Friday, February 23, 2018

Semper Augustus Investments Group: 2017 Annual Letter

For the third year in a row, Chris has earned my vote for year-end investor letter of the year, by a long shot. It's another must-read for followers of Berkshire Hathaway (There is also a whole lot more on Berkshire Hathaway in the 2015 and 2016 letters. And if you do decide to read the 2015-2017 letters that dive deep into Berkshire, I recommend reading Chris' 2016 interview with Kate Welling right after his 2015 letter.).



Links

6 Things to Watch for in Warren Buffett’s Annual Letter (LINK)
Saturday marks an annual day of celebration for value investors: the release of Warren Buffett’s latest letter to Berkshire Hathaway Inc. shareholders.
The nation that thrived by ‘nudging’ its population [H/T @mikedariano] (LINK)
Singapore has grown from almost nothing in 50 years. And this well-regarded society has been built up, partly, thanks to the power of suggestion.
Xi's Debt Crackdown Goes Into Hyperdrive With Anbang Takeover (LINK)

IEA Sees China Overtaking US as Biggest Nuclear Energy Nation [H/T @ChrisPavese] (LINK)

An Interdisciplinary Model for Macroeconomics - by Andrew Haldane and Arthur Turrell (LINK)

LinkedIn Speaker Series: Erik Brynjolfsson, Andrew McAfee, and Reid Hoffman (video) [The discussion starts at the 14-minute mark.] (LINK)
Related book: Machine, Platform, Crowd: Harnessing Our Digital Future
Exponent Podcast: Episode 142 — Google and Antitrust (LINK)

John Gray has a different view than the view of Bill Gates about Steven Pinker’s book Enlightenment Now (LINK)

Part 1 of a 2-part PBS Frontline series on the relationship between Iran and Saudi Arabia (video) (LINK)

Long-Lost Babe Ruth Interview Discovered In Prep School Archives [H/T Linc] (LINK)

When Poop Becomes Medicine - by Ed Yong (LINK)

Immediately writing things down...

From The Autobiography of Charles Darwin (p.111-112):
I think that I have become a little more skilful in guessing right explanations and in devising experimental tests; but this may probably be the result of mere practice, and of a larger store of knowledge. I have as much difficulty as ever in expressing myself clearly and concisely; and this difficulty has caused me a very great loss of time; but it has had the compensating advantage of forcing me to think long and intently about every sentence, and thus I have been often led to see errors in reasoning and in my own observations or those of others. 
There seems to be a sort of fatality in my mind leading me to put at first my statement and proposition in a wrong or awkward form. Formerly I used to think about my sentences before writing them down; but for several years I have found that it saves time to scribble in a vile hand whole pages as quickly as I possibly can, contracting half the words; and then correct deliberately. Sentences thus scribbled down are often better ones than I could have written deliberately.
I've begun to try and cultivate the habit of writing more thoughts down as soon as they come to me, instead of trying to remember them for later, or sending them from my phone via email. As the Darwin quote above suggests, this may often result in a better way of framing something than if one had thought about it more deliberately, and it may also help one to keep thinking about a given idea intently enough to force a better understanding and simplification of that idea in one's own mind. 

And for those interested in a few details.... My favorite pants over the last couple of years have been the UB Tech Men's Travel Pant from Costco ($17.99). Given that I like to always carry a pair of headphones with me so that I can listen to the large library of audiobooks and podcasts on my phone when some spare time arises, the side pocket on the pants is perfect for carrying small headphones (Apple EarPods in my case). And that pocket is also perfect for storing a small notebook and pen. The notebook I'm currently experimenting with is the Field Notebook - 3.5"x5.5" (that's about the largest size that will fit in the pocket). And the pens I'm experimenting with are the Pentel Mini Ballpoint Pens. I wish the pens were a bit bigger, but still smaller than normal-sized pens, so I may look for alternatives in that regard.

Thursday, February 22, 2018

Links

How Jeffrey Immelt’s ‘Success Theater’ Masked the Rot at GE (LINK) [In response to a question about assessing a company's culture from the outside, a wise and successful business man once told a small group of people that I was a part of that one of the ways to try and do it is to try and figure out if a company and its leaders lie. See if what they say and write is true. The example given (roughly) was a company that writes about how many new products it is developing, but when you go to a trade show, speak with a company employee and mention how you read about all the new products they have coming out soon and in development, and they say something like "Oh no, we haven't developed a new product in a decade." That's a sign the culture could be a rotten one; or at least an undesirable one in which to put your capital to work.]

The Ski Team That Sleeps Together Wins a Lot of Gold Medals Together [H/T Tamas] (LINK) [From a week ago, but a great example of building the right kind of culture.]

A long Twitter thread (100 replies) from someone who has read Nassim Taleb's new book, Skin in the Game (LINK) [The U.S. release date is next week.]

The Case Against Google - by Charles Duhigg (LINK)

Sergio Marchionne's final lap (LINK)

Retired sanitation honcho pulls in $285K a year in pension — twice his old salary [H/T @jtepper2] (LINK)

How Australia All But Ended Gun Violence (LINK)

What Muhammad Ali Can Teach Us About Success and an Authentic Life - by Robert Greene (LINK)

The Knowledge Project Podcast -- Survival of the Kindest: Dacher Keltner Reveals the New Rules of Power (LINK)
Related book: The Power Paradox: How We Gain and Lose Influence
Why Is Blue So Rare In Nature? (video) [H/T Linc] (LINK)

Wednesday, February 21, 2018

Links

The Aggregator Paradox - by Ben Thompson (LINK)

Trump Administration Looking at Bankruptcy Options for Student Debt ($) (LINK)

After Decades of Growth, Colleges Find It’s Survival of the Fittest ($) [H/T Matt] (LINK)

Will Quantitative Tightening (QT), which is deflationary in theory, be inflationary in practice? (LINK)

Why Decentralization Matters - by Chris Dixon (LINK)

Twenty Questions with Steven Pinker (LINK)
Related book: Enlightenment Now
Michelle Leder talks to Meb Faber (podcast) (LINK)
Related book: Financial Fine Print: Uncovering a Company's True Value
EconTalk Podcast: Jordan Peterson on 12 Rules for Life (LINK)
Related book: 12 Rules for Life: An Antidote to Chaos
Niall Ferguson talks to Sam Harris (podcast) (LINK)
Related book: The Square and the Tower
A Biohacker Regrets Publicly Injecting Himself With CRISPR (LINK)

Tuesday, February 20, 2018

Links

Full Transcript of the Daily Journal Annual Meeting 2018 (LINK) [Note: If you read this, I recommend listening to the joke Munger tells at the 39:28 mark in the audio version (in his reply to Question 4) when you get to that part, as it is way more entertaining to hear him tell it than just reading it.]

Private Equity: Overvalued and Overrated? - by Dan Rasmussen (LINK)

GORILLA BATTLES: Q1 2018 On What Amazon Means For The Rest Of Us (LINK)

Direct Wisdom from John Malone (LINK)

Labor 2030: The Collision of Demographics, Automation and Inequality [H/T @AlexRubalcava] (LINK)

A Chinese Casino Has Conquered a Piece of America (LINK)

Washington’s $500 Million Financial-Storm Forecaster Is Foundering ($) (LINK)

Invest Like the Best Podcast: Pat Dorsey Returns – The Moat Portfolio (LINK)

Sebastian Junger Never Owned a Smartphone (and Why This Matters) - by Cal Newport (LINK)

Jordan B. Peterson on 12 Rules for Life (video) (LINK)
Related book: 12 Rules for Life: An Antidote to Chaos
A 30-part BBC Podcast Series: Living With The Gods [H/T Tamas] (LINK)
Neil MacGregor explores the role and expression of shared beliefs in communities around the world. 

Sunday, February 18, 2018

Links

Charlie Munger on Bitcoins, Banking, AI, and Life (LINK)

How Warren Buffett Won His Multi-Million Dollar Long Bet (LINK)

GMO Quarterly Letter (Ben Inker) (LINK)

Sequoia Fund Q4 2017 - Investor Letter [H/T Linc] (LINK) [And for a comprehensive list of Q4 investor letters, see THIS link.]

The importance of GE's credit rating - by John Hempton (LINK)

Mohnish Pabrai's Q&A Session at Dakshana Valley (Pune District), Dec. 26, 2017 (video) (LINK)

Authors@Wharton Speaker Series presents Satya Nadella (video) [H/T ValueWalk] (LINK)
Related book: Hit Refresh
a16z Podcast: The Business of Continual Change (a chat between Charles Koch and Marc Andreessen) (LINK)

a16z Podcast: The Internet of Taste, Streaming Content to Culture (a chat between Ted Sarandos and Marc Andreessen) (LINK)

How cryptocurrency mining is hurting astronomers (LINK)

Friday, February 16, 2018

Links

I had a great time in L.A. this week, and enjoyed getting to see Charlie Munger in-person holding court at the Daily Journal Annual Meeting. It appears we are still awaiting a video to be released, but there are some notes HERE (and someone recorded an audio of the meeting HERE). And I agree with my friend Phil that one of the more interesting pieces was also Peter Kaufman's brief remarks that Munger asked him to give. As Phil posted on Twitter: 
My favorite part of the $DJCO meeting yesterday was actually from Peter Kaufman. His "Five Aces" of investment management:
1. Total integrity.
2. Actual, deep fluency in the subject.
3. Fee structure w/two-way fairness.
4. Uncrowded investment space.
5. Long runway.
I think he then also added (roughly) that if you find someone who fits that criteria, give them as much as you can afford to give them. 

***

"There are worse things than having people misunderstand your work. A worse danger is that you will yourself misunderstand your work." - Paul Graham, "Hackers and Painters" (Source)

Making Sense vs. Being Right - by Morgan Housel (LINK)

Tony Hsieh of Zappos on Hiring for Culture (LINK)

Wild, But Not Crazy - by Clifford Asness (LINK)

The end of the low-volatility regime (LINK)

Tech Luminary Peter Thiel Parts Ways With Silicon Valley ($) (LINK)

Jim Chanos on the return of choppy markets, Tesla, and the 'rent-seeking behavior' that's hurting our economy (video) [H/T Josh Brown] (LINK)

This Short Seller Pressed ‘Tweet.’ Then the FBI Showed Up (LINK)

Matt Levine chats with Tyler Cowen (audio/podcast) (LINK)

Exponent Podcast: Episode 141 — The Mailbag Episode (LINK)

These Crickets Can’t Sing Anymore—But They’re Still Trying - by Ed Yong (LINK)

Wednesday, February 14, 2018

Discipline equals freedom. Prioritize and execute.

The two phrases making up the title of this post come from Jocko Willink, a retired Navy SEAL commander who spent 20 years in the U.S. Navy. I first heard him use the phrases on various podcast appearances, including his own, and then in more detail in Extreme Ownership, a book he co-authored. He also mentions them in his answers to questions in Tim Ferriss' book Tribe of Mentors
If you could have a gigantic billboard anywhere with anything on it, what would it say and why?  
“Discipline equals freedom.” Everyone wants freedom. We want to be physically free and mentally free. We want to be financially free and we want more free time. But where does that freedom come from? How do we get it? The answer is the opposite of freedom. The answer is discipline. You want more free time? Follow a more disciplined time-management system. You want financial freedom? Implement long-term financial discipline in your life. Do you want to be physically free to move how you want, and to be free from many health issues caused by poor lifestyle choices? Then you have to have the discipline to eat healthy food and consistently work out. We all want freedom. Discipline is the only way to get it.
That excerpt reminded me of the quote from Warren Buffett: "We don't have to be smarter than the rest. We have to be more disciplined than the rest." And how true it is in investing. All too often, it's in trying to be too smart, and straying from one's circle of competence, that gets one into trouble. Lack of discipline in one's investing habits, and not sticking to things that are simple and easily understandable, will cause one to miss the freedom being sought. And discipline is a process, made up of the habits one puts forth on a consistent basis. As Willink defines it in his more recent book by the title of his response to the question above, Discipline Equals Freedom
Discipline: The root of all good qualities. The driver of daily execution. The core principle that overcomes laziness and lethargy and excuses. Discipline defeats the infinite excuses that say: Not today, not now, I need a rest, I will do it tomorrow.
And for another application of discipline to investing, we can turn to a quote from Seth Klarman: "The hard part is discipline, patience, and judgment. Investors need discipline to avoid the many unattractive pitches that are thrown, patience to wait for the right pitch, and judgment to know when it is time to swing."

Now, back to Tribe of Mentors:
When you feel overwhelmed or unfocused, what do you do?  
Prioritize and execute. I learned this in combat. When things are going wrong, when multiple problems are occurring all at once, when things get overwhelming, you have to prioritize and execute. 
Take a step back. 
Detach from the mayhem. 
Look at the situation and assess the multitude of problems, tasks, or issues. Choose the one that is going to have the biggest impact and execute on that. 
If you try to solve every problem or complete every task simultaneously, you will fail at all of them. Pick the biggest problem or the issue that will provide the most positive impact. Then focus your resources on that and attack it. Get it taken care of. Once you have done that, you can move on to the next problem or issue, then the one after that. Continue doing that until you have stabilized the situation. Prioritize and execute.
Like many others whom I imagine read this blog as well as continuously re-read Poor Charlie's Almanack, Willink's reply reminded me of the quote from Thomas Carlyle: "The task of a man is not to see what lies dimly in the distance, but to do what lies clearly at hand." 

It's easy to get so flooded with data and information, much of which is good and interesting, that one feels overwhelmed or so behind on things that you start to think you'll never catch up. How am I ever going to read all those books? ...read all those articles and reports? ...listen to all those podcasts? ...watch all of those videos? Prioritize and execute. Pick the most important task, focus, and finish it. And do it like Jeff Bezos, without multi-tasking

And as is often the case, let's let Charlie Munger have the last word:
Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Step by step you get ahead, but not necessarily in fast spurts. But you build discipline by preparing for fast spurts.... Slug it out one inch at a time, day by day. At the end of the day—if you live long enough—most people get what they deserve.

Tuesday, February 13, 2018

Links

The Gates Foundation's 2017 Annual Letter from Bill and Melinda Gates (LINK)

Winning the Battle, Losing the War (LINK)

Inside Facebook's Two Years of Hell (LINK)

Amazon’s Latest Ambition? To Be a Major Hospital Supplier ($) (LINK)

How I Built This Podcast -- Dyson: James Dyson (LINK)
Related book: Against the Odds
Invest Like the Best Podcast: This is Who You Are Up Against, w/ Josh Wolfe (LINK)

A Doctor’s Painful Struggle With an Opioid-Addicted Patient - by Siddhartha Mukherjee (LINK)

Health Care Professionals Share Their Stories About Opioid-Addicted Patients (LINK)

The serendipity test [H/T @AdamMGrant] (LINK)

Book of the day (I've mentioned this before, but given the 13D Research piece on the current state of natural gas I linked to last week, I thought it was worth posting again. And if anyone has any other good recommendations on the industry, feel free to pass them along.): Natural Gas: Fuel for the 21st Century - by Vaclav Smil 

Monday, February 12, 2018

Intuition needs nurturing...

From Leonardo da Vinci by Walter Isaacson:
When Leonardo was painting The Last Supper, spectators would visit and sit quietly just so they could watch him work. The creation of art, like the discussion of science, had become at times a public event. According to the account of a priest, Leonardo would “come here in the early hours of the morning and mount the scaffolding,” and then “remain there brush in hand from sunrise to sunset, forgetting to eat or drink, painting continually.” On other days, however, nothing would be painted. “He would remain in front of it for one or two hours and contemplate it in solitude, examining and criticizing to himself the figures he had created.” Then there were dramatic days that combined his obsessiveness and his penchant for procrastination. As if caught by whim or passion, he would arrive suddenly in the middle of the day, “climb the scaffolding, seize a brush, apply a brush stroke or two to one of the figures, and suddenly depart.” 
Leonardo’s quirky work habits may have fascinated the public, but they eventually began to worry Ludovico Sforza. Upon the death of his nephew, he had become the official Duke of Milan in early 1494, and he set about enhancing his stature in a time-honored way, through art patronage and public commissions. He also wanted to create a holy mausoleum for himself and his family, choosing a small but elegant church and monastery in the heart of Milan, Santa Maria delle Grazie, which he had Leonardo’s friend Donato Bramante reconstruct. For the north wall of the new dining hall, or refectory, he had commissioned Leonardo to paint a Last Supper, one of the most popular scenes in religious art. 
At first Leonardo’s procrastination led to amusing tales, such as the time the church prior became frustrated and complained to Ludovico. “He wanted him never to lay down his brush, as if he were a laborer hoeing the Prior’s garden,” Vasari wrote. When Leonardo was summoned by the duke, they ended up having a discussion of how creativity occurs. Sometimes it requires going slowly, pausing, even procrastinating. That allows ideas to marinate, Leonardo explained. Intuition needs nurturing. “Men of lofty genius sometimes accomplish the most when they work least,” he told the duke, “for their minds are occupied with their ideas and the perfection of their conceptions, to which they afterwards give form.”
.....................

Related previous post: Curiosity and Observation

Sunday, February 11, 2018

Links

"In order to taste my cup of water you must first empty your cup. My friend, drop all of your preconceived fixed ideas and be neutral. Do you know why this cup is so useful? Because it is empty." - Bruce Lee (Striking Thoughts)

The 2017 Broyhill Book Club (LINK)

A full chapter from Intelligent Fanatics: Standing On The Shoulders Of Giants -- The Fighting Scottish Clan: Harold & Dan Leever (LINK)

When Investing in Stocks Makes You Feel Like Throwing Up and You Do It Anyway ($) - by Jason Zweig (LINK)

There’s Never Just One Cockroach in the Kitchen - by Frank K. Martin (LINK)

Exit Interview: Mark Mobius on 30 Years of Emerging Markets (LINK)

An extensive investigation into Credit Acceptance Corporation [H/T @RodBoydILM] (Part 1, Part 2)

Eddie Lampert: Just The Facts—Sears Canada (LINK)

What are the markets telling us? Peak S&P 500? Inflation break-out? Bond break-down? (LINK)

Business Lessons from Reed Hastings/Netflix (Part 2) - by Tren Griffin (LINK)

Max Levchin on This Week In Startups (Video, Podcast)

a16z Podcast: The Evolution of Payments (LINK)

Eagles quarterback Nick Foles' Super Bowl victory speech has an important lesson about failure (LINK)
"I think the big thing is don't be afraid to fail," Foles said. "In our society today — you know, Instagram, Twitter, it's a highlight reel. It's all the good things. And then when you look at it, you think, like, wow, when you have a rough day or your life's not as good as that, you're failing. 
"Failure is a part of life. That's a part of building character and growing. Like, without failure, who would you be? I wouldn't be up here if I hadn't fallen thousands of times, made mistakes. We all are human. We all have weaknesses." 
..."I think when you look at a struggle in your life, just know that that's just an opportunity for your character to grow. And that's really just been the message. Simple. Like, if something's going on in your life and you're struggling, embrace it, because you're growing."
Adam Grant talks to Lindsey Vonn (LINK)
LV: Competition is what I find joy in as well. I like pushing myself. I like setting those goals. I like knowing that I’ve executed the plan I have set forth. All those things feel good. I don’t mind the mistakes. Failures are new challenges—they make me more excited to go back out there because I did something wrong and I know I can fix it.

Friday, February 9, 2018

Links

Michael Mauboussin on the Future of Active Management (LINK)

Polleit & Riechert Investment Management's H2 2017 Letter (LINK)

Why Competitive Advantages Die - by Morgan Housel (LINK)

Has Anyone Seen the President? - by Michael Lewis (LINK)

Latticework of Mental Models: Hot Hand Fallacy (LINK)

Jimmy Buffett Does Not Live the Jimmy Buffett Lifestyle (LINK)
He’s so rich that he’s done a 23andMe DNA test with Warren Buffett because in addition to sharing a last name, the mutual ability to sustain such mind-boggling wealth is so otherworldly that it could surely only be the result of the same extremely rare and fortunate genetic mutation. The test showed no biological relationship, but they stayed friends. Jimmy calls Warren “Uncle Warren” and Warren, who has been a business mentor to Jimmy, calls him “Cousin Jimmy.” 
Uncle Warren gave Cousin Jimmy some advice while he was growing the Margaritaville empire: “Management in place,” he said. Find a good business that makes sense, and make sure there are good people running it. Jimmy Buffett didn’t just want to license his name around. He wanted to work only with people who would give the customer a great experience: “If you like what I do in goods and services, if we make you feel better after a hard day of work and you want to come blow off some steam and you pay for that, I’m going to give you your money’s worth and have a good time doing it.”
Amazon to Launch Delivery Service That Would Vie With FedEx, UPS ($) (LINK)
Amazon.com Inc. is preparing to launch a delivery service for businesses, positioning it to directly compete with United Parcel Service Inc. and FedEx Corp. 
Dubbed “Shipping with Amazon,” or SWA, the new service will entail the tech giant picking up packages from businesses and shipping them to consumers, according to people familiar with the matter.
Facebook’s Desperate Smoke Screen (LINK)

The Rise of China and the Fall of the ‘Free Trade’ Myth [H/T @ProfSteveKeen] (LINK)

Natural gas: the longest bear markets with the greatest over-supply always lead to long bull markets with shortages. (LINK)

Macro Voices Podcast: The week short vol imploded (LINK) [Chris Cole, whose interviews and papers I've linked to the last couple of days, also joins the show for an update, at the 50:38 mark.]

Exponent Podcast: Episode 140 — The Products They Built Along the Way (LINK)

Talks at GS – Jonathan Haidt: The Psychology of Partisanship & Ethical Leadership (video) [H/T Tamas] (LINK)

What Scientists Learned From Putting 3-D Glasses on Praying Mantises - by Ed Yong (LINK)

Thursday, February 8, 2018

Links

Taking the Long Road with Volatility | Chris Cole Real Vision Video [filmed before the volatility of the past week] (LINK) [See yesterday's post for related links.]

Why American Workers Aren’t Getting A Raise: An Economic Detective Story - by Jonathan Tepper [H/T @Valuetrap13] (LINK)

Why Expedia or Priceline Might Just Be the Next Great Hotel Brand [H/T @JohnHuber72] (LINK)

Freakonomics Radio (podcast): It’s Your Problem Now (LINK)
No, it's not your fault the economy crashed. Or that consumer preferences changed. Or that new technologies have blown apart your business model. But if you're the C.E.O., it is your problem. So what are you going to do about it? First-hand stories of disaster (and triumph) from Mark Zuckerberg, Steve Ballmer, Satya Nadella, Jack Welch, Ellen Pao, Richard Branson, and more. (Part 4 of a special series, "The Secret Life of C.E.O.'s.")
Steven Pinker on The Joe Rogan Experience (podcast) (LINK)
Related book: Enlightenment Now
Crushed wood is stronger than steel (LINK)

The islands of yesterday and tomorrow - by Phil Plait (LINK)

The White Darkness: A Journey Across Antarctica - by David Grann (LINK)

Wednesday, February 7, 2018

Links

Inside Wall Street's $8 Billion VIX Time Bomb (LINK)

The MacroVoices Podcast‏ discussion between Erik Townsend and Chris Cole that was released on January 25th (and related article and presentation) is a great overview of some of the things that have happened over the last few days (and the risks still inherent as a result of short-volatility trades) (Audio and Show Notes, Transcript)
Erik: There’s a lot of people that are very concerned just about the explicit part of this. The people that are essentially profiting from the contango and the VIX term structure by either the XIV ETF or similar strategy implemented by rolling forward short futures contracts. 
And a lot of people are very worried about the blowup of that trade. You know, I think the statistic is if the VIX doubles overnight that could completely wipe out the XIV ETF, or something like that. 
You’re saying that, really, that’s the least of our problems. So, aside from the Target manager who’s made a bunch of money by shorting the VIX, what is the full scope of what could go wrong here? And how would it likely go wrong? 
Would it start with, say, a change where the share buybacks dry up because the interest rates no longer support them? Or what do you think the catalyst might be? And what could the potential blowback be if this were to start to unwind in the other direction? 
Chris: There’s a lot to talk about on that topic. First of all, on the short VIX trade, I think it’s interesting, because now it’s become very popular to talk about that. I think if you go back and read Artemis’s research, dating back as far as 2014, we talked about how, really, just a 65% move in the VIX could be all that it would take to wipe out those products. We actually presented our numbers years ago on that. I think it’s become a very popular thing to talk about today. 
I think these short-vol products, these ETMs – you know, Artemis runs a hedge fund – the regulators are going to require you to be an accredited investor and pass all these tests to invest in a hedge fund that trades volatility in a risk-controlled and smart manner, and it’s largely going long-vol in an intelligent way. 
Meanwhile, anyone on the street can go out and buy a double-levered VIX ETN or a short-biased VIX ETN. So there’s a great irony to this. And I think that these products are a class-action lawsuit waiting to happen. It’s not a matter of “if” – it’s a matter of “when.”  
But, are they a systemic risk to the system? Not so much, compared to the larger short-volatility trade.
.....
...Well, what common knowledge today will be proven wrong in the future? We only need to look into the past actually, empirically, to understand what that is going to be. It’s going to be the fact that stocks and bonds are anti-correlated with one another. 
In my entire life and trading career, and the trading career of almost anyone who is managing money today, stocks and bonds have experienced incredible anti-correlation. And when stocks  sell off, central banks ease and bonds perform. And risk parity funds have found ways to short that correlation in order to generate excess returns.
That’s all a risk parity strategy really is. A dispersion trading desk coupled with data exposure to the underlyings. It’s not that complex. The excess Alpha comes from a short correlation bet.
Well, the problem – and that has been a very good return in an environment where interest rates have dropped and dropped and dropped and dropped.
But what’s interesting is that, if you look at financial history – and I have a graph in “The Volatility and the Allegory of the Prisoner’s Dilemma,” which is a paper from 2015 and we talk about this at length – and also in the latest paper, “Volatility and the Alchemy of Risk” – if you look at the relationship between stocks and bonds over the past 120 years, they’ve actually spent more time correlative with one another than they’ve spent anti-correlative with one another.
What’s terrifying about this is that the entire modern asset management business is built on the short correlation trade of stocks and bonds. 
***

Inflation Is About to Appear ‘With a Vengeance,’ Paul Tudor Jones Says (LINK)

Beware When Studying Greatness - by Sean Iddings (LINK)

Masters of Scale Podcast: How To Build Your Company To Last — with Fiat's John Elkann (LINK)

A nice, short tribute video to SpaceX's maiden Falcon Heavy Launch (LINK)

Here’s what’s next for SpaceX after Falcon Heavy’s first flight (LINK)

This Mutant Crayfish Clones Itself, and It’s Taking Over Europe [H/T David] (LINK)

How to Survive Being Swallowed by Another Animal - by Ed Yong (LINK)

Tuesday, February 6, 2018

Links

Money and trust: lessons from the 1620s for money in the digital age (LINK)

An Inventor of the VIX: 'I Don't Know Why These Products Exist' [H/T Linc] (LINK)

Not Wages. Not Inflation. Volatility. ETFs. - by Rick Bookstaber (LINK)

Interactive Brokers CEO Peterffy says the 'short volatility' trade is akin to what caused the '87 crash [H/T Matt] (LINK)

This bit from Monday's "Almost Daily Grant's" is worth highlighting, which excerpts some things from a May 2017 issue relevant to recent market moves [Related presentation HERE]:
In light of the veritable explosion in options volatility as measured by the VIX Index, we return to the May 5, 2017 issue of Grant’s (“Portfolio insurance of the 21st Century”) and its examination of strategies which were designed to capitalize on the historically pleasant market conditions of 2017. 
“There is a fair bit of capital. We don’t exactly know how much, but we think it is on the order of a couple of hundred of billion dollars of capital that is invested [in volatility targeting],” says Frank Brosens, co-founder of Taconic Capital. Which is to say: Get invested and keep investing as volatility falls or flattens; scale back as volatility spikes. As volatility has functionally vanished from the market, our hypothetical seller of variable annuities might be emboldened to raise its equity exposure to as much as 140%, say, of normal allocation. 
“We look at this,” Brosens goes on, “and say, ‘Let’s say it’s $200 billion that is invested this way, and it was 140% invested, and if [the market] starts to trade down dramatically, it could go to being 60% invested.’” It could mean that $160 billion comes on the market for sale, not necessarily all at once, as in the week or so leading up to Oct. 19, 1987, but persistently enough to count.
Brosens goes on to compare the 2017 vol-selling regime with portfolio insurance, the infamous pseudo-hedging technique that played a contributing role in “Black Monday.”
I don’t think that we are quite at the point of portfolio insurance, but there is so much capital out there that just seems to be selling vol because it has worked, buying the market because it has worked, feeling confident that they can be invested in the market having done no work because they have these various mechanisms that will protect them if it starts to go down. Collectively, all of these strategies strike us as not so dissimilar to what we saw in ’87.” 
Invest Like the Best Podcast: Emerging Market Opportunities, with Harvey Sawikin (LINK)

How to Think About Culture - by Daniel Coyle (LINK)
Related book: The Culture Code
Dan Pink chats with Steven Johnson (LINK)
Related book: When: The Scientific Secrets of Perfect Timing
Book of the day (recommended by Annie Duke in her chat with Ted Seides): Kluge: The Haphazard Evolution of the Human Mind

Lee Kuan Yew quote

From Lee Kuan Yew: The Grand Master's Insights on China, the United States, and the World (and taken from a speech given at his 60th birthday dinner in 1983):
What have I learned since 1973? Some more basic unchangeables about human beings and human societies, the ways in which they can be made to do better, and the ever-present danger of regression and even collapse…I realize how very fragile a civilized society is…I have also come to understand the insignificance of personal achievements. For at 60, more than at 50, comes the realization of the transient nature of all earthly glories and successes, and the ephemeral quality of sensory joys and pleasures, when compared to intellectual, moral, or spiritual satisfactions…I have wondered how much of what I am is nature and how much was nurture? Would I have been a different person if I had not been tempered through the crucible of struggle?…Having taken life-and-death decisions and gone through one acute crisis after another, my perspectives, ambitions, and priorities have undergone a fundamental and, I believe, permanent, transformation. I may not have changed in my physical, mental, and emotional make-up, the hardware side. But the software side, my responses to God, glory, or gold, has been conditioned by my experiences. In other words, however capacious the hardware (nature), without the software (nurture), not much can be made of the hardware.

Monday, February 5, 2018

Links

A November 2012 interview with Warren Buffett and Carol Loomis (audio) (LINK)
Warren Buffett, of Berkshire Hathaway; Jeff Bezos, of Amazon; and Jamie Dimon, of JPMorgan Chase, announced they would form a health care company together. We thought it was a perfect time to revisit this interview. 
We talked with Buffett back in 2012 about Dimon, the business decisions he regrets, and yes, eating Oreos for breakfast. Buffett had recently released a book with Carol Loomis, a longtime financial journalist who had covered Buffett's career. She joined him for this interview. 
John Huber's Talk at Google (LINK)

We’ve Just Had a Taste of What the Tightening Will Be Like - by Ray Dalio (LINK)

Business Lessons from Reed Hastings (Netflix) - Part 1 - by Tren Griffin (LINK)

Apple’s Middle Age - by Ben Thompson (LINK)

How Amazon Rebuilt Itself Around Artificial Intelligence - by Steven Levy (LINK)

Grant's Podcast: Index orphans (LINK)
Jon Boyar, president of Boyar Research, joins the team to discuss opportunities in U.S. equities that are not eligible for the major indices.
Ted Seides talks with Annie Duke – Improving Decision Making (LINK)
Related book: Thinking in Bets
A World Without Microbes: An Apocalyptic Thought Experiment (video) (LINK)

The Edge Annual Question—2018: What Is The Last Question? (LINK)

Saturday, February 3, 2018

Links

Financiers, Heal Thyselves - by Jason Zweig ($) (LINK)

Literally, the Trade of the Century ($) [H/T Matt] (LINK)

How GE Went From American Icon to Astonishing Mess (LINK)

How Warren Buffett’s New Man at Dairy Queen Plans to Keep a Classic Brand Fresh ($) (LINK)

Bruce Berkowitz's annual letter and Fairholme's annual report (LINK)

The Federal Reserve cracks down on Wells Fargo over scandal involving sham accounts (LINK)

Why Mark Zuckerberg Can’t Be Trusted to Regulate Facebook - by Niall Ferguson (LINK)
Related book: The Square and the Tower
Shane Parrish on The Investors Podcast (LINK)

Exponent Podcast: Episode 139 — Amazon and Health Care (LINK)

The Best Mentors Think Like Michelangelo [H/T @profgalloway] (LINK)

The CDC Is About to Fall Off a Funding Cliff - by Ed Yong (LINK)

Friday, February 2, 2018

Marcus Aurelius quotes

Two different translations of one of my (and many others') favorite passages from Marcus Aurelius' Meditations (Book 5.20):

From a translation by George Long:
In one respect man is the nearest thing to me, so far as I must do good to men and endure them. But so far as some men make themselves obstacles to my proper acts, man becomes to me one of the things that are indifferent, no less than the sun or wind or a wild beast. Now it is true that these may impede my action, but they are no impediments to my affects and disposition, which have the power of acting conditionally and changing: for the mind converts and changes every hindrance to its activity into an aid; and so that which is a hindrance is made a furtherance to an act; and an obstacle on the road helps us along this road.
From the translation by Gregory Hays:
In a sense, people are our proper occupation. Our job is to do them good and put up with them. 
But when they obstruct our proper tasks, they become irrelevant to us—like sun, wind, animals. Our actions may be impeded by them, but there can be no impeding our intentions or our dispositions. Because we can accommodate and adapt. The mind adapts and converts to its own purposes the obstacle to our acting. 
The impediment to action advances action. 
What stands in the way becomes the way.
***

And a complementary passage to the one above occurs later in the Meditations (Book 8.32):

From the Long translation:
It is your duty to order your life well in every single act; and if every act does its duty, as far as is possible, be content; and no one is able to hinder you so that each act shall not do its duty. But something external will stand in the way. Nothing will stand in the way of your acting justly and soberly and considerately. “But perhaps some other active power will be hindered.” Well, but by acquiescing in the hindrance and by being content to transfer your efforts to that which is allowed, another opportunity of action is immediately put before you in place of that which was hindered, and one which will adapt itself to this ordering of which we are speaking.
And from the Hays translation:
You have to assemble your life yourself—action by action. And be satisfied if each one achieves its goal, as far as it can. No one can keep that from happening. 
—But there are external obstacles.… 
Not to behaving with justice, self-control, and good sense. 
—Well, but perhaps to some more concrete action. 
But if you accept the obstacle and work with what you’re given, an alternative will present itself—another piece of what you’re trying to assemble. Action by action.


Thursday, February 1, 2018

Links

A New Mental Model for Investing - by Ian Cassel (LINK)

It’s Hard To Predict How You’ll Respond To Risk - by Morgan Housel (LINK)

How J.D. Power Was Acquired by a Chinese Company Shrouded in Mystery ($) [H/T Matt] (LINK)

a16z Podcast: Self-Driving Cars — Where Are We, Really? (LINK)

In Science, There Should Be a Prize for Second Place - by Ed Yong (LINK)