I always feel like I’m getting both nutrition and entertainment when I read the Berkshire Hathaway annual meeting transcript, found here at Rev.com
Asked about the morality of owning an oil and gas company like Chevron, Charlie Munger poses and then answers a strange hypothetical:
You can imagine two things. A young man marries into your family, he’s an English professor at, say, Swarthmore, or he works for Chevron. Which would you pick? Sight unseen? I want to admit, I’d take the guy from Chevron. Yeah.
Did not know this about the origin of the rear view mirror:
Warren Buffett: (01:35:54)
Maybe that’s why they called it Marmon. And that we’re proud of the fact that the company in 1911 named one of the first Indianapolis 500. It also was the company that invented the rear view mirror. I’m not sure whether that was a big contribution to society. And certainly around your household rear view mirror, you don’t want to emphasize too much. But they, the car that was entered in Indianapolis 500, the guy who normally sat next to the driver and looked backwards to tell what the competitors were doing, he was sick. So they invented the rear view mirror. So let’s just assume that you had decided that autos were this incredible thing. And someday there’d be an Indianapolis 500 and someday they’d have rearview mirrors on cars. And someday 290 million cars would be buzzing around the United States or autos or trucks there.
On BNSF railroad:
15% of the interstate goods move on our railroad
Competition for BNSF, and for Geico:
This question comes from Glen Greenberg, it’s on the profitability of GEICO and BNSF. He said, “Why do these companies operate at meaningfully lower profit margins than their main competitors, Progressive and Union Pacific? Can we expect current managements to at least achieve parity?
Warren Buffett: (02:33:25)
Was it GEICO and-
Warren Buffett: (02:33:28)
Oh, actually, if you look at the first quarter figures, you’ll see that the Berkshire Hathaway/Union Pacific comparisons has gotten quite better. Katie Farmer’s doing an incredible job at BNSF, and it’d be an interesting question whether five years from now or 10 years from now, BNSF or Union Pacific has the higher earnings. We’ve had higher earnings in the past, Union Pacific passed us. The first quarter, you can look at and they think they’ve got a slightly better franchise. We think we’ve got a slightly better franchise. We know we’re larger than Union Pacific, we will do more business than they do. And we should make a little more money than they do, but we haven’t in the last few years. But it’s quite a railroad, I feel very good about that.
And it’s a very interesting business, both Progressive and GEICO were started in the ’30s. I believe I’m right about Progressive on that, and we were started in ’36. We have had the better product for a long, long time, I mean, in terms of cost. And here we are 80, 85 years later, in our case, and we have about 13% or so of the market, whatever it may be, and Progressive as just a slight bit less. So the two of us have 25% of the market, roughly, in this huge market, after 80 something years of having a better product. So it’s a very slow changing, competitive situation, but Progressive has done a very, very good job recently. We’ve done a very, very good job over the years, and we’re doing a good job now, but we have made some very significant improvements.
Is Flo just more appealing than the Geico Gecko? Ajit Jain doesn’t think so:
Progressive has certainly done better, but when it comes to branding, GEICO is, I think, miles, excuse me, ahead of Progressive. And in terms of managing expenses as well, I think GEICO does a much better job than anyone else in the industry.
On interest rates:
I mean, interest rates, basically, are to the value of assets, what gravity is to matter, essentially. …
I mean, if I could reduce gravity, it’s pull by about 80%, I mean, I’d be in the Tokyo Olympics jumping. And essentially, if interest rates were 10%, valuations are much higher. So you’ve had this incredible change in the valuation of everything that produces money, because the risk-free rate produces, really short enough right now, nothing. It’s very interesting. I brought this book along, because for 25 or more years, Paul Samuelson’s book was the definitive book on economics. It was taught in every school and Paul was… he was the first Nobel a prize winner. It’s sort of a cousin to the Nobel prize, they started giving it in economics, I think, in the late ’60s, he was the first winner from the United States, Paul Samuelson. Amazingly enough, the second winner was Ken Arrow, and both of them are the uncles of Larry Summers. Larry Summers had the first two winners as uncles.
Weird, did not know that. Buffett goes on:
But if present rates were destined to be appropriate, if the 10 years should really be at the price it is, those companies that the fellow mentioned in this question, they’re a bargain. I mean, they have the ability to deliver cash at a rate that’s, if you discounted back and you’re discounting at present interest rates, stocks are very, very cheap. Now, the question is what interest rates do over time. But there’s a view of what interest rates will be based in the yield curve out to 30 years and so on.
It’s a fascinating time. We’ve never really seen what shoveling money in on the basis that we’re doing it on a fiscal basis, while following a monetary policy of something close to zero interest rates, and it is enormously pleasant. But in economics, there’s one thing always to remember, you can never do one thing, you always have to say, “And then what?”
Buffett goes on to invoke the St. Peterburg paradox.
On, basically, what’s cool about the stock market:
we’ve got the greatest markets the world could ever imagine. I mean, imagine being able to own parts of the biggest businesses in the world and putting billions of dollars in them and take it out two days later. I mean, compared to farms or apartment houses or office buildings, where it takes months to close a deal, the markets offer a chance to participate in earning assets on a basis that’s very, very low cost and instantaneous, huge, all kinds of good things, but it makes its real money if they can get the gamblers to come in because they provide more action and they’re willing to pay silly or fees and all kinds of things.
On the market as a casino:
Well, the stock market, we’ve had a lot of people in the casino in the last year. You have millions and billions of people who’ve set up accounts where they day trade, where they’re selling… Put some calls, where they, I would say that you had the greatest increase in the number of gamblers essentially. And there’s nothing wrong with gambling and they got better odds than they’ve got if they play the state lottery, but they have cash in their pocket. They’ve had action. And they actually don’t have a lot of good results. And if they just bought stocks, they do fine and held them.
But the gambling impulse is very strong in people worldwide, and occasionally it gets an enormous shove and conditions lead this place where more people are entering the casino than are leaving every day, and that creates its own reality for a while. And nobody tells you when the clock is going to strike 12:00, and it all turns to pumpkins and mice. But when the competition is playing with other people’s money, or if they’re playing foolishly with their own money, but the big stuff is done with other people’s money, they’re going to beat us. I mean, we’re not… that’s a different game and they’ve got a lot of money, so we’re not going to have much luck on acquisitions while this sort of a period continues.
Charlie Munger saying Bernie Sanders “has won,” but he didn’t mean it in a complimentary way:
MUNGER: And I think one consequence of the present situation is that Bernie Sanders has basically won. And that’s because with the, everything boomed up so high and interest rates, so low what’s going to happen is the millennial generation is going to have a hell of a time getting rich compared to our generation. And so the difference between the rich and the poor and the generation that’s rising is going to be a lot less. So Bernie has won. He did it by accident, but he won.
Charlie is asked, given high tax rates, what keeps him in California?
MUNGER: Well, that’s a very interesting question. I frequently say that I wouldn’t move across the street to save my children 500 million in taxes and stuff. So I have that, that’s my personal view of the subject, but I do think it is stupid for states to drive out their wealthiest citizens, the old people that don’t commit any crimes, they donate to the local charity. Who in the hell in their right mind would drive out the rich people? I mean, Florida and places like that are very shrewd and places like California are being very stupid. It’s contrary to the interest of the state.
I love the dodge here on a question about Bitcoin:
Yeah, I knew there’d be a question on Bitcoin. I thought to myself, “Well, I’ve watched these politicians dodge questions all the time.” I always find it kind of disgusting when they do it. But the truth is, I’m going to dodge that question because we’ve probably got hundreds of thousands of people watching this that own Bitcoin, and we’ve got two people that are short. We’ve got a choice of making 400,000 people mad at us and unhappy and/or making two people happy. That’s just a dumb equation. I thought about it. We had a governor one time in Nebraska, a long time ago. He would get a tough question, what do you think about property taxes or what should we do about schools? He’d look right at the person, and he’d say, “I’m all right on that one,” and he’d just walk off. Well, I’m all right on that one and maybe we’ll see how Charlie is.
A quality of a great business:
Well, we’ve always known that the green business is the one that takes very little capital and grows a lot, and Apple and Google and Microsoft and Facebook are terrific examples of that. I mean, Apple has $ 37 billion in property, plant, equipment. Berkshire has 170 billion or something like that, and they’re going to make a lot more money than we do. They’re in better business. It’s a much better business than we have, and Microsoft’s business is a way better business than we have. Google’s business is a way better business.
I thought this was funny. The question was re: Robinhood.
But they have attracted, maybe set out to attract, but they have attracted, I think I read where 12 or 13% of their casino participants were dealing in puts and calls. I looked up on Apple, the number of seven day calls and 14 day calls outstanding. I’m sure a lot of that is coming through Robinhood and that’s a bunch of people writing… They’re gambling on the price of Apple over the next seven days or 14 days. There’s nothing illegal about it. There’s nothing immoral. But I don’t think you would build a society around people doing it. If a group of us landed on a desert island, we knew that we’d never be rescued, and I was one of the group and I said, “Well, I’ll set up the exchange over and I’ll trade our corn futures and everything around it.” I think the degree to which a very rich society can reward people who know how to take advantage essentially of the gambling instincts of, not only American public, worldwide public, it’s not the most admirable part of the accomplishment. But I think what America has accomplished is pretty admirable overall. And I think actually, American corporations have turned out to be a wonderful place for people to put their money and save, but they also make terrific gambling chips.
Odd anecdote from Warren, Munger is talking about state lotteries (he doesn’t approve):
Charlie Munger: (04:40:03)
The states in America, replaced the mafia as the proprietor of the numbers game. That’s what happened.
Warren Buffett: (04:40:03)
Charlie Munger: (04:40:03)
They pushed the mafia aside and said, “That’s our business, not yours.” Doesn’t make me proud of my government.
Warren Buffett: (04:40:03)
When I was a kid, my dad was in Congress, they had a numbers runner in the house office building, actually.
On the potential CP/KSU railway merger, which would strengthen a rival to Berkshire’s own BNSF:
In terms of the price that’s being paid, like I say, if you can borrow all the money for nothing, it doesn’t make much difference to people. This would not be being paid under a different interest rate environment. I mean, it’s very simple. There’s no magic to the Kansas City Southern. I think their deal with Mexico ends in 2047. It’s the number of carloads carried. I mean, it’s not going to change that much, but it is kind of interesting. There’s only two major Canadian, what they call Class I railroads, and there’s five in the United States. This will result in, essentially, three of the units being Canadian, four being U.S., which is not the way you normally think of the way the development of the railroad system would work in the United States.
We looked at buying CP. Everybody looks at everything. We would not pay this price. It implies a price for BNSF that’s even higher than what the UP is selling for. But it’s kind of play money to some degree, I mean, when interest rates are this low. I’m sure from the standpoint of both CP and CN, there’s only one K.C. Southern. They’re not going to get a chance to expand. They’re not going to buy us. They’re not going to buy the UP. The juices flow, and the prices go up.
Charlie Munger: (03:37:15)
They’re buying with somebody else’s money.
Warren Buffett: (03:37:18)
Yeah. It’s somebody else’s money, and you’re going to retire in five or 10 years. People are not going to remember what you paid, but they’re going to remember whether you built a larger system. The investment bankers are cheering you on at every move. They’re just saying, “You could pay more.” They’re moving the figures around. The spreadsheets are out, and the fees are flowing.
The juices flow, indeed.
I can barely keep up with the story of Canadian Pacific and Kansas City Southern railways merging to form a transcontinental, Canada to Mexico super railway.
On April 13, Brooke Sutherland in Bloomberg reported on some potential bumps to the CP/KSU merger:
Canadian Pacific Railway Ltd.’s plan for taking over Kansas City Southern in a $29 billion transaction has drawn pushback from the Department of Justice. The Surface Transportation Board is the rail industry’s primary regulator and has the final say, but the DOJ is allowed to express its opinion and this week it asserted a “statutory right to intervene” in major railroad mergers. The DOJ takes primary issue with Canadian Pacific’s plan to close the deal on a financial basis in advance of regulatory approval by putting the acquired Kansas City Southern shares in a voting trust. It rightly points out that companies in other consolidated industries frequently have to wait a year or more to close transactions and they manage just fine without a voting trust that risks compromising the target’s independence and future competitiveness. The DOJ — along with rival railroads and some key shipping groups — also wants the STB to waive Kansas City Southern’s exemption from tougher 2001 merger rules that require major carriers to prove a transaction is in the public interest. While Kansas City Southern remains the smallest major North American railroad, it’s much bigger than it was, in part because of the 2005 acquisition of Mexico’s TFM railroad. Canadian Pacific issued a response to the DOJ, arguing that the pre-2001 rules are rigorous enough for its merger and that a voting trust is essential to make the transaction work. The voting trust is useful in staving off a counterbid from the private equity firms that were circling Kansas City Southern last year, but I’m less convinced of its public interest benefits. If there are any, Canadian Pacific should have to prove that.
Look I would never tell CP CEO Keith Creel how to do his job, but I worry about CP losing control of the story here. Creel may come off a little too confident in the 2001 merger rules putting him in the right here. This is the Surface Transportation Board’s time to shine, they’re gonna flex their muscles. Creel will need to win them over, not just bowl them over, to make this merger happen. What about a PR campaign? Creel should:
- remind the Surface Transportation Board that although the company may be called Canadian Pacific, he’s from Alabama.
- remind the Surface Transportation Board of where he comes from in a deeper sense. Creel is a protege of great Tennessee railroader Hunter Harrison. Harrison’s goal was simple: more efficient railroading. That’s good for the consumer, it’s good for partners, it’s good for rail customers, it’s good for traffic, it’s good for reducing congestion, it’s good for the environment, it’s good for America.
- sell the glorious, international, free trade vision he’s seeing here. The Canadian Pacific / Kansas City Southern railroad merger would create a true transcontinental railroad, rolling from Canada to Mexico and through Chicago by the way.
- should the new company be called North American Pacific, or even American Pacific? While no one would want to take away from the beautiful history of Canadian Pacific, flattering American regulators and winning over the American people should absolutely be the strategy for now.
- could HQ be moved from Calgary even? Just spitballing!
The beauty of this railroad isn’t a tough sell, people love thinking about this new, enormous railroad once you help them see it. At least I do.
It’s a question of storytelling here. CP needs to tell the story, and not let the DOJ come up with a darker, more unpleasant story.
But then, this morning, a twist! Canadian National, Canada’s other enormous railway, threw their hat in the ring to buy KSU and achieve the continental super railway!
Again, Brooke Sutherland in Bloomberg is on the case. We have to understand the CP/CNI rivalry, it’s over hundred years old:
Century-Old Rail Rivalry Flares Up Over a $30 Billion Prize
as Bloomberg puts it, Kevin Orland reporting:
The very formation of Canadian National made Canadian Pacific “apoplectic” that it now had to compete with a government corporation, and Canadian National’s public backing was a sore spot for decades, Anastakis said. Even when Canadian National was privatized in 1995, it was initially run by Paul Tellier, a former high-ranking government official.
The two firms also reflect regional and political tensions in Canada, with Calgary-based Canadian Pacific representing the western, conservative part of the country, and Montreal-based Canadian National embodying the more liberal, elite character of the east, Moore said — as well as the bilingual nature of Quebec.
I dunno, I might be biased as a CP shareholder, but this CNI bit seems weak to me. Didn’t they argue against any merger with KSU at all? A deal used to mean something in railroading. I’m afraid I have to root even harder for CP now.
Will the Surface Transportation Board see the phony arguments of CNI were just some Canadian pettiness, and be more inclined to allow the merger?
As Brooke Sutherland reports:
no one really knows at this point what the STB will or won’t allow
Note the headline:
Forget Bitcoin. Railroads Are the New Bubble.
Look, I’m just an enthusiast here.
“Investors will not be able to quantify which aspects of growth, earnings and the economy are organic, and which aspects are the result of a simulated world where monetary and fiscal excess artificially create a facade of health and wealth,” he said. “There won’t be real clarity for a couple of years.”
from “Stock Bulls Bet It All on Earnings Guesses With Troubled Record” by Lu Wang in Bloomberg today. Also of note:
Hypothetically speaking, should earnings fail to catch up and the market’s multiple return “back to normal” — the long-term average of 16, the S&P 500 is at danger of losing a third of its value.
Charlie Munger, age 97, recently held forth at the annual meeting for Daily Journal Company. Blunt and entertaining as ever. “Amateurs talk about Buffett, professionals talk about Munger” as the old saying goes.
Our long fascination with Munger has been a frequent topic on this site, resulting in some wonderful communication and connection with the secret world of Mungerists out there.
Munger was asked a question that got me thinking. It was about the founder of modern Singapore, long time prime minister, Lee Kuan Yew:
Question: Charlie, you have been a long-time admirer of Singapore and Lee Kuan Yew. You once said to study the life and work of Lee Kuan Yew. You are going to be flabbergasted. I would be curious to know how you started your interest in Singapore and Lee Kuan Yew. Have you met Lee Kuan Yew in person? And if there is one thing the world could learn from Singapore, what would that be?
Charlie Munger: Well, Lee Kuan Yew had the best record as a nation builder. If you’re willing to count small nations in the group, he had probably the best record that ever existed in the history of the world. He took over a malarial swamp with no army, no nothing. And, pretty soon, he turned that into this gloriously prosperous place.
His method for doing it was so simple. The mantra he said over and over again is very simple. He said, figure out what works and do it. Now, it sounds like anybody would know that made sense. But you know, most people don’t do that. They don’t work that hard at figuring out what works and what doesn’t. And they don’t just keep everlastingly at it the way he did.
He was a very smart man and he had a lot of good ideas. He absolutely took over a malarial swamp and turned it into modern Singapore—in his own lifetime. It was absolutely incredible.
He was a one party system but he could always be removed by the electorate. He was not a dictator. And he was just so good. He was death on corruption which was a very good idea. There’s hardly anything he touched he didn’t improve.
When I look at the modern Singapore health system, it costs 20% of what the American system costs. And, of course, it works way better than our medical system. That’s entirely due to the practical talent of Lee Kuan Yew. Just time after time, he would choose the right system.
In Singapore, you get a savings account the day you’re born. If you don’t spend the money, you and your heirs get to spend it eventually. In other words, it’s your money. So, to some extent, everybody buying medical services in Singapore is paying for it themselves. Of course, people behave more sensibly when they’re spending their own money.
Just time after time he would do something like that. That recognized reality and worked way better than what other people were doing. There aren’t that many people like Lee Kuan Yew that have ever lived. So, of course, I admire him. I have a bust of Lee Kuan Yew in my house. I admire him that much.
Sometimes Munger’s harsh rationality has an edge that makes me a little uncomfortable. The unabashed admiration of Singagore’s Lee Kuan Yew is an aspect of that. I’ve never visited Singapore. I’d like to, and see these weird tree buildings and eat the street food. In my travels I’ve met several people from Singapore. What discussion we had of Lee Kuan Yew was pretty ginger, because I’m too ignorant to have much of an opinion, because it’s polite to be sensitive when discussing another country’s main founding guy, and because, well, I get the sense in Singapore you don’t really criticize Lee Kuan Yew. Though LKY is dead, his eldest son is still in charge. That sense that we’re dealing with a bit of an authoritarian is what makes me uncomfortable.
Thomas Meaney has a review of Michael Barr’s history of Singapore in the LRB which gives me just the kind of context I need.
Lee Kuan Yew, by contrast, made no such attempt. ‘That’s the end of the British Empire,’ he told one of his classmates at Raffles College when the first blasts were felt over the city. Lee, then in his late teens, not only learned Mandarin and Japanese during the occupation, but worked as a translator of Allied news reports for the main Japanese propaganda bureau in the Cathay Building. A few floors down, Yasujirō Ozu, freshly arrived in Singapore, produced propaganda about the Indian National Army’s fight against the British Empire. ‘The three and a half years of Japanese occupation were the most important of my life,’ Lee wrote in his memoirs. He admired the ruthlessness of the Japanese, and believed it had toughened up his generation. The efficiency of their brothels impressed him. Spotting the head of a Chinese looter hanging from the marquee of a movie theatre, he thought: ‘What a marvellous photograph this would make for Life magazine.’
how about this?:
The key was to make Singapore appealing to US investment by ensuring laws favourable to corporate capital, and prioritising economic prerogatives over political freedom. With no local capitalist class to discipline the workforce, independent Singapore resorted to what Christopher Tremewan calls ‘forced proletarianisation’. The city-state’s notorious public order laws – lashes and prison for spitting, graffiti and public urination; swift execution for drug possession – were part of a breakneck effort to make Singapore’s citizens the most cowed and reliable semi-skilled workforce in Asia. ‘Disneyland with the death penalty’ was the way William Gibson described it. Free hospital care – which scandalised Milton Friedman when he learned of it – was ended. Lee consolidated all the trade unions into a single union under his control. With the Central Provident Fund, he could force workers to save part of their salaries for retirement, adjusting amounts at will, which allowed him to raise and lower wages in co-ordination with the needs of foreign industry. American corporate elites marvelled at such a partner. Lee personally escorted visiting CEOs around the island. The result was a boom of massive proportions, with Singapore leading the region in electronics assembly, ship repair and food processing. Full employment was achieved within a decade.
I don’t want anyone making me cowed, even if I am at best semi-skilled.
Here is Balaji Srinivasan on the Tim Ferriss podcast, articulating why CEO types seem to like LKY so much:
What Lee Kuan Yew did, really, the reason I think he’s so important, is I think he’s a piece of the 21st century that fell into the 20th, to paraphrase. Basically, I think he was the first startup CEO of a country, of a city state. And I think we’ll see a thousand more like him.
So he’s a very important person to study, his life and history, because here’s the thing: he did what he did with minimal coercion. He’s not famous for winning some giant violent conflict. He’s not famous for some activist movement. He stands for delivering results. That’s actually really, really interesting. He’s famous for boosting prosperity and zero-to-one-ing a society. He was really a lion, really a great guy.
But what about the collaborating with the Japanese?
In any case, I am trying to figure out what works in my own life, and do it. Munger’s right, it’s not that easy! Of course, there’s a question of how we’re measuring what works.” Posting thought-provoking stuff here on Helytimes works, that’s for sure, so I’ll keep doing it. Let us know what you think! We’re working to keep the posts “medium length.”
Canadian Pacific Railway Limited and Kansas City Southern today announced they have entered into a merger agreement, under which CP has agreed to acquire KCS in a stock and cash transaction representing an enterprise value of approximately USD$29 billion1, which includes the assumption of $3.8 billion of outstanding KCS debt. The transaction, which has the unanimous support of both boards of directors, values KCS at $275 per share..
Following the closing into a voting trust, common shareholders of KCS will receive 0.489 of a CP share and $90 in cash for each KCS common share held.
so reports Business Wire.
- Kansas Southern has one of the most compelling color schemes in railroading, a field noted for compelling color schemes.
- Arthur Stilwell founded Kansas Southern.
His writing attracted attention because in them he maintained that he had based many of his life and business decisions on the whispers of what he called fairies or brownies. In his memoirs published in 1927 he reframed this as hunches.
He also founded Port Arthur, Texas.
- CP CEO Keith Creel is a protege of Hunter Harrison, the king of railroad executives. He seems to have a reputation as a very effective railroad runner.
- The map of the combined rail lines is so pleasing. Imagine one unified train line from Vancouver to Mexico City
- The merger has to be approved by the Surface Transportation Board, as well as Mexican regulators. I know very little about the Surface Transportation Board. From FreightWaves:
“The regulatory consideration is an important one because in 2016, during CP’s attempted takeover of Norfolk Southern (NSC), the attempt ended after heightened scrutiny from the Obama administration on antitrust issues,” said Deutsche Bank analyst Amit Mehrotra. “But we note at that time NSC rejected CP’s offer, whereas [this] announcement is a friendly deal, and KSU is only about one-fourth the size of NSC from a revenue standpoint — i.e., pro forma for the deal CPKC will still be the smallest Class I rail.” CPKC stands for the name for the new company.
from High Plains Journal:
Some rail analysts have said STB approval is more likely because in this case, there is no overlap in the route networks that would be merged. “Whenever a merger or acquisition is proposed, red flags are particularly raised among customers when the two companies have a similar geographical footprint. This does not guarantee that significant portions of service will be disbanded or eliminated, but it often portends that,” said Steenhoek.
However, he added, “As one can see from reviewing the current Canadian Pacific and Kansas City Southern network maps, the two railroads currently have very little service overlap. This provides some degree of encouragement among customers–including agricultural shippers—that this particular proposed merger may result in increased service options.”
I see here an estimate of the chance of the deal going through at 67%
- some financial analysis of the deal.
- Today, Tuesday March 30, you can buy a share of KSU for $258.76. If the deal goes through, you will get .489 share of CP plus $90, something like $275. An 8% gain after about a year and a half. That may not be especially attractive, with your money tied up for awhile, most of the investors I can find who analyzed it on Twitter pass. But, the puzzle of calculating and weighing the risk reward there and comparing to other alternatives is kind of interesting. If the deal doesn’t go through, you’d still own part of an obviously valuable railroad network. It’s hard for me to think of a better example of an economic moat than an enormous railroad with no competition. Anyway, I’m not giving financial advice, I just like thinking about this magnificent railroad!
from The Wall Street Journal, “Robinhood Trader’s Battle Cry: ‘It’s All Just a Game to Me’,” Intelligent Investor column by Jason Zweig.
If this is what the charts and information are, can you blame these bros for ignoring?
(actually, very good analysis in the piece, respect for Zweig, I understand he is being semi humorous:)
As of March 23, 95.9% of the slightly more than 3,000 stocks in the Wilshire 5000 Total Market Index had a positive total return over the prior 12 months, according to Wilshire. No other one-year period has come close to that since the end of February 2004, when 93% of stocks had positive 12-month returns.
You could have made good money even with bad stock picks. It was like being invited to bet on black, without limits, at a roulette wheel on which 37 of the 38 pockets were black.
Somebody asked me* if I have any opinion on NFTs, or if I’d be doing an episode of Stocks: Let’s Talk about them. Truth: I do not understand them. I’m trying to gain insight. Why you’d pay lots of money for “ownership” of a digital artwork, or even stranger, pay $2.9 million for “ownership” of Jack Dorsey’s tweets, I don’t get. I’ve read through a lot of message boards and arguments that tend to cycle through the same stuff:
- why would you own something anyone can look at?
- well what about “owning” the Mona Lisa, anyone can look at that but it’s still valuable?
- why would you need to “own” a Picasso, just for bragging rights, this is same as
- what about Walter Benjamin’s “aura”?
- there’s too much money around
- the art market has always had an element of money laundering
- it’s a speculative bubble, it’s like the Dutch tulip craze (contra: we don’t understand the Dutch tulip craze, there was no Dutch tulip craze)
Here’s my one attempt at an original thought, or at least a thought I haven’t seen before: what if people are speculating is that these early NFTs (Beeple’s art, or Jack Dorsey’s tweet) will someday be valuable as digital artifacts, as early works from a new scene, or even a new kind of art?
There’s a scene in the movie Basquiat where Andy Warhol (David Bowie) flips through some postcards offered by Basquiat. I’ve watched that scene and thought, damn, a Basquiat has sold for $110.5 million, if you had just one of those postcards from back then you could at least trade it for enough cash to buy a sweet beach house!
I’ve also pondered in idle moments whether Madonna, who dated Basquiat, has more wealth in the form of Basquiat paintings than she does in her own music catalog. Surely it’s possible she has four or five of her ex-boyfriend’s paintings lying around, which could equal $100 mill easily. (Worse, what if she destroyed them in a fit of grief or jealousy?)
What if people are just betting that the NFT, or the ownership of the image of a tweet, or something, will someday be valuable just as an artifact or sample from this insane time, a time that was pretty interesting in terms of its invention?
The authentication of art has always been an issue, and a challenge. Consider John Berger talking about how much time is spent proving a Leonardo is a Leonardo at the National Gallery:
The Museum of Fine Arts in Boston has so many Impressionist paintings they don’t know what to do with them all, they’ve got a Van Gogh they keep in storage.
At the time the MFA’s greatest patrons were acquiring art, a Van Gogh wasn’t even that valuable. What was considered valuable art at that time, I once asked a curator there? Stuff like this, she said:
Maybe this is all just marketing spend for crypto/blockchain speculators, as someone suggested somewhere, I can’t remember.
Art speculation is hard! My guess is that NFTs will end up about as valuable as a complete set of 1986 Topps baseball cards, which I once speculatively bought myself as a youth.
Good luck to all the players.
*always funny when someone uses “since people have asked” or “someone asked me” as a setup for writing. In this case I swear I being honest! It was Eben!
We started out as nomadic. It may be the most natural state for human beings. We’re kind of returning to people freedom they lost starting in the Dark Ages. It was with the discovery of seeds that people ceased being nomadic—and my opinion, by the way, is that people remain nomadic by nature—but it is for economic reasons that we became fixed in our location.
Craig McCaw talking about wireless phones, quoted here by Tren Griffin. This 2013 Vanity Fair piece by Elise O’Shaughnessy, about tycoons of the new media/wireless world at Herb Allen’s Sun Valley summit, seems to be the original source, and it’s full of interesting stuff.
Ovitz showed up with the world’s best-trained orangutan, which had been carefully coached to hold a microphone and lip-synch a speech in imitation of Allen & Company Inc. managing director and master of ceremonies Jack Schneider.
As America’s military-industrial supremacy has waned, the nation is emerging as an information-and-entertainment superpower. “It’s a little bit like the advantage Henry Ford had at the turn of the century,” Malone points out. “Only America was big enough to justify building mass-production centers for Fords. So, here, in the latter part of the century, our market is the only one large enough to justify building the next Microsoft Windows software, or the next Terminator 2, Jurassic Park. That gives us, as an exporter, a huge edge.”
“Ted Turner is the classic four-year-old and man in the same body,” says Craig McCaw. “He’s pure. . . . People who are pure, like Ted, are required to do the obvious, because by the time it becomes completely obvious, people like him have already done it and the other guys haven’t. You’ve got to ask yourself why, what conceivable possible reason, is it that Ted Turner is the first man to do a news network. I mean, it blows your mind.”
Breaking the Breton Woods agreements, the American president said that the dollar would have no reference to reality, and that its value would henceforth be decided by an act of language, not by correspondence to a standard or to an economic referent.
Everywhere I turn these days, from the new Adam Curtis documentary to the Bitcoin-heads on Twitter, I hear about Sunday, August 15, 1971. On that evening, Richard Nixon, after conferring with his advisors in a weird weekend at Camp David, went on TV and announced he was taking the US dollar off the gold standard, ending the “Bretton Woods system.”
I’ve always had an interest in the Bretton Woods system, because it was worked out at the Mount Washington Hotel in Bretton Woods*, New Hampshire. My dad and I used to go cross-country skiing up there.
The hotel shut up for winter had a grand, imposing, and spooky quality.
President Franklin Roosevelt proposed the conference site, the Mount Washington Hotel, as a ploy (successful, as it turned out) to win over a likely opponent of the pact, New Hampshire senator Charles Tobey.
That’s from Michael A. Martorelli’s review of Benn Steil’s book about the conference, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order.
The conference happened in July 1944. The Allied forces were still stalled in the bocage of Normandy, but the leadership was already planning for the postwar order. The famed economist John Maynard Keynes, who’d studied the disaster of the last postwar peace, was trying to avoid some of the same mistakes while also attempting to save the status and dignity of the UK Keynes suggested the world switch to a new global currency called Bancor. The US, represented by Harry Dexter White, militarily and financially dominant, had the strongest position. The US proposed a system that would ultimately leave the US dollar, pegged to gold, as the world’s reserve currency.
Deeply indebted to the United States after the long, costly ordeal of World War II, the United Kingdom inevitably lost the battle. To secure one key victory, however, White had to resort to stealth. In the waning hours of the conference, he and his assistants replaced the phrase “gold” with “gold and US dollars” in the agreement, thereby enshrining the US currency as the international medium of exchange. Keynes confessed that he did not read the final version of the document he signed.
You think there aren’t thrills in a book about a 1944 economic conference whose results have mostly been overturned? Guess again:
In one noteworthy coup, [Steil] disproves Keynes biographer Robert Skidelsky’s claim that Keynes was assigned Room 129 in the Mount Washington Hotel.
The summit does sound kind of exciting. The Soviets brought a bunch of beautiful female “typists” to seduce everyone.
One committee of delegates took a 15-minute recess in the bar each night at 1:30 to watch the “titillating gyrations of Conchita the Peruvian Bombshell.” Afterward, reinvigorated, they would negotiate for another hour or so. The long arguments left White increasingly short-tempered on less than five hours of sleep a night. Keynes, already weakened by the heart disease that would kill him within two years, was soon holding court from his bed, tended (and guarded) by Lydia, his eccentric Russian ballerina wife. At one point, a rumor spread that he was near death; when he then appeared at dinner, the delegates spontaneously stood and sang “For He’s a Jolly Good Fellow.”
from a different review of a different book about the conference:
I’ve now taken a look at both Steil and Conway’s books. The Summit by Conway is a lot more fun and easy to read, and focuses more on the wild details – what he calls the “noises off” stuff – from the conference. The drunken songs, the parody newspaper about the “International Ballyhoo Fun,” the pleasure the delegates from wartorn countries took in huge plates of “chicken Maryland” and enormous bowls of ice cream, the South Africans chilling and playing golf once it was clear gold wouldn’t be replaced by silver, the results of the Soviet vs USA volleyball game (USSR won), that’s in Conway.
The details of the conference are interesting, but in a way the outcome was inevitable. The US was more or less the last power standing as World War II wound down. The UK was tremendously in our debt (literally). What we ended up with was the system we more or less devised, that left the dollar as the default world currency.
The true significance of the conference was noted by Keynes in a speech at the farewell dinner:
We have shown that a concourse of 44 nations are actually able to work together at a constructive task in amity and unbroken concord. Few believed it possible. If we can continue in a larger task as we have begun in this limited task, there is hope for the world.
If you read one review of one book about the conference, I recommend James Grant’s review of Steil in the Wall Street J (behind a paywall I suspect, they’re no fools about money at the WSJ):
Gold figures largely in these pages. The ancient metal was deeply rooted in the psyche of Keynes’s contemporaries, including that of Lt. Col. Sir Thomas Moore, a British Conservative member of Parliament. In parliamentary debate, Sir Thomas said that he had “the impression, not being an economist, that currency had to be tied to or based on something; whether it was gold, or marbles, or shrimps, did not seem to matter very much, except that as marbles are easy to make, and shrimps are easy to catch, gold for many reasons possessed a more stable quality.” For the soundest doctrine expressed in the fewest words, Sir Thomas was hard to beat.
Grant, if you can’t read it, isn’t too boosterish on the Bretton Woods system:
Rare among nations, America pays its overseas debts in money that it alone may lawfully print. Naturally, being human, we Americans have printed to excess. Not since 1975 has the United States exported more goods and services than it has imported. There is no institutional check to square up accounts. We buy Chinese merchandise with dollars. The Chinese, in turn, invest those dollars in U.S. government securities (the better to suppress the value of the Chinese currency). It’s as if the money never left the 50 states. In possession of the “reserve currency” franchise—White’s dream fulfilled—America has become the world’s leading debtor nation. At Bretton Woods, it was the world’s top creditor.
I mentioned the Nixon Shock to a bud who works at a hedge fund, and he put me on to WTF Happened in 1971, which takes a darker view. I love the idea that this is the moment everything went wrong and reality broke, but I’m not totally convinced. What about the Triffin dilemma? Was Nixon changing reality, or acknowledging it?
Consider how things worked before Bretton Woods. Both Conway and Stiel note that FDR would sometimes dictate the dollar price of gold from bed in the morning, once suggesting raising the price by twenty-one cents because that was a lucky number. This was hardly more “real.”
A crazy element of the conference is that the leader of the US delegation, Harry Dexter White, was secretly communicating with the Soviets. To what extent he was a traitor, a spy, vs kind of backchannel communicating with our wartime ally is unclear. But declassified transcripts make clear he was a Soviet asset known at “Jurist” or “Richard.” That’s if you trust our own NSA. Who knows?
White testified in front of HUAC that he was not a Communist, then had a heart attack. He went up to his home in New Hampshire and died four days later.
Is it possible White sabotaged the US team in the Bretton Woods volleyball game? Perhaps to provide a propaganda win for his Soviet masters? The Russians got a lot of concessions at Bretton Woods to induce them to sign on to the agreements, but I don’t see in Steil or Conway any strong case that White’s possible connection helped them unduly. Conway is more of a skeptic on the spy stuff, suggesting that yes, it looks pretty fishy, but it’s impossible to prove White “betrayed his country.”
One person who would’ve known White had been a spy? President Richard Nixon.
Following Alger Hiss’s perjury conviction in 1950, Representative Richard M. Nixon revealed a handwritten memo of White’s given to him by Chambers, apparently showing that White had passed classified information for transmission to the Soviets. Yet his guilt would only be firmly established after publication of Soviet intelligence cables in the late 1990s.
The IMF and World Bank still linger as Bretton Woods legacies. Conway in his epilogue notes how even after the demise of the Bretton Woods system, the IMF is still imposing the “Washington Consensus” on the developing world in return for loans, with mixed results. Maybe someone should activate the Coconut Clause:
Conway also notes that after the demise of the system, US and British banks became vastly more profitable.
In the United States, by the turn of the millennium banks now accounted for around 8 per cent of the country’s total economic output – more than double their zie when the Bretton Woods system ended… Until 1970, an investor in a UK bank could expect to make about 7 per cent a year on his investment. After 1970, the return on equity roughly trebled to 20 per cent, a figure maintained without a break until the financial crisis of 2008.
There is no single, simple explanation for this astonishing rise of the financial sector; however, there is no doubt that one important element is the sudden change in the international monetary architecture following the collapse of Bretton Woods. Almost immediately after the demise of Keynes and White’s system in the early 1970s, every single measure of the size, profitability, and leverage of the banking industry has begun to increase at unprecedented rates.
The big banks in the USA tried to stop Bretton Woods at the time,
After the Bretton Woods conference, the countries involved still had to sell it to a confused public. One method the USA used was to produce a pamphlet called Bretton Woods Is No Mystery, illustrated by the New Yorker cartoonist Syd Hoff. I’m on the trail of a copy, I can only find a few images online.
It’s heartbreaking to hear the names bandied about for the world currency, and think what might’ve been. From Conway:
among the suggestions were Fint, Proudof, Unibanks, Bit, Pondol, and Keynes’ favorite, Orb. Months later, Keynes sent round a note to his Treasury colleagues asking: “Do you think it is any use to try unicorn on Harry?”
What do you guys think will be the world’s reserve currency in 2031? Dogecoin?
*an archaic name for what’s now part of Carroll, New Hampshire.
from this Talks at Goldman Sachs discussion with Stanley Druckenmiller. How about this?:
First, there’s mathematics. Obviously, you’ve got to be able to handle numbers and quantities—basic arithmetic. And the great useful model, after compound interest, is the elementary math of permutations and combinations. And that was taught in my day in the sophomore year in high school. I suppose by now in great private schools, it’s probably down to the eighth grade or so.
It’s very simple algebra. It was all worked out in the course of about one year between Pascal and Fermat. They worked it out casually in a series of letters.
so says Charlie Munger in his 1994 speech, “A Lesson on Elementary Worldly Wisdom as it Relates To Investment Management & Business.”
These letters between Pascal and Fermat sounded worth a read, so I went to check them out. The year in question was 1654. Up until that time, no one* had really worked out and set down the math of probability. You can’t blame them, if you think about it. Even in 1654 it was probably pretty hard to even get your hands on enough paper for working out math problems.
Struggling to really wrap my head around the contents of the letters (on top of everything, the first letter is now lost), I picked up The Unfinished Game: Pascal, Fermat, and the Seventeenth-Century Letter that Made the World Modern: A Tale of How Mathematics is Really Done by Keith Devlin. An interesting book and a great introduction to the mental blocks that had kept people from working out probability before these two weirdos started corresponding.
An even clearer articulation of the problem of points that set Pascal and Fermat to work can be found in Peter Bernstein’s Against The Gods: The Remarkable Story of Risk:
In 1654, a time when the Renaissance was in full flower, the Chevalier de Méré, a French nobleman with a taste for both gambling and mathematics, challenged the famed French mathematician Blaise Pascal to solve a puzzle. The question was how to divide the stakes of an unfinished game of chance between two players when one of them is ahead. The puzzle had confounded mathematicians since it was posed some two hundred years earlier by the monk Luca Paccioli. This was the man who brought double-entry bookkeeping to the attention of the business managers of the day, and tutored Leonardo da Vinci in the multiplication tables. Pascal turned for help to Pierre de Fermat, a lawyer who was also a brilliant mathematician. The outcome of their collaboration was intellectual dynamite. What might appear to have been a seventeenth century game of Trivial Pursuit led to the discovery of the theory of probability, the mathematical heart of the concept of risk.
Their solution to Paccioli’s puzzle meant that people could for the first time make decisions and forecast the future with the help of numbers.
Bernstein helpfully restates the problem of points in the form of a World Series situation. What is the probability your team will win the best of seven series after it has lost the first game? (assume the teams are, as in a game of chance, evenly matched)
Well, Pascal pointed out that we just need to list all the possible outcomes of the remaining six games, and calculate from there. There are 22 combinations in which your team would come out on top after losing the first game, and 42 combinations in which the opposing team would win. As the result, the probability is 22/64 = .34375
As Bernstein points out, there’s something here that trips a lot of people up, even Fermat. There aren’t really 64 possible outcomes, because why would we include possibilities like your team goes win-win-win-win-win-win for the remaining six games? The World Series would’ve been over after that fourth win. W-W-W-W-W-W is not a possible outcome of the remaining six games.
As Pascal remarked in the correspondence with Fermat, the mathematical laws must dominate the wishes of the players themselves, who are only abstractions of a general principle. He declares that “it is absolutely equal and immaterial to them both whether they let the [game] take its natural course.
So there you go. Win-win-win-win-win-win-win is one of the forked paths off win-win-win-win. It must be accounted for, or we won’t count the potential possibilities correctly.
Naturally enough I got bored with the math part and wanted to know more about the Chevalier de Méré. Who was this fun loving gambling nobleman who put two all-time math geniuses to work helping him win at dice?
Turns out he was a guy, named Antoine Gombaud, who dubbed himself Chevalier de Méré in his writing. Much of his writing was obsessed with the idea of honnête, and how to be l’homme honnête, which included honesty but also modesty, elegance, appropriateness, excellence, sociability. You can read all about it here in what appears to be an excerpt of Manning The Margins: Masculinity and Writing in Seventeenth-Century France by Lewis Seifert, a professor at Brown.
But still, how did this cool guy hook up with Pascal? Devlin says that the Chevalier and Pascal met at a gambling table. Pascal would go back and forth between somewhat extreme religious periods. During an early one of these, when he was getting pretty hard core, a doctor warned him off:
His doctor advised him that for the sake of his health, he should abandon the Jansenist ways and lead a life more normal for a young man. Although he would remain strongly religious for the remainder of his all-too-short life, Pascal resumed normal activities. Indeed, he did so with vigor, adding regular visits to the gaming rooms to his earlier academic pursuits. It was at the gambling table that Pascal met the Chevalier de Méré
Looking into this question of how, exactly, the Chevalier and Pascal met, I found a different, more detailed, and funnier, version. Here is the Chevalier de Méré himself describing how he met Pascal:
“I once made a trip with the Duke of Roannez, who used to express himself with good and just sense and whom I found good company. Monsieur Mitton, whom you know and who is liked by all at court was also with us, and because that trip was supposed to be a promenade rather than a voyage, we only thought of entertaining ourselves and we discussed everything. The duke was interested in mathematics, and in order to relieve tedium on the way he had provided a middle-aged man, who was then very little known, but who later certainly has made people talk about him. He was a great mathematician who knew little but that. These sciences gave little sociable pleasure, and this man, who had neither taste nor sentiment, could not refrain from mingling into all we said, but he almost always surprised us and made us laugh.” De Méré goes on to tell that Pascal carried strips of paper which he brought forth from time to time to write down some observations. After a few days Pascal came to enjoy the company and talked no more of mathematics.
so reports Oystein Ore, writing in the May 1960 issue of The American Mathematical Monthly (vol 67, No. 5, “Pascal and the Invention of Probability Theory”). Oystein Ore says:
Pascal and Fermat never met in person, which is kind of sad. In 1660 Fermat proposed that they meet, but at the time they were both too sick and miserable to travel very far. Within a few years they were both dead.
Pascal invented a kind of calculator, the Pascaline, but it was too expensive to produce them:
Late in life, in another religious phase, Pascal reflected on gamblers:
And that’s the story of Pascal and Fermat!
* it wouldn’t blow my mind if one of the great mathematicians of the Arab world had worked some of this out, written it down, and put a copy in the House of Wisdom in Baghdad, but most of those books were destroyed when Hulagu, Genghis Khan’s grandson, destroyed that city in 1258. Bummer!
Some of the behavior going on at WSB sounds more jihadist than speculative. The idea that there are some investors who are ‘good’ and others who are ‘bad’, or that there is an ‘establishment’ is BS. Everyone has the same goal: I have a pile of money, I’m trying to make it bigger, fuck your pile–I don’t care about it. Anything other goal is contrived, foolish and won’t help you win. You can’t ‘fight the rich’ by trying to become one of them. Don’t you see the irony? A related thought experiment: what if this trade continued to work really well? And another, and another? Then some WSBers are billionaires. Aren’t they the new ‘enemy/establishment?’
Who do you think hedge fund managers are? They’re typically the anti-establishment. Things have changed a bit, but the most successful HFMs are actually the WSBers of the past. These are guys who didn’t fit in well at i-banks, often got kicked out for having big mouths or not wearing the right ties, or just wanting to wear jeans at work and not fill out TPS reports. When they started their firms, people like Soros, Icahn, Steinhardt, Robertson, Cohen, Griffin, Loeb (who has posted anonymously on boards), Samberg, even Cramer were fish out of water and had very tiny amounts of capital, often begging for investors.
That’s from Martin Skreli’s blog, in prison.
Why has this story so gripped Hollywood? As far as I can tell no two characters in it were ever in the same room, or even ever spoke to each other out loud. What about it is cinematic? Then again, maybe you could say that about the origin of Facebook.
One reason to be interested in the stock market is it can become a storytelling contest. Take the story of GameStop. There was a prevailing story, a sad story, that GameStop was Blockbuster all over again. Old mall stores, a dying dinosaur selling product that’s now online.
But then, people stood up and said, that’s not the story of GameStop. The story of GameStop is that yeah, it might need to change, but it’s not dying. It’s healthy. GameStop can live a long time. What’s more, it has real advantages, it just demonstrated some of them last Christmas. With clever thinking and fast action GameStop could succeed. It could even be big.
Then, in a place where people gather and share stories, an even more riveting story arose. A bunch of cocky suits have made arrogant bets on the old story of GameStop. They’re planning to feast on the carcass, as if they don’t have enough to feast on. But guess what. They’re not as smart as they think. There’s something they didn’t plan on. They wrote a check their ass can’t cash. If someone calls ’em on it? They’ll be ruined.
The power of this story became so strong that by now everyone’s heard it. Robinhood (and what story are they trying to tell? You’re out here saying you’re as good as Robin Hood?! Robin Hood, played by Errol Flynn, a Disney fox, Kevin Costner, and Picard?!) whose ball everyone was using had to declare a sudden rule change. Which every child knows is bullshit behavior and unfair.
Is that story true? Does it matter?
At some level there is truth to be faced. There are debts with dates on them and courts and legal power that will enforce them. But the value of GameStop, we’ve now seen, is a story that can be changed very quickly by compelling storytellers. The idea that the correct story is somehow already embedded in the stock price has been proven many times to not always be the case, no matter how many Sveriges Riksbank Prizes in Economic Sciences in Memory of Alfred Nobel are given suggesting such. (Note who gives that prize, by the way: a central bank, which has a vested interest, in fact its only interest, in maintaining a a steady, stable, version of the story of economics).
Sverges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel winner Robert Schiller didn’t miss this, he wrote a book about the power of stories:
(I’m working my way through it).
Oh and by the way money itself is a kind of story. Ever since 1971 when Nixon took the US dollar off the gold standard, money “floats,” money is an act of language, money is based on the story that the US government will honor the words on paper dollars and accept those for debts (which are themselves stories).
So, where does that leave us?
No idea, I’m riveted by the story. Who would add a jot to the GameStop discourse, it’s overwhelming! I can’t even keep up with Matt Levine, a great storyteller about these matters.
That’s Van Wyck Brooks, going off in The Flowering of New England about the generation of the 1840s.
the gist of which is that Oprah, Bill Gates, Sheryl Sandberg, and Whole Foods’ John Mackey sort of perpetuate a new version of the capitalist gospel rather than advocate for real or systemic change. But, you already knew that, didn’t you? Would it be more worthwhile to explore why stories of hustle and self-determination and drive remain so appealing to people despite the seeming fact that we’re trapped by oppressive and exploitative systems full of unfairness? Maybe that’s art’s job, not sociology’s.
Sometimes, calls get called. When the stock market becomes real, it becomes very real.
Consider the naked short, explained in this medium post, “GameStop: Power To The Market Players,” by Nope, It’s Lily:
If you’ve been anywhere in the trading universe, it’s been partly a meme and partly a higher calling to long $GME since about July/August 2020, when everyone suddenly realized the short interest on $GME actually exceeded its available float. In English, this meant that there were more shares sold short (a strategy to benefit from the stock price going down, this involves borrowing a share to sell with the intent to repurchase it at a lower cost later) than actually available to buy. How does this happen exactly?
This can happen one of two ways:
Naked shorting — This is a mostly illegal practice in which an individual or institution first sells shares without locating that they well, actually exist. This is fairly sneaky, but works as long as they can find the shares before the settlement period (delivery date) of the shares actually occurs. If they find it before then, no one is the wiser (except the SEC, when it decides to do anything ever).
Despite what idiots online believe, naked shorting isn’t always illegal (hence the word mostly). In particular, the ban on naked short-selling (Regulation SHO) isn’t because the government thinks you’re a meanie for doing it, but because of its hypothesized connections to the 2008 financial crash (actual data on it is mixed). In general, the belief was that naked short sellers helped destabilize investor confidence in the banks, leading to that fun period best remember by watching The Big Short accompanied by a full handle of Svedka.
Naked shorting, however, is legal by bona-fide market makers, which according to our SEC friends means simply it is done to hedge an option position sold (as part of market making duties, to buy and sell a security at publicly stated prices) rather than for speculation. If you want to read boring legal stuff, here’s a link to Regulation SHO.
Similarly, despite what your favorite rocket-emoji’ing internet guru believes, causing an actual short squeeze is hard, and almost always mostly illegal. The last public short interest (the next one should be released on January 27th, per FINRA reporting) on GME was released on Dec 31st, 2020.
Second bold mine.
I can’t say I understand the article. My first experience with this journalist. I’ll be interested to see what happens on January 27th.
The GameStop story is very compelling. Matt Levine’s take as always definitive. Comparisons to what Trump and Trumpians did to the GOP (and then the country) in 2016: an ebullient Internet-centered group of trolls realize there are tricks they can use to mock and demolish the establishment players, moving faster than the other guys can say “hey, what a second, that isn’t how we play!” The end result of that gleeful message board based takeover was (glances at Washington) huh looks like establishment people with 40 plus year careers are back in control of all branches after a brief reign of chaos (though they are rattled by what happened).
The Vibes Speculator
You hear about two schools of investing. Value investing, and growth investing. First, value investing.
Value investing involves generating a number for what a company’s intrinsic worth might be, comparing that number to the price the company’s shares are trading for on the stock market, and buying when there’s a discount (plus a margin of safety to account for the risk). You want to buy stocks that are cheap, on sale, and wait for their prices to return to what they should be.
Howard Marks, in his new memo “Something of Value” for Oaktree Capital, has a great definition of value investing, and we’re taking that as our text today. We would quote it extensively, but there’s a stern disclaimer on it. After an email correspondence with Oaktree Capital, I appreciate their denial of my request for permission to use lots of quotes in this piece.
We encourage third parties that are interested in sharing Howard’s memos with an audience to write their own summary/article about the memo and then link to the memo in its entirety on our website. Howard’s memos are meant to be read/viewed in their entirety and removing specific quotes can lead to them being taken out of Howard’s intended context. Also, as we operate in a highly regulated business, we are required to include our legal disclosures to Howard’s writings, and removing portions of his writing without the disclosures attached goes against our internal policies.
as Leia Vincent of Oaktree put it to me in an email. I see their point.
Check out Marks summary of value investing, paragraph four.
investing was pioneered by Benjamin Graham, whose teachings were transcribed by David Dodd, Graham taught Warren Buffett. There’s a lot to love about value investing. It’s bargain hunting. It almost feels virtuous. You must be rational to be a value investor. You must have emotional discipline as the market goes up and down.
Value investing is widely preached. Aswath Damodaran of NYU, who wrote a little book on the topic, will teach you on YouTube. Shawn Badlani spoke about his training as a value investor on episode 8 of my podcast, Stocks: Let’s Talk.
Value investing thinking has served Shawn pretty well. Every investor would be wise to study valuation.
As Marks acknowledges though, value investing has significant downsides. You’ve got to do a lot of calculating of discounted cash flow for one thing. Math, which is maybe not that hard, but tedious. There are computers, which can help you with the math. I like Guru Focus (you gotta pay to be a member) which can do shorthand estimates for you, like this one for Tesla:
but that can only get you so far, and it also reveals another problem. Value investing has imbedded in it both an attraction for the rational and a torture for them: stocks aren’t always trading for what they should be worth.
That is, their price isn’t always what it “should” be. That’s supposed to be an advantage, if you buy them when they’re cheap, and wait for the equilibrium that must come, when their true value will be revealed.
But what if that never happens? Consider the angst of Value Stock Geek, a smart writer on this subject. How long do you wait for the stock to achieve the correct price?
Not only that, but for all that math, you’re still just guessing! All your calculations are only as good as your inputs, some of which are guesses!
Plus, you’re competing against Warren Buffett, Munger, Aswath Damodaran, Shawn, Value Stock Geek, and literally one million other people. Wall Street has been sucking off physicists, computer scientists, “quants” of all kinds, taking them away from useful work and putting them into complex valuation shops. Their computers are faster, more powerful, and more expensive than yours, I guarantee. Their computers blow your puny computer out of the water. They’ve got an Alienware Aurora R11 with Intel Core i9 10900KF and an Nvidia GTX 1650 Super – RTX 3090, with 2TB M.2 PCIe SSD + 2TB SATA HDD and you’ve got an Epson 512K with 5.25 inch floppy disc. Who’s gonna kill if you’re playing Red Baron?
So much for value investing.
Then there’s growth investing.
The story of Marks’ memo is of how spending time during the pandemic with his son Andrew has opened his eyes to the second major school: growth investing. Marks memo describes how now he has his son Andrew living with him, and Andrew is opening his eyes to the thinking of a growth investor.
Growth investing is about assigning a valuation to a company that may not yet have shown its value, but whose growth, as measured by one metric or another, has a potential to grow into cash flows of great value.
Recently, growth chasing has worked out very well. The one quote I’ll lift from Marks:
the performance of value investing lagged that of growth investing over the past decade-plus (and massively so in 2020)
It’s easy to understand why that might be. The speed at which the fast growing companies grow is almost incomprehensible. In 2002 the so-called facebook at Harvard was a physical book the college handed out with pictures of faces in it. In 2020, eighteen years later, one young person’s lifetime, $FB has two point five billion people using it every month. Facebook has swallowed up billions of dollars in advertising, helped wipe out at least two thousand local newspapers, and influences world events, from elections in the USA to ethno-religious violence in Burma.
Scary stuff, if you’re an innocent citizen. Groovy if you’re a shareholder of Facebook (I am not).
Or take Amazon:
For a sense of scale, it took Amazon more than 14 years—58 quarters after its May 1997 initial public offering—to make, cumulatively, as much profit as it produced in the latest quarter alone. Keep in mind that Amazon consistently lost money for its first several years as a public company.
(first article when I Google “when did Amazon finally make a profit?” ) From Wikipedia:
The company finally turned its first profit in the fourth quarter of 2001: $0.01 (i.e., 1¢ per share), on revenues of more than $1 billion.
A traditional value investor would not have been into Amazon in 2001.
The endgame for growth investing is you grow so big you’re the biggest animal in the pond and you have no competitors, only, in this pond example, small frogs to amuse you, and minnows to tickle your feet, and perhaps birds, and someone (local villagers? customers?) just keeps bringing you food because they have to. Or even want to? Or because of a curse? The example fails at this point but you get the idea.
Picking those winners can be hard. You need to choose what metrics of growth to focus on. The important metric may not be how much money you’re making. This seems to defy logic and economics and years of Wall Street lore, but that is how the market has reacted. The word is out that even if a company is not only not making money but is losing more and more money, that can in some cases be fine, that can still be fine, as long as they’re swallowing market share.
(This has created some funny wins for the consumer, like MoviePass).
So: value and growth. Marks’ memo is lucid well-expressed thinking on how his thinking is evolving about the blend of these two schools.
i just read the memo and agree, it is really good. love the idea that value investing just means buying something for less than it’s worth, even if that thing you’re buying is a fast growing company with a high current p/e multiple.
Now, there’s also technical investing, which seems to be people studying candlestick charts, and then trying to reverse-divine the algorithms that make automated trading decisions in Flash Boys style scenarios. I admire these folks, and there’s probably something to it, but it’s not for me.
There’s also momentum investing, where you chase where you think the herd is going, based on anything from complex systems of pattern recognition to just what people seem to be talking about and what’s in the headlines. I used to study this school, and it’s very fun.
What I’d like to propose is a new school.
Vibes Investing we discussed on episode 7 of Stocks: Let’s Talk, with the legend Liz Hall.
We believe Vibes Investing has a bright future.
Is vibes investing even investing? Is growth investing investing? Most definitions of investing say something about “an expectation of achieving a profit,” or “a reasonable expectation.” What we’re talking about here may be something more like speculating. A different and perhaps equally noble pursuit.
The vibes speculator would not compete against the quants and the computers. The vibes speculator would look for signals the computer couldn’t see, invisible, unquantifiable signals. The vibes speculator would look for growth, but not according to any metric that might be spotted by a million growth investors. The vibes speculator would feel the growth.
I’ll have more to say on the topic of vibes speculating. I’ve considered launching a prestigious and expensive newsletter, The Vibes Speculator. Or perhaps a small book on the topic. I’m not sure if the book would be in the category “business” or “humor.”
If you control a budget at a well-funded company I’d consider giving a talk on vibes speculating for an extravagent fee.
If you have thoughts on vibes speculating, get in touch. It’s an exciting conversation.
(Disclaimer: none of what I say is investment advice of any kind. These are the musings of an enthusiastic amateur. If anything the sign that amateurs are talking about the stock market is a classic signal of a market top.)
In my hometown the bank building had a plaque on it, honoring Forbes McLeod, a policeman killed on Friday, Feb 2, 1934 in a gunfight with men robbing the bank. This bank robbery was considered of minor historical note as it was one of the first to involve machine guns.
The robbing of banks with guns has formed a theme of American movies possibly culminating in Heat (1995). What was the last good bank robbery movie? Before The Devil Knows You’re Dead (2007)? The Town (2010)? Has there been a good bank robbery movie in the last ten years? Who knows, maybe there will be another one soon.
The bank as “the place where the money is” has become less and less true. The bank buildings aren’t even impressive anymore. The bank as a physical place has become less significant.
If you have extra money, you have a good problem. What should you do with it*? “Put it in the bank” used to be a good answer. The money would be safe there. Even if the robbers took it, it would be covered. Right around the time Patrolman McLeod was killed, the Federal Deposit Insurance Corporation, FDIC, was formed.
Your money would be safe at the bank, and not only that, it would grow as it gained interest. Compounding interest is a powerful force, and this would be good. It was certainly better to put your money in the bank than to, say, take it to the casino.
However, many changes have happened since I was a kid being taken to the bank on a round of errands. These changes have happened very fast.
One change is that interest rates went down. And kept going down. This begins with the Federal Reserve Bank, and trickles down to your bank. The Federal Reserve is keeping interest rates down because it adds fuel (money) to the economy. Keeping money in the bank is a less good option as interest rates go down, so people don’t put money there, so more money flows around.
Another change that happened is that banks got deregulated**.
Restrictions on the opening of bank branches in different states that had been in place since the McFadden Act of 1927 were removed under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.
for instance. Conglomeration, mergers, big national and international banks could expand.
Deregulation also meant that banks got more and more freedom to take their deposit money and make all kinds of risky trades, hedges, and hedges of hedges with it. What the bank does now is bundle up money and take it over to the casino.
Sensibly enough, you may wonder if you should stop putting your extra money in the bank, and instead put it in the casino yourself.
Imagine a casino. Grand and intimidating. No one robs the casino, except Danny Ocean, and only when he has exactly the right ten for the crew, and that’s just in the movies. You don’t rob the casino because the casino is not screwing around. The casino might look funny on the outside, but that’s a trick. The casino is a machine to get as much money flowing through it as possible, and take some of the money.
The casino may look kind of appealing, especially when you keep seeing rich people walking out of it. But the casino is deadly serious. They wear suits in this casino. To even be allowed into the casino, you have to talk to a guy, maybe pay a fee.
Once you are inside, the casino is full of sharps. Some of the sharps are very, very rich. The players in the casino speak in sophisticated language that’s hard for you to understand. But if you can figure out the terms, you can place a bet on almost anything.
To place a bet in this casino is not free. The fee for a bet is about $8.95. Not only that, but many of the bets themselves are in significant amounts. There are bets you can make for a dollar or pennies (plus the fee). But some of the most popular bets are in minimum amounts of a hundred or even a thousand dollars.
These rules made this casino seem like something more serious and significant than like a casino casino, a Las Vegas casino. But just because this casino is on Wall Street doesn’t mean it’s not a casino.
Then, pretty rapidly, the rules of the casino change.
First, they get rid of the guy you need to talk to just to walk in. Now, you don’t need to talk to anybody. And there’s no cover. You don’t need to talk to anybody to place a bet. First they let you do that on your computer, and then when phones got good enough, they let you do it on your phone. There’s still a physical casino, but it’s sort of just for stock photos and background footage now. The casino is now totally online.
Next, the casino gets rid of the cost to place a bet. Now, there is no fee. Placing a bet is free.
Not only that, the casino starts marketing itself to young people, with colors and buttons. The online betting interface gets easier and easier. You can play in the casino as if it’s just another app on your phone, as easy to use as Instagram.
Just to eliminate one last hurdle the casino gets rid of the idea of minimum bet amounts. Now, you can do fractional bets, with however much money you have.
Very fast, the once grand and intimidating casino has changed, and now is more or less just an app where anybody place a bet on anything in any amount with no fee.
What happens to the casino, after these changes?
I don’t know, I’m trying to figure it out.
Are the old casino sharps inside happy? Or sad?
Maybe they’re happy at first – hey, lots of dumb money. But then they are overwhelmed. The dumb money changes the logic of the casino.
Do the sharps take their money to a new casino? Maybe even a secret casino? Do they band together and create alliances, even if this is technically against casino rules? Do they come up with new side games and bets?
I truly don’t know.
The friction that kept money from the casino and steered it to the bank has been eliminated. The safe and steady returns that lured money to the bank and away from the casino have been reduced. The bank and the casino are in business together now. Have the bank and the casino merged? They certainly flow together. Money is flowing from the bank to the casino, sure as sun follows moon.
It cannot be an accident that our outgoing president is a former casino operator. The president before him and the president before him and the president before him (who was raised in a casino town) were all surrounded, advised, and funded by leaders of the effort to merge the bank and the casino.
The incoming president was a senator from Delaware for almost forty years. Delaware is actually a real place: it has a population a little less than half that of San Bernardino County, 1/39th that of California. But legally what Delaware is is a jurisdiction for favorable rules for large-scale bank, casino, and bank-casino corporations.
Over half of publicly traded corporations listed in the New York Stock Exchange (including its owner, Intercontinental Exchange) and 60% of the Fortune 500 are incorporated (and therefore domiciled) in the state.
The bank and the casino may physically exist, somewhere, in a strip mall or a tall anonymous building, on Wall Street or in Delaware or in one of many downtown streets with big anonymous buildings, but it doesn’t matter. The bank and casino are all on your phone now.
What happens now?
I don’t know, I’m trying to figure it out.
My second-best speculation is to bet on the casino itself, because the federal government has revealed that one of its major goal if not its only true goal is keeping the bank-casino’s business growing.
My best speculation is that something totally unpredictable will happen. Rapidly growing complexity will have effects no one can predict, this is the lesson of both Jurassic Park and the Nicholas Nassem Taleb books. What happens when stuff like this starts happening?:
No one can predict, it cannot be modeled. After the fact there will be some sage identified who saw it all coming. If there are a million guesses, at least one will later appear kinda right. But it doesn’t really matter. No one can know with any confidence what will happen in such a system.
There could be a panic at the casino. Consider Larry McMurtry’s memory of a stampede he saw as a boy. He was helping to drive about one hundred cattle down an asphalt road:
Men, horses, and cattle were all drowsy, the herd just barely plodding along, until one cow happened to drag her hoof on the rough asphalt, making a loud rasping sound. In an instant that sleepy herd was in full flight, and our horses too. A single sound on a summer afternoon produced a short but violent stampede. The cattle and horses ran full-out for perhaps one hundred yards. It was the only stampede I was ever in, and a dragging hoof caused it.
A dragging hoof can cause a stampede, on a Texas farm-to-market road, or at the bank-casino. There doesn’t have to be a good reason.
Disclaimer: not investment advice, duh. I’m an amateur musing here.
* Jesus had a simple answer that solves this problem.
** in The Uprising: On Poetry and Finance, by Franco “Bifo” Berardi (semiotext(e), 2012) it’s claimed that the word deregulation was “first proposed by poet Arthur Rimbaud, and later reculced as a metaphor by neoliberal idealogues. Dérèglement des sens et des mots is the spiritual skyline of late modern poetry.”
A man worth study.
At which point I discovered that there was a war about to explode on the scene for control of TelePrompTer between Cooke and Irving, and so I passed on the opportunity and Hub Schlafly ended up getting stuffed into that job for a while. Then I got an inquiry from Steve Ross at Warner and did I want to go do that? And unfortunately, the first thing I would have had to have done is have a difficult posture with the fellow that they had just bought a big company from and I didn’t really like that too much. Plus, the other issue there was New York headquarters. And while Steve said, “Well, you can live in Connecticut and have a limo” and all that kind of stuff, I didn’t think that was the life I was looking forward to. And then the third guy was Bob Magness, who was out here in Denver and Bob was just an intriguing kind of a guy and TCI was my kind of a company. They were so broke at the time that Bob used to say, “We’re so broke we’ve go to look up to see bottom. Lower than whale shit.” Very colorful expressions, but it was the opportunity I thought, in my mind, to get the family out of the New York metro and into clear and clean and beautiful Colorado, and so that’s the direction that… Oh, I took a 50% pay cut and agreed to buy a bunch of stock, which turned out to be underwater, very quickly, before I even got on the scene, but that brought me out to Denver. But they were guys that I had gotten to know over the prior couple of years – Sparkman and Bill Brazile and Carter Paige and Larry Romrell, Donne Fisher and I kind of liked them. I liked the attitude, it was a laid back kind of group.
from this conversation with Trgyve Myhren at The Cable Center
The first thing you learn is, once you make a guy rich, don’t expect them to work hard. Very unusual people do that.
How about this, from a 2012 lecture at the University of Denver:
I think the best example of vertical integration is, for instance, I get a phone call from Rupert Murdoch. He says, “CNN exists. I’ve got a company called News Corporation. I would love to have a cable television news channel in the United States. What do you think?” I say to him, “There’s probably room for another one, but you got to come down in terms of your political posture, a little bit to the right of center because CNN is going a little bit to the left of the center.” In the opinion of certainly people on the right [inaudible 00:19:32]. He says, “I think that’s great. Will you help me? i.e., will you invest with me?” and so we say, “Yes. What do you want us to do?” He said, “Why don’t you A, agreed to distribute our channel. B, I want you to go see if you can recruit Rush Limbaugh to be on my channel because I know him. C, how about 20% of this thing if it works?”
We launched Fox News Channel. We own 20% of it. We distribute it. He programs it. We take relatively little risk because we don’t put any money up. What we agreed to do was carry the channel, pay a fee per customer, an affiliate fee. It depends on him to do a good job of promoting it and creating. We end up owning 20% of what turns out to be a valuable asset. That’s the most no-brainer of the things you can do.
There was a company called BlueMountain, traded for one and a half billion dollars, zero revenue. It was in the online greeting card business. You could go to BlueMountain and you could download a greeting card and you could send it off to your friends. It was free; had lots of traffic; never made the transition to economic viability. The Internet world was full of those bubble phenomenon, vaporware companies, we called them. They came and they went.
MCN: What about the threat of over-the-top players such as Netflix?
JM: I don’t know. I mean his (Netflix CEO Reed Hastings’) business model, of course, was to buy flat into the future and hope he grows into it. And if he doesn’t grow he’s got serious cash flow problems facing him. His stock has reflected debt, to some degree. I mean he’s got what, a couple-billion-dollar market cap? But that’s pretty low for 24 million subs.
I don’t see how Reed gets scale. That’s the curse for him. I mean he needs 40 million to 50 million households. I don’t see how he gets it if it’s split four ways.
MCN: Do you think Netflix, or any over-the-top player for that matter, can be a true competitor to cable?
JM: It all has to do with access to content. It really is about access to content.
The content that people care about, the content that will really move people, is pretty much controlled by big programmers like Disney, who are not about to shoot themselves in the foot. And so they are going to exploit it across all platforms in a very orderly and well thought through way. You know, right now cable has been a very effective monetization scheme for cable networks …
I was screaming at the Discovery [Communications] guys and the Starz guys about don’t shoot yourself in the foot with your Netflix thing. And ultimately, of course, Starz pulled back and Discovery was able to do a limited extension. Reed’s money is good, but I don’t know if he’s got a business model that really works for him.
In 1960 journalist Hugh Sidey attempted to gauge JFK’s economic credentials. “What do you remember about the Great Depression?” Sidey asked. Kennedy responded candidly:
Morgan Housel, who writes this semi-regular column for The Collaborative Fund, has a great gift for historical anecdotes. How about this one:
The Battle of Stalingrad was the largest battle in history. With it came equally superlative stories of how people dealt with risk.
One came in late 1942, when a German tank unit sat in reserve on grasslands outside the city. When tanks were desperately needed on the front lines, something happened that surprised everyone: Almost none of the them worked.
Out of 104 tanks in the unit, fewer than 20 were operable. Engineers quickly found the issue, which, if I didn’t read this in a reputable history book, would defy belief. Historian William Craig writes: “During the weeks of inactivity behind the front lines, field mice had nested inside the vehicles and eaten away insulation covering the electrical systems.”
The Germans had the most sophisticated equipment in the world. Yet there they were, defeated by mice.
You can imagine their disbelief. This almost certainly never crossed their minds. What kind of tank designer thinks about mouse protection? Nobody planned this, nobody expected it.
But these things happen all the time.
“These things happen all the time” reminds me of the opening of the movie Magnolia.