What We’re Reading (Week Ending 28 July 2024) - 28 Jul 2024
Reading helps us learn about the world and it is a really important aspect of investing. The late Charlie Munger even went 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 28 July 2024):
1. Open Source AI Is the Path Forward – Mark Zuckerberg
In the early days of high-performance computing, the major tech companies of the day each invested heavily in developing their own closed source versions of Unix. It was hard to imagine at the time that any other approach could develop such advanced software. Eventually though, open source Linux gained popularity – initially because it allowed developers to modify its code however they wanted and was more affordable, and over time because it became more advanced, more secure, and had a broader ecosystem supporting more capabilities than any closed Unix. Today, Linux is the industry standard foundation for both cloud computing and the operating systems that run most mobile devices – and we all benefit from superior products because of it.
I believe that AI will develop in a similar way. Today, several tech companies are developing leading closed models. But open source is quickly closing the gap. Last year, Llama 2 was only comparable to an older generation of models behind the frontier. This year, Llama 3 is competitive with the most advanced models and leading in some areas. Starting next year, we expect future Llama models to become the most advanced in the industry. But even before that, Llama is already leading on openness, modifiability, and cost efficiency.
Today we’re taking the next steps towards open source AI becoming the industry standard. We’re releasing Llama 3.1 405B, the first frontier-level open source AI model, as well as new and improved Llama 3.1 70B and 8B models. In addition to having significantly better cost/performance relative to closed models, the fact that the 405B model is open will make it the best choice for fine-tuning and distilling smaller models…
…Many organizations don’t want to depend on models they cannot run and control themselves. They don’t want closed model providers to be able to change their model, alter their terms of use, or even stop serving them entirely. They also don’t want to get locked into a single cloud that has exclusive rights to a model. Open source enables a broad ecosystem of companies with compatible toolchains that you can move between easily…
…Developers can run inference on Llama 3.1 405B on their own infra at roughly 50% the cost of using closed models like GPT-4o, for both user-facing and offline inference tasks…
…One of my formative experiences has been building our services constrained by what Apple will let us build on their platforms. Between the way they tax developers, the arbitrary rules they apply, and all the product innovations they block from shipping, it’s clear that Meta and many other companies would be freed up to build much better services for people if we could build the best versions of our products and competitors were not able to constrain what we could build. On a philosophical level, this is a major reason why I believe so strongly in building open ecosystems in AI and AR/VR for the next generation of computing…
… I expect AI development will continue to be very competitive, which means that open sourcing any given model isn’t giving away a massive advantage over the next best models at that point in time…
…The next question is how the US and democratic nations should handle the threat of states with massive resources like China. The United States’ advantage is decentralized and open innovation. Some people argue that we must close our models to prevent China from gaining access to them, but my view is that this will not work and will only disadvantage the US and its allies. Our adversaries are great at espionage, stealing models that fit on a thumb drive is relatively easy, and most tech companies are far from operating in a way that would make this more difficult. It seems most likely that a world of only closed models results in a small number of big companies plus our geopolitical adversaries having access to leading models, while startups, universities, and small businesses miss out on opportunities. Plus, constraining American innovation to closed development increases the chance that we don’t lead at all. Instead, I think our best strategy is to build a robust open ecosystem and have our leading companies work closely with our government and allies to ensure they can best take advantage of the latest advances and achieve a sustainable first-mover advantage over the long term.
2. How a long-term approach to stock investments pays off in spades – Chin Hui Leong
Let’s look at the S&P 500’s performance between May 2004 and May 2024, a 20-year period which produced an average annual return of 10.2 per cent per year.
Here’s the shocker: If you missed the market’s 10 best days, your double-digit gains would shrink to only 6 per cent per year. If you missed the top 20 days, your returns would plummet to a mere 3.3 per cent, barely keeping up with inflation.
But don’t bet on timing your entry either. During this period, seven of the 10 best days occurred within 15 days of the 10 worst days. In other words, unless you can day trade with precision multiple times in a row, you are better off just holding your stocks through the volatility…
…Here’s another thing. History has shown that the longer you hold, the better your chances of reaping a positive return. From 1980 to 2023, the S&P 500 delivered positive returns in 33 out of the 43 years.
For the math geeks, that’s a win rate of over 76 per cent, far better than a coin flip. To top it off, there hasn’t been a single 20-year period since 1950 where the stock market has seen negative returns…
…While compounding is powerful, blindly buying any stock isn’t the answer. Many are not worthy to be held over long periods. Quality is the key. For a stock to compound, you need its underlying business to be built to last…
…What if you are wrong in your assessment of a business?…
..I submit to you that the lessons you learn holding a stock for the long term will far outweigh any other lessons you pick up from the stock market. Each stock, whether it turns out to be a winner or loser, will provide invaluable lessons you can apply in the future.
As you learn more over time, you’ll get better at picking the right stocks to hold. After all, as the late Nelson Mandela once said: “I never lose, I either win or I learn.”
3. What We Can Learn From The Oil Market – 1980 – Gene Hoots
Autumn 1980, the energy sector was 33% of the S&P 500 Index. Two personal incidents illustrate the mindset about energy, that we now know was unjustified mania…
…One investment advisor visited me in the fall of 1980. He had recently been an Assistant Secretary in the Department of Energy in Washington, Clearly, he was better informed than most about the world oil market. His company was overweight in oil stocks, and he laid out their case.
Oil had hit a new high, $39 a barrel in June. A few weeks before, he had met with the Saudi Oil Minister, Sheik Zaki Yamani. Everyone in the world was listening to Yamani who was setting Saudi oil prices; Yamani seemed to be the most powerful man in the world. My advisor said that in his meeting, Yamani “had personally assured that by April 1981 oil would hit $100 a barrel” – 2 ½ times the current price – a frightening thought…
… I gave my annual pension fund report to the RJR board finance committee. This year, taking my cue from the very conservative Capital Guardian Trust advisors, I (cautiously) stated my concern that oil stocks were becoming too big a part of the market. I did NOT say that oil stocks would decline, rather, that they might not be a bargain relative to other stocks. No sooner had I made the comment than one of the directors interrupted and asked, “Did you say oil stocks are going down?” His tone made it clear that he strongly disagreed with what I had said. I clarified and moved on with my talk, but the board clearly thought that I was completely wrong about oil…
…Spring 1981, the price of crude was far below $100 a barrel, even a bit below $39. Oil would not reach $100 until February 2008, 27 years later. When it comes to major economic and market inflection points, there are no experts!…
…Over the next two years, oil stocks dropped on average 35-50% and many of the smaller companies went bankrupt. 43 years later, the Energy Sector is 3.6% of the S&P 500. $100 invested in the energy stocks at the end of 1980 would have returned $493 and $100 in everything else would have returned $5,787 – 3.5% vs. 9.8% annually (without dividends).
4. Sometimes a cut is just a cut – Josh Brown
When is a rate cut not an emergency rate cut? When it’s a “celebratory rate cut” – a term coined by Callie Cox, whom you should be subscribed to immediately by the way.
Callie’s making the point that sometimes the Federal Reserve cuts because they can and they should – policy is overly restrictive relative to current conditions. And sometimes they cut because they have to – an emergency cut with even more emergency cuts to come later…
…The rate cutting cycles that stand out in our memories are the emergency ones. So there is a reflex in market psychology where we automatically equate cutting cycles with oncoming recessions. We need to stop that nonsense…
…Interest rate cuts have not historically meant a “slam dunk” recession call. Sometimes a cut is just a cut. The Y axis is S&P 500 performance rebased to 100 on the left scale and on the right scale it’s the date of the first interest rate cut of the cycle. The X axis is days after the first cut. You can plainly see that in many cases after the first cut we did not have a recession (the blue lines). There are even some instances where we did have a recession (red lines) but stock market performance did not go negative from the time of the first cut.
Which means the range of outcomes after the initial cut are all over the place. Crafting a narrative for what will happen to either the stock market or the economy (or both) as a result of the initial interest rate cut is an exercise in telling fairy tales.
5. AFC on the Road – Turkmenistan – Asia Frontier Capital
We decided to visit Turkmenistan in May 2024 after the third AFC Uzbekistan Fund Tour. Turkmenistan borders Uzbekistan to the west and happens to be one of the least visited countries in the world with what’s purported as being one of the ten hardest visas in the world to obtain…
…Upon receiving the invitation letter for our visa from the tour agency we used in Turkmenistan, we went to the Turkmen embassy in Tashkent. Warned of how chaotic the embassy is and how long it could take, along with a customary light interrogation, we were prepared to be patient. However, our interaction at the embassy was the polar opposite.
We provided our invitation letter and visa form along with our passports and the gentleman on the other side of the glass said to wait five minutes. Not being our first time dealing with a government agency in this part of the world, “5 minutes” often means 30 minutes or one hour. However, after approximately 5 minutes we were called and given our passports with our shiny green Turkmen visas pasted inside…
…The day after our May 2024 AFC Uzbekistan Fund Tour, we took the evening Afrosiyob (fast train) which takes four hours from Tashkent to Bukhara, arriving around 23:00. We took in the sights of the ancient city around midnight. For anyone going to Uzbekistan, Bukhara is a must see, much more so than Samarkand, especially as the old city is lit up at night.
The following morning at 06:30 we were picked up by a taxi for the two-hour drive to the Uzbek-Turkmen border where we exited the taxi and continued on foot. The border was easy to cross on the Uzbek side, taking five minutes as there was only us and a group of four Chinese tourists. We crossed no-man’s land in a minivan to the Turkmen side where we took a Covid-19 PCR test (just a money-making opportunity) which costs USD 33 each. Then we proceeded to the Turkmen immigration building via another, this time Soviet, minivan (nicknamed a “bukhanka” as it is shaped like a Soviet loaf of bread called bukhanka) where we met our Turkmen tour guide for the next 4 days (foreigners cannot freely travel in Turkmenistan, save for a 72-hour transit visa), completed our customs declaration forms (which were not in English), then they took our fingerprints and checked each luggage item thoroughly and finally proceeded onto another bukhanka to the border exit. There, after a final confirmation from a border guard that we had our visas stamped, we entered the parking lot, surrounded by the sprawling Karakum desert (which covers 80% of Turkmenistan).
We then took a twenty-minute drive to the nearby city of Türkmenabat, formerly Novy Chardzhou, the second largest city in the country, hosting a population of ~250,000, for a quick lunch before a back-breaking four-hour drive with our modern Japanese 4-wheel drive SUV to the ancient city of Merv on one of several roads to be that resembled the moon (and probably was a similar experience to what riding in the back of a dump truck full of rocks must feel like). On the drive, we passed a handful of wandering camels, some large petrochemical facilities (Turkmenistan hosts the world’s fourth largest natural gas reserves behind Russia, Iran, and Qatar), and hundreds of trucks with either Iranian, Turkish, or local number plates. We suspected that all the Iranian and Turkish trucks were in transit to Uzbekistan.
After about 2 hours into the journey, a brand new nicely paved 4 lane highway (resembling a German Autobahn) appeared parallel to our “tank track” road with a few trucks from time to time on it. After a short while, we innocently asked our tour guide why we can’t use it too and his answer was “it costs money”. To our surprise after a few minutes our driver drove off the “tank tracks” and followed another SUV which led us to the Autobahn. For about 30 minutes we were able to drive at about 120 km/h (instead of the maximum 50 km/h on the “tank tracks”) and realized that this road was actually still closed as from time-to-time construction works were taking place. Finally, we had to exit the Autobahn since a bridge was still under construction and a dirt track led us back to the normal road. However, before entering the normal road we had to pass by a guard (he was obviously a construction worker) and our driver handed him the equivalent of 50 USD cents for the “informal toll”…
…The former President of Turkmenistan, Gurbanguly Berdimuhamedov, is famous for his obsession with Guinness World Records. So it is only natural that at Ashgabat International Airport we encountered our first such world record, that of the world’s largest bird-shaped (seagull) building (according to Guinness World Records) with a wingspan of 364 meters.
The passenger terminal is also host to the world’s largest carpet, at 705 square meters. Opened in 2016, the airport is as modern as anything you see in Istanbul or Hong Kong. As we departed the airport, we passed by the world’s biggest fountain complex and thereafter we stopped to take a photo; our first glimpse of the ostentatious capital. We then drove to the Sports Hotel which is part of a massive complex built for the “2017 Asian Indoor and Martial Arts Games”, where the stadium, clearly visible from our hotel rooms, showcased the world’s largest statue of a horse…
…Only a few days before travelling to Turkmenistan, our broker in Uzbekistan casually told us during a dinner that the country “seems to have had” a stock exchange but its website (https://www.agb.com.tm/en/) did not work for the last 2 years and emails he sent to them were never answered so he was not sure if the stock exchange was still operating. Of course we were very surprised after we found the exchange’s website on Google and that it was operating again and updated (even in English) with new information and price quotations. The next day we wrote an official email to the CEO of the Ashgabat Stock Exchange but as of the day of publishing this travel report we never received a reply – what do you expect? Naturally, we asked our tour guide if we could visit the stock exchange and try to arrange a meeting, which of course we were denied since “you are travelling on a tourist visa and not with a business visa” we were told…
…One of the most fascinating things about it and Turkmenistan is the country’s exchange rate.
The official exchange rate is 3.5 manats to 1 USD. However, the black-market rate is 19.5 manats to the USD. If you order something in your hotel and charge it to your room, say a coffee for 40 manats, you will be billed at the official rate leading it to cost USD 11.42. However, if you pay cash, that coffee’s price collapses all the way down to a more normal USD 2.05…
…What is typical in many countries is a difference in pricing for hotels between locals and foreigners. Our hotel, the Sports Hotel costs approximately USD 85 per person per night. However, for a local, a suite costs 170 manats, or USD 8.71 at the black market rate. And, no that is not a typo!
Before returning to the hotel, we visited the modern shopping mall opposite our hotel in order to stock up on food and alcohol in an upscale supermarket. The shopping mall was full of local shops – and no international brands with the exception of LC Waikiki.
In the supermarket most of the goods were from either local, Iranian or Turkish companies. There were only a few international brands, but the big U.S. brands and European brands were almost all missing – just a few infamous German brands (no Ricola or Lindt chocolate for Thomas)…
…As we drove out of the ghost town that is Ashgabat, we crossed a bridge into a neighborhood with traditional homes that look similar to what you see in the rest of Central Asia, where it appeared the majority of Ashgabat’s population (about 1 million) actually lives. There was traffic, bus stops and buses were full, and some of the houses were very beautiful, while none of the construction was white marble!
As we drove further on the highway it became increasingly obvious, we were moving further afar from the stage the President set, for the infrastructure grew worse and worse until we were again driving on roads that resembled the moon (little did we know how much worse the road would get).
Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. We currently have a vested interest in Meta Platforms and Microsoft. Holdings are subject to change at any time.
