australian investment landscape, because the “guru of greed” was such an epic character: a high-octane, cigar-smoking, Prozac-popping Sydney-sider dubbed “Australia’s most aggressive broker.” Some even labeled him messianic based on his grandiose claims of persecution, going so far as to compare his criminal conviction to the crucifixion of Jesus…
…Later that year the Australian investments commission charged Rivkin with insider trading for buying 50,000 Qantas Airways shares after chatting to the head of the aptly named, now-defunct Impulse Airlines. In 2003 Impulse founder Gerry McGowan testified to having told Rivkin that Australia’s flying flag carrier planned to buy his company.
In one of many plot twists, Rivkin’s mischief yielded a piddling profit. Nonetheless, Justice Anthony Whealy denied clemency….
…What drove Rivkin, Wood’s troubled boss? Jan Marshall, a scam victim advocate and educator and the chief executive of Life After Scams, says: “People start off with small risks, and as they pay off, they begin to think they are invincible. They are driven by their greed to take bigger and bigger risks.”
Almost certainly, Marshall adds, Rivkin had a sociopathic streak. That means no conscience and no concern for how others might be affected by his acts, she explains.
Hong Kong–based Dr. Anthony Dickinson, an expert on workplace psychopaths, also believes Rivkin to have been a sociopath. Unlike full-blown psychopaths, sociopaths have some empathy, he notes.
“But their sense of right and wrong is based upon the norms and expectations of their subculture,” says the neuroscience-trained psychologist.
As to why Rivkin risked all on Impulse Airlines, Dickinson suggests: “Classic case of the gambler’s fallacy” — the myth that winning streaks are inevitable. Or, more likely, Rivkin was just “upscaling” business-as-usual practices, assuming he would never be caught or could buy his way out if he was.
Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. We currently have no vested interest in the shares of any companies. Holdings are subject to change at any time.
