Recent Deep Reads: June 2019

Investing/Business

Assessing Vincent Bollore

Bollore is one of the greatest capitalists most Americans have never heard of. There aren’t many examples of other French corporate raiders. He built up a massive business empire consisting of 457 companies over four decades. In the three decades its main holding company has been public, investors are up 40x, compared to an 8x return to France’s index. Its a story horribly neglected by English language media(most of the time). Some argue that the various holding companies are full of hidden value, others that they are on the brink of collapse. At the very least, as Muddy Waters has pointed out, you can’t model it in a spreadsheet. Here is what it looks like:

Accounting reality and economic reality are often divergent. You get interesting feedback loops from all the cross shareholdings. The Economist article takes a bit of a bearish slant

Analysts attribute over a third of Bollore SA’s Market value to shareholding in its parents; these parents are also worth around 12 billion in total. That does odd things to Bollore SA accounts. When its value falls (like last year when its shares lost 24%), that of the holding companies above it dips too. Because Bollore SA in turn owns them, its balance-sheet and income must be adjusted downwards. This then effects metrics used to calculate the value of its shares, whose fall prompts a further adjustment. Share-price rises cause upward revisions.

Have Regulators Created a New Type of Financial Monster?

I would place clearing houses in the category, of important risk that not a lot of people are thinking about. Everyone knows central clearing is better(which it generally is), but ignores how clearing houses actually work. Clearing houses have offsetting positions, so they never have directional risk. However if one side of a transaction goes bust, and the clearing houses funds are exhausted, then members need to pay in.

Nasdaq Clearing’s recent Norwegian problems have put this issue on more people’s agenda. Clearing houses have outright failed in the past (Paris 1974, Kuala Lumpur 1983, Hong Kong 1987) . Post financial crisis global clearing has become increasingly centralized. If it fails the need for members to pay in could be a systemic problem. Who will clear the clearing houses when they get too big?

A Hong Kong Doctor’s Nefarious Network Sparks Market Inquiry – Epic

The collapse of Cho’s network would lead to one of Hong Kong’s most spectacular stock implosions and is now part of the biggest investigation of market malfeasance in the city’s history, an effort to expose and shut down what the regulator has called “nefarious networks.” These are groups of public companies, licensed dealers and other financial firms that “enrich themselves at the expense of unsuspecting investors,” Securities and Futures Commission enforcement head Thomas Atkinson said in an October speech revealing plans for criminal and civil action against about 60 companies and individuals. Their activities, Atkinson said, are “having a deleterious effect on our markets.”

Investors Beware: Today’s $100m + Late-stage Private Rounds Are Very Different from an IPO– From 2015, this perspective is even more true today.

Over the last few years, the late-stage (pre-IPO) market has become the most competitive, the most crowded, and the frothiest of these financing stages. Investors from all walks of life have decided that “late stage private” is where they want to play. As a result, a “late-stage” financing is no longer reserved for high-revenue, pre-profitability companies getting ready for an IPO; it is simply any large round of financing done at a high price. An unprecedented 80 private companies have raised financings at valuations over $1B in the last few years. These large, high-priced private financings are the defining characteristic of this particular technology cycle.


Some have argued that each of these companies would already be public in a prior era. Buying into such a notion is dangerous – dangerous for the entrepreneur and dangerous for the investor. Actually, very few of these companies are at a point where they could or should consider being public. Lost in this conversation are the dramatic differences between a high priced private round and an IPO. Understanding these differences is crucial to understanding the true risks in this large private-round phenomenon.

The Problem With Ben Thompson’s Aggregation Theory, and Ben Thompson’s response are essential reading for understanding modern business reality and narratives driving markets.

Is the paradigm that has defined investment returns for a decade coming to an end? An important question anyone with capital at risk should be asking.

Graham and Doddsville interview with Harvey Sawikin of Firebird – one of the all time greats of frontier market investing.

In the early stages, we’re looking for a few things. First, is the political environment: you want a country that ha been through political change that has made things more stable. For example, Russia had come out of a period of chaos, and Yeltsin finally established more personal control and installed a prime minister who could make things happen. We’ve seen this many times, in Georgia in 2004, and Mongolia. Second is macroeconomic stabilization. If you have a government that is determined to stabilize the economy, it’s often after a period of high inflation or when they’ve lost a war and everything is in chaos.
Someone comes in and manages to get control of the economy, and bring the inflation rate down. Third, we look for a functioning capital market that should have a few investible stocks. It doesn’t have to have a lot. You can make a lot of money on just one stock, which is what we
did in Georgia where we made 10x our money on Bank of Georgia.

In general, ETFs have proven to be a poor way to invest in emerging markets. Institutional investors who want low fees and that have played emerging markets through ETFs are starting to realize that it may not be suitable, and there’s a reason why: ETFs are market cap-weighted. Market caps tend to be the largest in state owned or state-influenced companies, which generally tend not to be managed for the benefit of minority shareholders. The top five stocks in the MSCI Russia constitute 60% of the index. You’re missing out on all these amazing companies that have smaller market caps.

(See also: Riches among the Ruins)

The Non-Interchangeable, Non-Mechanical Elements of Value Creation

A lot of investors – including us – were influenced by William Thorndike’s excellent book, The Outsiders, which profiled eight CEOs with some common traits that work wonderfully at certain types of businesses. Outsiders improve operational efficiency, make opportunistic buybacks, bold M&A decisions, and so on. They work great when a business generates a lot of cash and has room to generate more. There’s a clear blueprint for success.
On the other hand, there are situations in which there is no blueprint for success – new and emerging industries or business models, for example, or trying to revive a company in steady decline. In these situations, an Outsider CEO will do more damage than good. Here, you’d rather have a Visionary/Creative CEO at the helm who inspires his or her staff, is mission-driven, and is willing to experiment with new products or services.
Limiting your concept of a “good” CEO to the Outsider archetype can lead to you missing out on opportunities in companies on their way to establishing or dramatically widening their moats.

Data is not the new oil and most of the debate around it makes no sense

…we are now faced with a series of peculiar ideas that draw heavily on misleading uses of the term data. They call for the monetisation of data, stating that it is valuable, and customers should be compensated for providing it. These ideas presuppose that data is some kind of commodity, and even the refutations of these positions engage with inherent differences between, say, data, which can be reused, and oil, which can’t. But the conversation doesn’t even need to reach this point.

The Radical Lucrative and Controversial Company Hiding in Steve Schwarzman’s Pocket Good profile of Blackstone’s massive GSO group. Huge force in the distressed credit space lately.

GSO was a dominant force in the massive restructuring of credit that started a decade ago, becoming a major lender to non-investment-grade companies that the banks could no longer finance with cheap money after 2008. Banks retreated to their traditional role as advisers to corporations, underwriting bonds for highly rated companies and riskless deals. That left an enticing vacuum, and many firms eagerly and profitably stepped in, including Apollo Global Management, Ares Management, TPG Capital, KKR & Co., Bain Capital Credit, and scores of smaller credit shops. GSO capitalized on being early and being part of Blackstone, yet still independent. Now firms like Apollo and Ares have become formidable competitors in huge sectors like business development companies.

Geopolitics

The Trump Dump: War Gaming The Next China Move Makes a very important and scary point of where escalation of the trade war may go

When each side has exhausted the potential for trade-damage by tariffs (and the US has inflicted all the self-harm it can bear), if not sooner, we would not be surprised to see Mr Trump apply capital sanctions and force US Persons to dump their holdings of Chinese equities and bonds. They have potentially wide scope to do this, using the US Treasury’s Office of Foreign Assets Control (OFAC)

Side note: since sanctions are such a handy tool, trigger happy Trump has used sanctions a lot. This has created a bull market in financial compliance services, in spite of the general trend towards deregulation.

A Look at the Future of Sino-US Relations from the Historic Lens of Human Civilization One of the better pieces on this important bilateral relationship.

In the United States there are four schools of thought on China policy. Till recently, the mainstream school of thought was that of engagement. Its proponents argued that China’s market reforms were good for the United States and the international community as a whole, since they believed that economic liberalization would spill over into politics and lead to political democratization, and that China would gradually become more and more like the US. They put their faith in American soft power, believing that the US would exert a subtle influence on China. On the opposite side were the China hawks that supported the school of containment, who argued that the ideologies of the two would never be compatible as long as China remained under the totalitarian rule of the Communist Party. They believed that, as her economic power grew, China’s threat level would go from mere adversary to potential enemy. One can see that people from both camps carry a certain amount of missionary zeal that is the hallmark of American tradition. The third school was the school of pragmatism, particularly popular in the business community. The rationale behind this approach was that China’s rise has created many business opportunities for American companies. In addition, both were big nuclear states, and should stay friendly. Furthermore, closer economic ties could win China’s cooperation and support in addressing global challenges such as global financial crises, nuclear nonproliferation, climate change and counterterrorism. The fourth group was the populists, who came mostly from the lower and middle classes and helped elect Trump. Supporters of populist policy viewed themselves as primarily victims of globalization and the rise of China, citing the ills of unemployment and the hollowing-out of American manufacturing.

Psychology/Philosophy/Sports/etc.

The Best Ideas Are the Ones That Make the Least Sense Perhaps the problem is we overrate our rational capabilities- there are simply factors our models don’t take into account.

My contention is that nearly all really successful businesses — like Dyson, Apple, Starbucks, and Red Bull — owe most of their success to having stumbled onto a psychological magic trick, even if unwittingly. But you don’t have to stumble onto it. To find that magic, you must embrace the idea that anything — from consumer behavior to people’s perception of a product — can be transformed, so long as you’re willing to think like an alchemist.

The models that dominate all human decision-making today are heavy on logic and light on magic. A spreadsheet leaves no room for miracles. But while logic may be right in the narrow sphere of physics, it is hopelessly wrong when it comes to the very different business of psychology.


We don’t value things; we value their meaning. What they are is determined by the laws of physics, but what they mean is determined by the laws of psychology. The reason the alchemists gave up in the Middle Ages was because they were looking at the problem the wrong way. They had set themselves the impossible task of trying to turn lead into gold but had got it into their heads that the value of something lies solely in what it is. This was a false assumption, because you don’t need to tinker with atomic structure to make lead as valuable as gold. All you need to do is to tinker with human psychology so that it feels as valuable as gold, at which point, who cares that it isn’t actually gold? If you think that’s impossible, look at the paper money in your wallet; the value is exclusively psychological.


All these disproportionate successes were entirely illogical. And all of them worked. In the modern world, oversupplied as it is with economists, technocrats, managers, analysts, spreadsheet tweakers, and algorithm designers, it is becoming a more and more difficult place to practice magic — or even to experiment with it. I hope to remind everyone that magic should have a place in our lives. It is never too late to discover your inner alchemist.

Standing Against Psychiatry’s Crazes

Dr. McHugh believes psychiatrists’ first order of business ought to be to determine whether a mental disorder is generated by something the patient has (a disease of the brain), something the patient is (“overly extroverted” or “cognitively subnormal”), something a patient is doing (behavior such as self-starvation), or something a patient has encountered (a traumatic or otherwise disorienting experience). Practitioners too often practice what he calls “DSM checklist psychiatry” — matching up symptoms from the Diagnostic and Statistical Manual of Mental Disorders with the goal of achieving diagnosis — rather than inquiring deeply into the sources and nature of an affliction

Israelis “know that you can get a terrible psychological reaction out of a traumatic battle. And they do take the soldiers out, and they tell them the following: ‘This is perfectly normal; you need to be out of battle for a while. Don’t think that this is a disease that’s going to hurt you, this is like grief. You’re going to get over it, it’s normal. And within a few weeks, after a little rest, we’re going to put you back with your comrades and you’re going to go back to work.’ And they all do.” By contrast, American psychiatrists say: “‘You’ve had a permanent wound. You’re going to be on disability forever. And this country has mistreated you by putting you in a false war.’ They make chronic invalids of them. That’s the difference.”

The Age of Diffraction


The Great Weirding and associated narrative collapse is, in a sense, the narratives of the industrial age reaching some sort of diffraction limit. Even the best historians of our age will not be able to handle the narrative collapse we’re living through with traditional history-writing techniques. So what are our options?

We could go grander. Bigger telescopes! This is what a lot of big history theorizing of the Sapiens variety appears to attempt. The results are kinda janky and feel like unsatisfying just-so myth-making. It is just hard to make and hold up really big mirrors to the human condition.
We could work with shorter and shorter wavelengths. I think this is roughly what intersectional identity politics is trying, and failing, to do.
Or finally, we could learn to work with our own wave-like nature, embracing diffracted identities and multitemporality

I like to think of it in terms of that old stoic line: the only way out is through. I’ve preferred the slight variant the only way through is through, because with time, there is no “out”, even though sometimes it is helpful to pretend like there is. The quantum-tunneling update to that is: the only way through is to diffract through.

That’s why we are in the Age of Diffraction. You have to interfere with yourself to get anywhere at all.

When Men Lose To Women

What we are seeing is that, in ultramarathons, more and more of the fatigue comes from central fatigue, which means that the brain is not able to drive the muscle, even though the muscle is capable,” says Shawn Bearden, a professor of exercise physiology at Idaho State University. Researchers in France have hooked runners up to electrodes to stimulate muscles, demonstrating they still have the ability to produce movement. “There’s something about a person’s brain that just isn’t driving the muscle as well late in these very long-distance races,” Bearden says. “It turns out women have a slightly, it seems, better resistance to that kind of fatigue.” While some studies show no real difference—women are on par with men—others show women with an ever-so-slight advantage. “Running economy and fatigue resistance are places where women seem to have a bit of an edge,” says Bearden. “And, with those two factors, the longer the distance of the race, the more important those two factors are.”

A marathon is run on a relatively flat, paved road designed to remove variables. But because there are so many hazards along the course of an ultramarathon—from tree roots and loose rocks to bee stings and hallucinations—few runners have perfected their craft. No one factor in an ultramarathon will propel a winner to the podium, but a single mistake can remove any runner from the race. An ultramarathon, therefore, may be the competition where gender matters the least.

We Are Nowhere Close to the Limits of Athletic Performance Gene editing will have a far bigger impact than doping. Although performance has increased a lot in the past century in basically all sports, we are still far from our true potential. Interesting to think of the search problem inherent in getting the best talent into the right sports.

Now we are entering an era in which it will not be chance that configures DNA, but rather the human intellect via tools of its own creation. As our understanding of complex traits improves, genetic engineers will be able to modify strength, size, explosiveness, endurance, quickness, speed, and even the determination and drive required for extensive athletic training. Estimates of the number of variants controlling height and cognitive ability, two of the most complex traits, yield results in the range of 10,000.5 If, as a simplification, we assume that in each of the 10,000 cases the favorable variant is present in roughly half the population, then the probability of random mating producing a “maximal” outlier is roughly two raised to the power of negative 10,000, or about one part in a googol (10 to the power 100) multiplied by itself 30 times. Of course it may not be possible to simultaneously have all 10,000 favorable variants, due to debilitating higher-order effects like being too large, or too muscular, or having a heart that is too powerful. Nevertheless, it is almost certain that viable individuals will exist with higher ability level than any person has ever had.

In other words, it is highly unlikely that we have come anywhere close to maximum performance among all the 100 billion humans who have ever lived. (A completely random search process might require the production of something like a googol different individuals!

But we should be able to accelerate this search greatly through engineering. After all, the agricultural breeding of animals like chickens and cows, which is a kind of directed selection, has easily produced animals that would have been one in a billion among the wild population. Selective breeding of corn plants for oil content of kernels has moved the population by 30 standard deviations in roughly just 100 generations.6 That feat is comparable to finding a maximal human type for a specific athletic event. But direct editing techniques like CRISPR could get us there even faster, producing Bolts beyond Bolt and Shaqs beyond Shaq.

The Gospel According to X-22 Classic article profiling one of the greatest backgammon players of all time(and the author of classic books). Interesting how he was decades before the “moneyball” movement in sports.

“The dice”, Magriel contends, don’t change the game intellectually, but only psychologically. Theres still a move for every roll in every position. But the dice make the game a gamble. They make a game perverse. It can be unbelievably vexing The dice can mock you, tease you, lead you on. It requires a certain amount of masochism to subject yourself repeatedly to their brutality. But intellectually, the challenge is to react neutrally to the dice, to make the right move on a bad roll on as a good one.

Peculiar looking plays of course are relative to one’s expectations.  There is no such thing as an inevitable arrangement of checkers in backgammon, any more then there is such thing as an inevitable musical scale.  Its purely a matter of convention. But conventions come to seem inevitable ,and it takes a special species of genius to see beyond them.

See also: Backgammon and Life Philosophy

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