I love reading investment fund letters. This business requires a rare combination of variant insight and brutal intellectual honesty, which the best managers express in their writing. My highlights from the best letters I read this quarter are below, in no particular order. In this piece I mostly avoid quoting on specific stocks, and focused on broad investing and psychology themes. You can find plenty of investment ideas by following the links to the letters. This quarter several funds discussed the value/growth divide, the underappreciated risk of inflation(or deflation), business impact of negative interest rates, and mental model challenges in investing.
Thanks to the generous curators that make this possible. Mine Safety Disclosures is probably the best single source for hedge fund letters. They’ve sought out and organized many off the beaten path managers that I wasn’t reading before. The investment letter page on Reddit is another great source. I found several of these letters on twitter as well.
Vtltava Fund had one of my favorite letters this quarter. Here is their perspective on hyperbolic discounting :
I always say that one can learn a lot just by looking around oneself, seeing how the world works as well as how people perceive it. The way people perceive the world is then reflected in how investors (a subset of people) perceive the events on the capital markets (a subset of the world). The aforementioned tendency to overestimate short-term events and underestimate the importance of longterm trends is very strongly demonstrated in both cases. (Finance theory even has a name for this: hyperbolic discounting.)
On long term vs short term:
If we as investors were to profit from shortterm events, we would have to be able to recognize the truly fundamental ones in real time as they are happening. This is practically impossible, and even the effort to do so might bring very negative results, because in most cases it will transpire that one has overreacted to something that in the end will have been of no practical importance. We find it is much better to take the approach of betting on long-term expected developments in society.
One of the most cogent defenses of the valuable role that the finance sector can play in society:
For the capital market to work well and efficiently and for it to allocate capital at low costs, there must exist a sizeable number of entities of various types. Vltava Fund is one of those entities. Our role in the overall system is twofold: we act as intermediaries and analysts. We collect free capital from investors who want to invest and then analyse the individual investment opportunities to determine those into which we invest the collected capital. Even though we are just a tiny cog in the gigantic global markets machine, I am very proud of the work we do and how all of us associated with investing in Vltava Fund contribute collectively to the general progress, growth of wealth, and betterment of society.
Tollymore on epistemic humility and the Gell-Mann effect:
Serious media publications invent stories to explain outcomes, without the resources or inclination to determine causality. This often manifests itself in major descriptive U-turns as the outcome changes with the wind. The matters about which financial and political journalists opine are complex. This limits the mechanism to scrutinise these stories and hold their authors to account. And there is value to their readers and listeners, who can paraphrase talking heads’ memorable soundbites at cocktail parties rather than acknowledging ignorance or retrieving the relevant facts from their addled brains. Authority bias plays a role: media appearance confers credibility, the belief in which is counter to independent thought and self-awareness. Unsubstantiated conjecture is rife. As Mr. Crichton puts it: “one problem with speculation is that it piggybacks on the Gell-Mann effect of unwarranted credibility, making the speculation look more useful than it is”.
The goal of epistemic humility is consistent with maintaining a careful distance from today’s media. To exercise good judgement, we should shield ourselves from the Gell-Mann effect. Financial markets, political and economic systems, unlike meteorology, are reflexive; participants are second guessing one another and the bases on which decisions are made are altered by the decisions themselves. Speculation thrives because it is cheap and speculators are not held to account, but forecasting is foolish when nobody knows the future.
Epistemic humility is a key concept I try to apply in my approach to life.
Greenhaven Road discussed how they subdivide investments in high quality companies into those that are bets on the status quo continuing, vs those that are bets on the status quo changing.
They are also SPAC curious. They rarely do SPACs, but interesting what he goes through when he does they go to extreme lengths to compete due diligence, which they discuss in a case study.
Also, they have decided to make an investment in South Africa, which is a bit unusual for them. Here is some of their reasoning:
Why Bother with South Africa? For me, there are two parts to the answer. The first is a desire to hold some non-U.S. companies. While it is true that the world catches a cold when the United States sneezes, South Africa is in the interesting position of having not meaningfully participated in the last decade’s equity market growth due to poor political leadership, poor policy choices, and corruption. I believe that new leadership and positive reforms are likely to place South African equity markets in a position to be less correlated to developed equity markets yet produce positive returns, albeit more volatile. This is intended to be rational diversification.
The second and more important reason to venture to South Africa is the potential for returns. With a bit of continued growth, operating leverage, and anything approaching a fair multiple, I believe that the price of the shares we are acquiring could very realistically go up 5X. A hundred things can prevent that type of return from being realized, but given how absolutely beaten down South Africa is from a valuation perspective, any return to normalcy could produce abnormally positive returns.
They have some great points. We’ve also found opportunity in Africa.
Alta Fox Capital
Alta Fox on the concept of zooming in and zooming out:
The concept of “zooming in and out” is an important one for my investment process, both from a single idea and a portfolio construction perspective.
For any individual idea, it is important to “zoom in” to understand the unit economics of a business, appreciate the finer nuances of the financial model, and to develop a sound valuation technique. However, it is equally important to “zoom out” and to understand at a higher-level what could go wrong, develop intuition for risk and uncertainties that transcend a few valuation scenarios, and know when to ride winners or when to fold losers. For a broader portfolio management perspective, it is also important to zoom in and out. It is important to track performance relative to indices over time as that is ultimately the measuring stick, and if the market is disagreeing with you, it is important to know why. However, one has to zoom out and focus on the process because too much focus on short-term performance is absolutely detrimental to day by day decision-making.
The abilities to zoom in and out are different skills. This is one of the primary distinctions between a good analyst and a good portfolio manager. They have complementary, but different, skill-sets. An analyst is most often tasked with “zooming in,” which normally involves ripping a business apart and understanding the filings at a very rigorous level. A portfolio manager, on the other hand, must have an overarching philosophy on how to allocate scarce research time to specific ideas, passing on others, how to size positions, etc. The best investors are capable of simultaneously zooming in and out.
Firebird on negative interest rates:
In theory, companies trade at the present value of all future earnings. There are two key inputs to this: earnings and the discount rate. Companies that are growing earnings faster should be valued higher than companies with a slower growth rate, but how much more depends on the discount rate.
Consider a simple thought experiment at different interest rates: Company A is growing earnings at 2% per annum while Company B is growing at 15%. At a 7% blended discount rate, Company A is worth 17x this year’s earnings, while company B is worth 107x! Company B is value higher but has a much higher sensitivity to interest rates. A mere 1% change in the blended discount rate leads to 35% drop in value of Company B, while Company A valuation drops by only 15%
Note we also wrote up an extensive Negative Interest Rates Thought Experiment here. The implications across the economy are startling.
Of course, so are the implications of reversing negative interest rates, as Firebird points out:
In the U.S. market, growth companies have been outperforming value dramatically since the beginning of 2015, when we first started seeing corporate debt trading in negative territory. We believe that this outperformance is in large part due to repricing the cost of capital in light of the likelihood that low rates could persist for longer than originally anticipated. With the negative impact of low rates becoming more apparent every day, it is not surprising that the market reacted to the possibility that the policy of low negative interest rates may be in question.
According to Third Point, the markets aggregate results have masked a “tumultuous factor rotation” taking place underneath the surface.
In August, equity portfolios tied to momentum or the near inverse – “laggards” – outperformed, as markets inflated assets reflecting economic weakening in a low inflation/low growth world. These momentum asset biases – favoring large cap over small cap stocks, growth versus value, or “min vol” strategies – became increasingly correlated, crowded, and sometimes expensive. The equation extended itself more acutely in secular growth names and similarly punished unloved shorts.
Third Point has increased its emphasis on activism. Currently activist names account for 40% of their assets, the highest percentage in history.
Askeladden Capital’s letter this quarter reflected a maturing process. They discuss the limitations of primary research, and how their approach to risk has changed:
In certain circumstances (such as levered companies), we have become far more conservative, and less willing to underwrite certain outcomes with any confidence whatsoever. In other circumstances (such as recurring revenue businesses), we have become far less conservative, and far more willing to underwrite certain outcomes with a high degree of confidence. We have become more aggressive in underwriting knowable factors which we can understand better through thorough research and become far more conservative in underwriting unknowable factors which we generally believe cannot be elucidated by research to a degree helpful for the investing process. When we aren’t sure if something is knowable or unknowable, we like to default to ´unknowable for conservatism -overconfidence is killer in our business.
Nuances like these are what drive outperformance …
The letter was also full of links to articles on mental models. Separate letter for clients that includes specific positions. I won’t disclose any specific positions , but I will say as a client that performance has been solid, and there are several intriguing investments currently in the portfolio.
Comus Investment’s letter had some intriguing criticism of dividend investing:
Firstly the term dividend- investor makes no sense at all to me, and it makes even less sense than the fabricated demarcation between supposed growth and value investors. Dividend- investing often implies that one is investing with the goal to receive a currently yield at the expense of long term capital appreciation as if the two sources of returns are distinct(they aren’t)
Also, notable discussion on absurdities in the valuation in SAAS companies
Any tech investors reading this will likely roll their eyes given how often they are mentioned but I have to bring up the SAAS basket of stocks. I believe it is lower now, but last I saw the entire group of public SAAS-related stocks was valued above 10x sales. This is similar to 100 fishermen at a single lake estimating they can each catch a fish a day with only 10 fish in the lake- for the fishermen to be right the fish will have to reproduce extremely quickly. The entire industry is valued as if every investor will do extraordinarily well and each business is valued as if it will experience organic ROE’s of 20%+ for decades.
Theye also had an interesting point about how accounting changes (ASU 2014- 09B) will influence SAAS accounting
Punch & Associates
In their latest letter, Punch & Associates frames a fascinating discussion around the parallels between the Screwtape Letters (great book) and the emotional and psychological challenges investors face. Screwtape Letters are fictional letters from Screwtape, to his nephew Wormwood, part of an underworld organization charged with taking souls from people trying to live a righteous life.
parallels exist between the forces (temptations, distractions, habits) acting on the Patient and the forces impacting the hearts and minds of individual investors. While these forces may not be described as demonic (some may be), and while the fate of one’s soul may not hang in the balance, the fact that these forces exist and that we are all vulnerable at times does indeed matter. The world is not perfectly architected so that you can get rich, beat the S&P 500, or even reach your financial goals. Quite the opposite.
People’s lives go through peaks and troughs, and this impacts thaeir ability to live a good life. Similarly, peaks and troughs in the market impact people’s ability to make rational decisions.
Closely related, there are great lessons for dealing with temptation of noise:
Noise is something that we all deal with in investing and in our lives. Like Wormwood’s whisperings, it’s constant. Noise can enter into your life and cloud both your judgement and priorities. People are subject to it one moment, and then they are not. The effect of noise, therefore, undulates. It’s not enough, however, to occasionally ignore noise, because mistakes are made in moments. Wormwood’s efforts are like the noise we encounter today, constantly whispering in our ears.
Pangolin Investment Management
Pangolin Investment Management is focused on Asia, and their August letter made some interesting points about tax policy in Southeast Asian countries . Also they have some commentary on a challenging history/geopolitics situation in Indonesia. In their October letter Pangolin discussed car racing in Malaysia, and the broader meaning implications for emerging markets.
Lifestyles are changing quickly in Asia. Motor racing with all its glamour is a million miles away from Lombok’s subsistence padi farming of 20 years ago. Here, income growth lifts people from being poor farmers to basic consumers, and then on to becoming middle class discretionary spenders.
It’s not just about a GDP growth, but the massive change in people’s lifestyles that accompanies it.
Ensemble Capital on the three types of traps they avoid:
We’ve identified three traps we want to avoid. First, the commoditization trap. This is when there’s strong management in place and an easy-to-understand business, but either a non-existent or narrowing moat. Much of a company’s intrinsic value is driven by its so-called “terminal value” – the value the business will create over the very, very long term. As such, if we’re not confident that a company can maintain or widen its economic moat beyond 5 or 10 years, estimating terminal value becomes increasingly difficult. In this circumstance, long-term returns on invested capital and growth – the two pillars of our valuation model – can decline faster than might otherwise be expected. Some investors are comfortable making a bet on a company decline being slower than market expectations – and that’s another way to make money – but we think that’s a dangerous game and one we intentionally avoid.
The second trap is a stewardship trap. This is when there’s evidence of a durable moat and an easy-to-understand business, but we lack confidence in management. We live in a hyper-competitive economy where cheap and abundant capital and new advertising platforms have made it easier than ever for challengers – whether that’s a startup or Amazon – to take on lazy incumbents and chip away at their business. Because of this, we require our companies to be managed by what we consider to be good business stewards. Our management teams need to understand how to create sustainable value and thoughtfully allocate capital.
The final trap is the complexity trap. This is when we like management and think there’s a durable moat, but we just can’t get comfortable understanding the business. Sometimes the reason is that we lack requisite domain knowledge in a specialized field. Other times, the financials are opaque, or the business operates in multiple competitive arenas and we struggle to grasp unit economics. Before investing in any company, we want to appreciate the known risks and the so-called “known unknowns” about the business, and a lack of understanding prevents us from achieving this.
Artko Capital’s latest letter included discussion on investment business challenges of focusing on microcaps. Although returns in the space are lucrative, structural reasons that opportunities are left for smaller funds. Also includes a great case study on handling portfolio responsibilities as a portfolio manager when investing in turn around type situations.
Andaz Private Investment
Andaz Private Investment’s latest letter includes some provocative commentary on the real meaning of inflation statistics:
There is a prevailing argument out there that inflation is nowhere to be seen, and that deflationary forces are at play e.g. technology replacing workers, offsetting the effects of money printing. In our view, this is naive. The metric used to measure inflation (CPI) is misleading and we would argue, deceptive. In fairness, the Australian Bureau of Statistics makes no attempt to hide this and has the following disclaimer:
“In practice, no statistical agencies compile true cost of living or purchasing power measures as it is too difficult to do.”
Other bodies are not so forthcoming. Central banks have decided that this garbage-in, garbage-out statistical measure is their sacred metric, that 2.0% is their precise target, and will print money until that figure is very close to 2.0% but not over it.
The most crucial criteria for investment over the foreseeable future will be to hold assets and securities which can outrun inflation (e.g. businesses which can raise prices or use levers to increase profits/earnings on a per share – again undiluted – basis).
The East 72 Quarterly letter had some interesting macro discussion on company earnings trends.
Additionally, they also discussed a bunch of super cheap, esoteric investment/asset holding company investments. Listed investment companies in Australia seem like an especially interesting hunting ground these days.
It has been noteworthy that the mania surrounding Australian LIC’s, rather than subsiding, has turned to near derision in some cases. This is leading to a number of corporate actions and activist behaviour designed to close up value gaps or force liquidation against hefty fee imposts for “me-too” investment strategies. …
We have always held the belief that having permanent capital available means that a far more esoteric/illiquid investment strategy can be pursued (in essence, that’s the basis of East 72 itself). However, in these situations, care needs to be taken to retain liquidity to ensure discounts to NAV do not blow out.
Great discussion on the different types of edge in the Saber Capital letter. This comment on time horizon edge is key for long term investors:
….the deterioration of the info edge has actually increased the size of the “time horizon” edge.
GMO recently released a letter called Shades of 2000:
..many investors made the case in 2000 that long-term averages were not meaningful anymore and the future would be far different from the past. From the standpoint of the world from 200-2010, those investors proved to be wrong as asset prices
Value investing is way out of favor these days, but GMO believes the current environment that value investors have had in 20 years.
Horizon Kinetics 2019Q3 letter summarizes their current investment positining this way:
The composition of our equity portfolios is intended to avoid making their performance dependent on the continuation of the status quo.
They discuss what type of companies might do well under different scenarios, and include this handy diagram:
Horizon Kinetics’ points out that most investors are all invested in the same group of stocks, and are not prepared for any inflation. Enroute they point out some of the absurdities of ETF land, such as the fact that the same stocks are classified as both growth, value, low vol, high dividend in different indexes.
A couple of interesting statistics, since this discussion is all about diversification. This year through September, the daily price correlation of the following indexes with the S&P 500 were all between 0.86 and 0.98, meaning that their price behavior varied almost identically with the S&P 500: S&P 500 Growth ETF, the S&P 500 Value ETF, the Russell 2000 ETF of small-cap stocks, and the All Country World Index Ex-U.S. The greatest variance, among the major equity classifications was from the Emerging Markets ETF, and that fund mirrored the S&P 500 77% of the time.
People think they are diversified, but they aren’t.
Focused Compounding discusses different types of price risks in their investments. They explains why they look for a combination of low share turnover , and low beta in order to identify underfollowed stocks. It contained this gem of a quote :
In investing: beta is like syphilis. If art, cash, gold, or bonds are inherently lousy, low returning assets (barren islands) – then, institutions and individual investors can simply switch into inherently more productive assets like stocks, farmland, timberland, real estate, etc. (fertile islands) and collectively lower the risk they won’t achieve their long-term financial goals.
They use a couple case studies to discuss why their experience has led them to personally prefer “compounders” to asset plays as well.
Silver Ring Value Partners
Silver Ring Value Partners mostly follows a bottom up stock picking strategy. However, they have decided to put on a Minsky style tail hedge, which they discuss in detail in the letter. They looked for for companies that have high debt levels and will need to refinance soon. These companies are most likely to decline severely in a panic. Its a great example of combining micro and macro- of a bottom up investor, productively worrying from the top down.
See also: Thinking and Applying Minsky
Templeton & Phillips Capital Management
Tempelton & Phillips latest letter has interesting commentary on how the value and growth divide is blurring when you look carefully. (see also: Why All Great Investors Are Intellectual Cross Dressers)
Excellent analysis of how intangible assets influence modern balance sheet analysis:
…the assets driving economic gains today are more closely related to Mickey Mouse in nature, than they are to the tangible assets that statistical measures, accounting methods, and valuation methods were designed around in the last century. This reality has created significant challenges for today’s economists and accountants, who still struggle to account for intangible assets that defy being touched, seen, measured, valued, and in some cases even fully understood. Rather than tackle the anomalous values of Mickey Mouse, or the formula for Coke,
economists and accountants today are tasked with collecting, interpreting and recording data representing a widely expanded realm of intangible assets including: in-house proprietary software, customer databases, customer network effects, business processes, and organizational structures. So, while the assets listed above are very real to shareholders, and tend to be more durable than not, the business activities used to create them flow through the income statement as expenses, rather than get recorded on the balance sheet as an investment. In sum, the financial parties that collect and report data to the markets are failing to capture an increasing amount of economic activity tied to today’s growth in intangible assets.
One final note here is that we believe in order for a Ben Graham style asset-based valuation approach to be successful today—such as the widely used price to book ratio—the analysis would need to make an estimate regarding the value of intangible assets (not fully reported in financials) in order to calculate a reasonably accurate ratio. Since many intangible assets are not counted in traditional book value, the price to book value without any adjustment appears inflated (and expensive). Similarly, a low price to book ratio without any adjustments implies to us the possible need for asset write-downs or a firm’s reliance on underperforming tangible assets. Since low price to book ratios are a key focus for the “value” indices, we believe
these measures have a bias towards selecting firms with less productive assets. To the extent this is true, this collection of assets are very likely to underperform the overall market, much less the growth stocks where earnings estimates are growing even faster (but may not be sustainable).
White Crane discusses the bifurcation of the credit markets between companies that can raise tons of easy money on easy terms, and those unable to raise any at all.
Such bifurcation of credit markets is often witnessed in the latter stages of credit cycles, as the availability of capital erodes. With credit availability becoming finite, lenders allocate only towardsselect borrowers, while others are either forced to pay exorbitant rates or seek other forms of Capital.
In order to take advantage of this market bifurcation, and a potential transition into a broader credit downturn, the Fund has built short positions in a basket of corporate credit securities.
These short positions can be grouped into two categories:
1) Investment grade credits that currently have access to unlimited amounts of low-costcredit; and
2) High yield credits that, in our opinion, do not have access to capital markets – yet are being priced as if they are investment grade credits with unlimited access to inexpensive
The common theme between all the credits in our short basket is that the all-in negative carry is low and they each have specific catalysts that we believe will result in a re-rating of the securities. Through this basket, we have created inexpensive capital structure put options where our downside is limited (i.e. essentially the negative carry) and our potential upside is substantial should our identified catalysts unfold. We expect to continue adding to this basket of credit shortsas the credit cycle becomes increasingly elongated and additional opportunities emerge.
Saga Partners latest letter on investing in a time of heightened uncertainty
… when is there not a heightened sense of uncertainty in the markets? And when markets do inevitably panic again, as they did in the fourth quarter of last year, will investors then overcome their fears and say now is the right time to invest? Or will they wait until things calm down and become less uncertain?
We are certain that another recession will happen sometime in the future, but we do not know when it will happen, how long it will last, or how extreme it will be. We do not even know how the market will react going into and coming out of it. We do know during 2008 following the Lehman Brothers bankruptcy and subsequent financial meltdown, the outlook at the market lows was far from certain. We prefer to keep our heads down, ignore the noise, and simply look for the best opportunities we can find given the information we have today. As we’ve noted before, more money has been lost waiting for corrections or trying to anticipate them than has been lost in the corrections themselves.
On value vs growth:
A company is neither cheap nor expensive because of where it sells relative to recent fundamentals. These classifications of value or growth are just a convenient box ticking, quantitative oriented practice used by consultants which can distort the investing process. While different styles, genres, or investing factors may go in and out of favor at times, at the end of the day, the value of a stock is all the cash that can be taken out of a company going forward.
They also had a detailed discussion on how fee structure impacts ultimate returns to investors.
In contrast with Horizon Kinetics, Forager Funds argues that it might actually be deflation for which investors are most egregiously underprepared.
Many investors assume that “what goes down must go up”. Many of our clients lived through the inflation of the 70s and 80s and seee its return around every corner. But what if that period was the anomoly rather than the rule. We all thought that the stimulus andgrowth in money supply after the financial crisis was certain to kick start an inflationary spiral. It hasn’t. In fact, inflation has been worryingly low. Best prepare, I would suggest, for a sustained period of zero rates.
More importantly, what do these zero rates imply about the future of the economy? What if, rather than rates going up, we are headed for a long period of low growth and deflation?
Low nominal rates are not necessarily a panacea for borrowers. It feels like it because the interest payments today are so low. But if we are headed for a deflationary world, its repayments later in life that you need to worry about.
The world might be “turning Japanese. Forager’s research into ASX listed Japanese property trusts leads to some startling conclusion of what that might be like. They were initially intrigued by how the companies were, but then realized that with wages, and rents falling in 18 out of 20 years, they might think they were earning a good return only to one day find the property was worth less than the debt.
Today’s low rates are sending a very important signal. The world is turning more and more Japanese.
If that is the world we are headed for, be very wary of debt.
In addition to this macro commentary, the letter includes a lot of intriguing off the beaten stock ideas in Asia.
What great managers did I leave out? Send me your favorite hedge fund letters.
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
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.
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
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.
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.
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.
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
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.”
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?
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”
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”
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.
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.”
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.
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.
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.
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.
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.” …
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.
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.