Category: Links

Some Recent Deep Reads- May 2019

Investing/Business

The Ruthless, Secretive and Sometimes Seedy World of Hedge Fund Private Investigations Highly entertaining expose.

Listening to Barakett talk about some of his wildest cases gives some idea of how easy it is for people to fall through the cracks during cursory due diligence. For example, on its website, DDC says it once found that “the president of a large U.S. asset manager was arrested twice for major art theft” but was never charged due to the expiration of the statute of limitations.


The art theft case was a “thing of beauty,” Barakett recalls. The manager, who still runs $2 billion, was even discovered to have one of the stolen paintings in his office when a police investigator went to interview him regarding the second theft. (The man was in college at the time of the thefts, which were from the university.) DDC’s client, a family office considering making a big investment, “could not believe what we were telling them,” Barakett says. It decided to walk away.


Another case involved a Bear Stearns executive whose murder conviction had previously gone undetected because, Barakett suspects, a casual background check either did not look at records in every state he had lived in or checked the wrong name or date of birth. “Our client [an asset manager who was considering hiring the man for an IR position] could not believe it, and we showed him the proof,” he recalls.

Vanguard Patented a Way to Avoid Taxes on Mutual Funds Interesting implications for tax policy, fund structuring and intellectual property strategy.

Vanguard has discussed licensing its hybrid ETF-mutual fund design to other firms, but no deal has come to fruition, according to people with knowledge of the talks. Those that have expressed interest included both index followers and active stock-pickers. United Services Automobile Association licensed the patent but never used it, and Van Eck Associates Corp. once sought regulatory approval for a similar design. Spokesmen for USAA and Van Eck declined to comment


Biglari Holdings is the Fyre Festival of Capitalism Hilarious because I’m not a shareholder in this company.

Many managements probably revile their shareholders, but most of them do not publicly delight in doing so. Sardar Biglari and Phil Cooley, Chairman and Vice Chairman of Biglari Holdings, seem to delight in the annoyance of its shareholders. At one point laughing at them for being upset that the share price went down 58% last year and then subsequently watching the board increase Sardar’s compensation package. It is not my best-self that enjoyed this spectacle, it was more like the part of me that likes watching dragons fight dragons on Game of Thrones that was riveted by Sardar Biglari and Phil Cooley or the part of me that once saw two clowns get into a fist fight at a kid’s party in St. Petersburg and rather enjoyed it.

Buspirone Shortage in Healthcaristan SSR Close look at weird incentives and unintended consequences of regulation in the generic drugs market.

You get more of what you subsidize and less of what you tax. Unfortunately, the FDA is inadvertently taxing companies for being in the generic drug business. And it’s taxing them more if they’re not a monopolist with economies of scale. That means we get fewer companies in the generics industry, and more monopolists.


So my very tentative guess as to why buspirone is more plagued by shortages than bread or chairs is because number one, the need for FDA approval makes it hard for new companies to enter the buspirone industry, and number two, the FDA’s fee structure favors large-scale monopolies over small-scale competitors.

Why So Many Investors Missed Nike’s Stock Rebound Good case study


Legendary stock-picker Peter Lynch’s maxim to “buy what you know” has long been misconstrued to mean invest in the everyday products you consume. That’s not quite right, as it only reflects part of his investment strategy. The other half is buying what you have a unique insight into that the market has yet to figure out. Knowing what those things are is the hard part.

Artko Capital 2019Q1 Letter Interesting commentary around position sizing.


This is where the “Valeant problem” that is rarely discussed, becomes an issue for us: what to do with a position that rapidly increases in size relative to the rest of the portfolio and where Hahn Capital Management and Sequoia/Value Act approaches to the matter differed. While the latter funds continued to hold, and allowed the single position to become almost a third of their portfolio, Hahn Capital had strict risk controls and processes in places that forced them to sell down the position to at least 4% of the portfolio when it became 6% of the portfolio’s weight. Luckily for Hahn, they exited the position prior to the spectacular blow up while the other aforementioned funds suffered significant double-digit portfolio losses when the truth about Valeant’s practices became public. Of course that is not to take away from the spectacular track records of all of the aforementioned funds, but to point out how different investment strategies (concentrated versus diversified), portfolio manager incentives (Management Fee Only versus Performance Carried Interest), and risk control processes (on single position sizes) can result in very different portfolio returns and risk profiles for different shareholders of the same stock. To put another way, sometimes a sell decision is not one of security analysis but one of portfolio risk management and fund strategies. As a result of this, and other similar experiences throughout our career, we have tried to approach the middle ground of the two styles by having a strong degree of concentration and conviction in our portfolio while still maintaining a robust portfolio risk management process focusing on capital preservation, position size, and its risk-reward ratio relative to the rest of the portfolio.

Additionally, we believe the other lesson to be learned from Valeant was no matter how high of a conviction, knowledge base or confidence you have in a publicly traded company or its management, at the end of the day things can and occasionally do go unpredictably wrong and are out of your control. This is a staple of public equities investing and is a common mistake made by even the most reputable investors: having the illusion of control.


An Ancient Relationship: FinTech and Financial Advice Classic look at an ancient profession. Interesting how the stock ticker seemed to have an impact almost as large as the internet.

How has this profession lasted so long? The industry’s longevity is largely attributable to financial technology (FinTech), which has historically empowered advisers to better serve their clients. Many companies, for example, offer advisers quantitative and accurate measurement of investors’ risk tolerance. Equipped with this technology, advisers have a better sense of how clients will respond to volatility, and can construct portfolios that most accurately reflect a client’s ability to endure market swings.

The ticker technology served as a means for democratizing access to market information. Prior to its invention, only those physically present at the stock exchange – or very close by – were privy to real-time market prices. Everyone else received their data at a substantial lag, often to the point where it was no longer useful. Once the ticker was released, however, cables and telegraphs connected brokers across the country to a network of data constantly flowing from a central source, the New York Stock Exchange. According to Horace Hotchkiss, 23,000 offices paid for ticker services in the United States

In Defense of Complexity Most people are knee jerk advocates of simplicity, but forget what lies beneath.

But simple is impossible without complex. Simple is how you interact with your web browser or an app on your phone. Complex is everything else happening in the background that allows it to function.

There are some valuable and diversifying asset classes that routinely get discarded to the “Too Complex” pile for reasons related to ambiguous classification, unfamiliar tools, novel wrappers and peer/career risk. Which is unfortunate, because I would argue that certain alternative investments are complex in implementation only. Conceptually, they are often quite simple, intuitive, backed by data and grounded in economic theory. The arc of the investable universe is long, and it bends towards democratization and innovation. Not every shiny new toy deserves a spot in your portfolio, but it would be wise to reconsider exactly what constitutes simplicity in investing.

Geopolitics and History

Robert Caro Interview

You read in every textbook that cliché: Power corrupts. In my opinion, I’ve learned that power does not always corrupt. Power can cleanse. When you’re climbing to get power, you have to use whatever methods are necessary, and you have to conceal your aims. Because if people knew your aims, it might make them not want to give you power. Prime example: the southern senators who raised Lyndon Johnson up in the Senate. They did that because he had made them believe that he felt the same way they did about black people and segregation. But then when you get power, you can do what you want. So power reveals. Do I want people to know that? Yes.

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There’s always something the other guy doesn’t want to tell you, and the longer the conversation goes, the easier it is to figure that out

Peter Frankopan Interview

The one thing we haven’t had mercifully over the last 60 year except for the breakdown of Yugoslavia, and Iraq and so on is a major confrontation between big powers wanting to escalate.

Philosophy/Psychology Etc

On the Collaboration Between psychiatrist Carl Jung, and Physicist Wolfgang Pauli

While there is a long and lamentable history of science — physics in particular — being hijacked for mystical and New Age ideologies, two things make Jung and Pauli’s collaboration notable. First, the analogies between physics and alchemical symbolism were drawn not only by a serious scientist, but by one who would soon receive the Nobel Prize in Physics. Second, the warping of science into pseudoscience and mysticism tends to happen when scientific principles are transposed onto nonscientific domains with a false direct equivalence. Pauli, by contrast, was deliberate in staying at the level of analogy — that is, of conceptual parallels furnishing metaphors for abstract thought that can advance ideas in each of the two disciplines, but with very different concrete application.

What If We Already Know How to Live?

Philosophy is, in part, kept alive by ever-changing sociocultural circumstances that demand new lived responses to its question. But the changes brought by the digital age are of a magnitude beyond the routine vicissitudes of history. The global distribution of knowledge is arming, perhaps overloading us with more information than ever before, and the proliferation of digital interfaces is reprogramming how we experience life itself, our attentive and perceptual faculties.

…What I’m getting at is the possibility that the basic human conundrum is no longer driven by a deficiency in discovery, but in design. That now more than ever, we’re equipped with the information needed to live well, but aren’t integrating that information into our daily routines, our lived realities. There’s a lag between what we’re discovering and how we’re living.

The flood of information made available through the internet filled the discovery container with more than it can hold. We’re spilling things, getting the fabric of human life all wet. These moments of imbalance are when priority shifts from discovery to design. At these points, the work falls upon those positioned between the two containers, using what we’ve discovered to imagine and implement new designs, to convert influxes of knowledge into wisdom that can be embedded into the internal logic of our ecologies, enriching the relational environments from which our sense of being is woven.

The Year the Singularity Was Cancelled

In other words, the singularity got cancelled because we no longer have a surefire way to convert money into researchers. The old way was more money = more food = more population = more researchers. The new way is just more money = send more people to college, and screw all that.

But AI potentially offers a way to convert money into researchers. Money = build more AIs = more research.

If this were true, then once AI comes around – even if it isn’t much smarter than humans – then as long as the computational power you can invest into researching a given field increases with the amount of money you have, hyperbolic growth is back on. Faster growth rates means more money means more AIs researching new technology means even faster growth rates, and so on to infinity.

Presumably you would eventually hit some other bottleneck, but things could get very strange before that happens



Links that made me think (March 9, 2019)

Will sports betting change how games are played and even watched?

This is an interesting meta view of how betting will change sports.

The games we watch are already enhanced by data collected through technological advances. Announcers tell us how hard baseballs are hit and how far they travel, or how many miles a particularly active soccer player has run. Because such derivatives create new opportunities for betting, we’re sure to see many more of them. (The N.B.A. has been advertising for a gambling data analyst on the employment website Glassdoor.) Hockey hasn’t traditionally generated much in the way of metrics, but in order to learn who is skating the fastest or shooting the hardest, the N.H.L. is preparing to record the movements of every player during every game and even put a chip inside the puck. “Leagues are building a fire hose of data around their product,” says Chris Grove, an analyst who consults for gaming companies and investors. “And the logical recipient of that data is the betting industry.”

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But gambling’s greatest impact, at least proportionally, could come in the new professional leagues it spawns and the moribund ones it helps to resurrect. The Arena Football League once included 19 teams spread across the continent; last year there were four. Leonsis owns the Washington and Baltimore franchises, which makes him not only the most powerful owner in the league but the only person preventing its demise. He has positioned it as an ideal entertainment vehicle for the next generation. That includes gambling, of course. Arena Football averages a touchdown every six plays, Leonsis notes, as well as 98 points a game. “Lots of data generated,” he says — and a multitude of possible bets.

Personally I would love to see arena football go mainstream.

Death in the time of bitcoin

Purchasing uncertain cryptocurrency claims at a discount is an interesting investment strategy. I know some opportunistic investors were buying Mt. Gox claims , but that situation is arguably less complex than Quadriga.

… this tale of “boy meets girl; boy marries girl; boy stores all client cryptocurrency data on cold wallets with no backup; boy dies; more than 115,000 people get screwed out of their precious crypto” could have a happy ending for a progressive asset allocator.

The cold wallets were subsequently found empty so the search continues I wonder how the hunt for the missing crytpo will be financed?

Theranos: How a broken patent system sustained its decade long deceptionh

I’m not convinced by the assertion that the patent office gives out patents much too easily on a consistent basis. But this article points out that many of Theranos’ patents arguably don’t pass basic tests of patent law.

What does this mean long term now that Theranos has been seized by its lenders?

Accused of having lied to investors and endangered patients, the company leaves us with a parting gift: a portfolio of landmines for any company that actually solves the problems Theranos failed to solve.

So basically the shell of Theranos will become a patent troll? Also, apparently Mark Cuban has endowed a research organization to fight “stupid patents”

When Britain chose Europe

The Brexit debate in a historical context going back to Cobden and the fight against the corn laws. Points out a startling implication of Brexit that the media barely covers:

There is, in fact, simply no way thata hard Brexit, much less a no-deal Brexit, can be accomplished without an intra-national upheaval that will result, sooner or later, in a disunited kingdom”


The fallen superpower: US foreign policy from triumph to hubris

Review of a new book, the Back Channel A Memoir of American Diplomacy and the Case for Its Renewal , written by William Burns, the ultimate foreign policy insider who has served 5 presidents and 10 secretaries of state

…diplomatic profession has lost its near monopoly on presence, access, insight and influence. In the age of WikiLeaks and transnational actors, secrecy is porous, information ubiquitous. Those like Burns who have practised statecraft risk being drowned out. Lost in the Twittersphere are the age-old virtues of diplomacy: the ability to convene, communicate and manoeuvre for future gain, especially through alliances.

The End of Economics?

That economics has since slipped from that pedestal is simply a testament to the fact that the world is messy. The social sciences differ from the hard sciences because “the subjects of our study think,” said Herbert Simon, one of the few scholars who excelled in both. As we try to understand the world of the next three decades, we will desperately need economics but also political science, sociology, psychology, and perhaps even literature and philosophy. Students of each should retain some element of humility. As Immanuel Kant said, “Out of the crooked timber of humanity, no straight thing was ever made.”

Rediscovering literacy

Literacy meant using mastery over language — both form and content — to sustain a relentless and increasingly sophisticated pursuit of greater meaning. It was about an appreciative, rather than instrumental use of language. Language as a means of seeing rather than as a means of doing.

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Gutenberg certainly created a huge positive change. It made the raw materials of literary culture widely accessible. It did not, however, make the basic skills of literacy, exposition and condensation, more ubiquitous.

Instead, a secondary vocational craft from the world of oral cultures (one among many) was turned into the foundation of all education, both high-culture liberal education and the vocational education that anchors popular culture.

Articles that made me think (March 2, 2019)

Markets are Eating the World

Many internet pioneers in the 90’s believed that the internet would start to break up corporations by letting people communicate and organize over a vast, open network. This reality has sort-of played out: the “gig economy” and rise in freelancing are persistent, if not explosive, trends. With the re-emergence of blockchain technology, talk of “the death of the firm” has returned. Is there reason to think this time will be different?

Transaction costs can be subdivided into trust costs, transfer costs and triangulation costs. Technology drives down transaction costs. In general this increases the prevalence of gig work and incentivizes renting instead of buying.

Technology increases coordination scalability which is key in understanding how this all changed from the Neolithic to the Blockchain eras. Mechanical clocks and cryptocurrencies are both useful examples to understand the impact of technology on the economy.

Would be interesting to develop a framework for shocks caused by a sudden increase in transaction costs. Revolutions and natural disasters can cause a break down in trust in society. This of course does create an opening for crypto that can be overlooked by people’s whose experience consists of stable monetary regimes. Crypto has played a larger role in Argentina and Venezuela recently.

Ultimately, what we call society is a series of overlapping and interacting ledgers. In order for ledgers to function, they must be organized according to rules. Historically, rules have required rulers to enforce them. Because of network effects, these rulers tend to become the most powerful people in society. In medieval Europe, the Pope enforced the rules of Christianity and so he was among the most powerful.

Should I hire someone or outsource this role? Should a business vertically integrate? Why are CPG brands being upended by upstart product designers? Transaction costs is the datapoint that can answer all these questions.

Going for broker: Remittances to North Korea
Speaking of high transaction costs and low trust economies, its risky and expensive for North Korean refugees to send money home to relatives.

If a refugee in south South Korea wants to make a transfer, she may contact a broker in the North who owes a smuggler in China. The refugee may offer to pay some portion of the broker’s debt; in return, the intermediary gives an equivalent amount the the refugee’s family in the North, usually in dollars or Chinese yuan. The system is based on trust — and extravagant fes. The broker who facilitates the transaction takes a cut of around 30%.

Actually I’m kind of fascinated by how robust this market actually is all things considered.

Bond Illiquidity And LIBOR

Financial markets’ failure to solve the LIBOR replacement problem is the result of a misunderstanding of the reasons for the LIBOR problem. Understanding of LIBOR suffers from journalistic misdirection, on one hand, and a misunderstanding of the root problem that the LIBOR brouhaha exemplifies, on the other.

….In short, any satisfactory LIBOR replacement must be a form of debt that doesn’t exist now. We could throw up our hands and use the hazardous SOFR, but this seems to be a negative way of looking at the situation.

This is an obvious opportunity to seize an enormous chunk of the financial markets in one fell swoop by addressing bond market illiquidity more generally. Moreover, it is an opportunity that anybody with the courage and the capital could pursue. The problem is one of creating a new debt market with a different structure. Such a new market would have no incumbent oligopolies and no reactionary regulators. Capital, a few hotshot IT professionals, and some people with skills of persuasion would be enough ammunition to get the job done. Island overwhelmed the incumbent stock exchanges with less.

Enrique Abeyta has four pieces of advice for Jorge Paulo Lemann

The story of 3G’s value creation — buying a big brand and cutting costs to generate high equity returns — worked for ten years, “but they sailed in the direction of a storm they did not forsee. They overleveraged the ship in search of returns and lost their flexibility.” …


Rule thinkers in, not out

Imagine a black box which, when you pressed a button, would generate a scientific hypothesis. 50% of its hypotheses are false; 50% are true hypotheses as game-changing and elegant as relativity. Even despite the error rate, it’s easy to see this box would quickly surpass space capsules, da Vinci paintings, and printer ink cartridges to become the most valuable object in the world. Scientific progress on demand, and all you have to do is test some stuff to see if it’s true? I don’t want to devalue experimentalists. They do great work. But it’s appropriate that Einstein is more famous than Eddington. If you took away Eddington, someone else would have tested relativity; the bottleneck is in Einsteins. Einstein-in-a-box at the cost of requiring two Eddingtons per insight is a heck of a deal.

Basically its the framework of high upside convexity applied to ideas and people.

The fall of America’s “Money Answers Man”
This guy was simply promising 6% risk free. But it was too good to be true. Early Ponzi schemes usually promised outlandish returns with no risk. Perhaps after many years of millenium low interest rates, the bar for return promises on ponzi’s has been lowered.

America is obsessed with Theranos and Fyre Festival
The insatiable appetite for all things Holmes is part of an overarching obsession in America right now: We can’t get enough of scams and scammers.

Why hipsters all end up looking the same
Mimetic desire is a powerful force- even(or especially) for those who claim they don’t care.

In a vast range of scenarios, the hipster population always undergoes a kind of phase transition in which members become synchronized with each other in opposing the mainstream. In other words, the hipster effect is the inevitable outcome of the behavior of large numbers of people

For some reason this also reminded me of the movie SLC Punk.

RIP culture war thread
Slate Star Codex creator was subjected some of the crazier human tendencies that come to surface in the cultur war. Painful to read. Which is why it is essential reading.

In praise of work

The reason for the emergence of workism was that the jobs of banking and consulting were fundamentally about signaling intelligence, competence, credentials, hard work and availability. They were not about what sliver of work was being done, or how much meaning anyone invested in it. The job was – and is – almost wholly abstracted from that work. That is the soul of workism: that the job is, in every meaningful respect, to look like you are doing the job.