What We’re Reading (Week Ending 7 June 2020) - 07 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 7 June 2020):
1. Complexity Bias: Why We Prefer Complicated to Simple – Farnam Street
Meanwhile, we may also see complexity where only chaos exists. This tendency manifests in many forms, such as conspiracy theories, superstition, folklore, and logical fallacies. The distinction between complexity and chaos is not a semantic one. When we imagine that something chaotic is in fact complex, we are seeing it as having an order and more predictability than is warranted. In fact, there is no real order, and prediction is incredibly difficult at best.
Complexity bias is interesting because the majority of cognitive biases occur in order to save mental energy. For example, confirmation bias enables us to avoid the effort associated with updating our beliefs. We stick to our existing opinions and ignore information that contradicts them. Availability bias is a means of avoiding the effort of considering everything we know about a topic. It may seem like the opposite is true, but complexity bias is, in fact, another cognitive shortcut. By opting for impenetrable solutions, we sidestep the need to understand. Of the fight-or-flight responses, complexity bias is the flight response. It is a means of turning away from a problem or concept and labeling it as too confusing. If you think something is harder than it is, you surrender your responsibility to understand it.
2. Ben Thompson – Platforms, Ecosystems, and Aggregators – [Invest Like the Best, EP.176] – Patrick O’Shaughnessy & Ben Thompson
Why? Because the content they seek out is evergreen. It’s always available. I can go watch Orange is the New Black, one of the original shows and it’s valuable to me today. So the marginal value of Netflix is increasing as their customer base increases as opposed to a lot of services where the more customers there are, it degrades in quality and becomes even harder to acquire them and then they have to spend marketing costs to acquire them.
And that’s just where companies fall apart. So many companies based their sort of projections and calculations on the cost of acquiring a customer at the beginning. The problem is at the beginning you’re serving your ideal customer, the one that really wants your product, and so they’re going to look over the problems with your product, et cetera, et cetera. They’re going to be easy to acquire and usually your marginal customer gets more and more difficult to acquire. You have to spend more money, and what happens is Facebook and Google actually end up taking all your profit over time.
3. An Unlikely Hero for 1906, 1929…and Today – Jason Zweig
“I might never have gone into the banking business,” he later recalled, if he hadn’t gotten into a shouting match with the head of a local bank about its reluctance to make small loans to individual borrowers. In 1904, Giannini founded a bank of his own in San Francisco, called Bank of Italy, to do just that.
Then, on April 18, 1906, an earthquake struck the Bay Area, killing more than 3,000 people and setting the city ablaze.
Realizing the fires were heading toward his bank, Giannini heaved $80,000 of gold and cash into two horse-drawn produce wagons. He buried the money under crates of oranges to hide it from looters rampaging through the streets. For weeks afterward, he recalled later, the bank’s money smelled like oranges.
By the next day, the Bank of Italy had burned to the ground. But Giannini rode in from his home in San Mateo, where he had stashed the money. With San Francisco still smoldering, he set up a desk on the wharf and plunked a sack of gold on it, under a cardboard sign on a stick that read BANK OF ITALY: OPEN FOR BUSINESS.
Giannini lent to almost everyone with a legitimate need, on one condition: They had to raise half of what they needed elsewhere. That forced them to enlist their friends and family in the recovery of their business or the rebuilding of their home.
Then Giannini would lend the other half, often accepting little more than people’s character as their collateral. After all, he’d just gotten others to assume half the bank’s risk. What’s more, much of the hoarded cash the borrowers raised from their friends and family ended up as Bank of Italy deposits—or was invested in shares of its stock.
4. Permanent Assumptions – Morgan Housel
Some things are always changing and can’t be known. There can also be a handful of things you have unshakable faith in – your permanent assumptions.
Realizing it’s not inconsistent to have no view about the future path of some things but unwavering views about the path of others is how you stay humble without giving up. And the good news when the world is a dark cloud of uncertainty is that those permanent assumptions tend to be what matter most over time.
5. The Day Coronavirus Nearly Broke the Financial Markets – Justin Baer
Mr. Rao, who was working remotely that Monday, walked down the 20 steps to his home office at 4:30 a.m. to discover the debt markets were already in disarray. He started calling the senior Wall Street executives he knew at many of the big banks.
Executives told him that Sunday’s emergency Fed rate cut had swung a swath of interest-rate swap contracts in banks’ favor. Companies had locked in superlow interest rates on future debt sales over the past year. But when rates fell even further, the companies suddenly owed additional collateral.
On that Monday, banks had to account for all that new collateral as assets on their books.
So when Mr. Rao called senior executives for an explanation on why they wouldn’t trade, they had the same refrain: There was no room to buy bonds and other assets and still remain in compliance with tougher guidelines imposed by regulators after the previous financial crisis. In other words, capital rules intended to make the financial system safer were, at least in this instance, draining liquidity from the markets.
One senior bank executive leveled with him: “We can’t bid on anything that adds to the balance sheet right now.”
At the same time, the surge in stock-market volatility, along with falling prices on mortgage bonds, had forced margin calls on many investment funds. The additional collateral they owed banks was also booked as assets, adding billions more.
The slump in mortgage bonds was so vast it crushed a group of investors that had borrowed from banks to juice their returns: real-estate investment funds.
The Fed’s bond-buying program, unveiled that Sunday, had earmarked some $200 billion for mortgage-bond purchases. But by Monday bond managers discovered the Fed purchases, while well-intentioned, weren’t nearly enough.
“On that first day, the Fed got completely run over by the market,” said Dan Ivascyn, who manages one of the world’s biggest bond funds and serves as investment chief at Pacific Investment Management Co. “That’s where REITs and other leveraged-mortgage products started getting into serious trouble.”
6. How Pandemics End – Gina Kolata
When will the Covid-19 pandemic end? And how?
According to historians, pandemics typically have two types of endings: the medical, which occurs when the incidence and death rates plummet, and the social, when the epidemic of fear about the disease wanes.
“When people ask, ‘When will this end?,’ they are asking about the social ending,” said Dr. Jeremy Greene, a historian of medicine at Johns Hopkins.
In other words, an end can occur not because a disease has been vanquished but because people grow tired of panic mode and learn to live with a disease. Allan Brandt, a Harvard historian, said something similar was happening with Covid-19: “As we have seen in the debate about opening the economy, many questions about the so-called end are determined not by medical and public health data but by sociopolitical processes.”
Endings “are very, very messy,” said Dora Vargha, a historian at the University of Exeter. “Looking back, we have a weak narrative. For whom does the epidemic end, and who gets to say?”
7. Massive Up and Down Moves in Stocks in the Same Year Are More Common Than You Think – Ben Carlson
Here are some reminders I like to consider when thinking through big moves like this:
- I cannot predict the direction of the stock market over the short-term.
- I cannot predict the magnitude of stock market moves.
- I cannot predict when market moves are going to start or stop.
- The stock market doesn’t always make sense nor does it have to.
- The stock market has the ability to make everyone look foolish at times.
Things looked bleak in March. Now things look not so bad considering the S&P 500 is down just 2-3% on the year. What happens next is anyone’s guess.
I don’t know.
