Links

"If the business changes in a material way, you’d better change your business model. Or somebody else will. And then you’ll even have more changes facing you.... Capitalism is creative destruction. And sometimes, you’re on the short end of that." --Warren Buffett (2009)

"Some of our businesses have a shared-hardship model, where they don’t layoff, at least not yet. And the businesses with that model tend to be very strongly placed economically. So I guess it shows that Benjamin Franklin was right, when he said, 'It's hard for an empty sack to stand upright.' So we’re all over the map on that, and so is all of industry. But I do think an ideal model would be a business so strong that it could operate in the shared-hardship mode instead of the layoffs." --Charlie Munger (2009)

"Yeah, some are doing that, where you give up hours. But a lot of operations don’t lend themselves to that very well, either. So...in other cases, you basically have to close down whole plants. That’s just the nature of it. You really can’t operate every plant at 50 percent and have it work as effectively as shutting down the least-productive plants." --Warren Buffett (2009)

"In a world where you sometimes have to amputate a limb to stay alive, you can’t expect that every business can stay exactly as it is." --Charlie Munger (2009)

***

Klarman Made $1 Billion Hedging Markets. He Still Lost Money (LINK) [If anyone happens to have a copy of a Baupost quarterly update letter during this time, and is willing to share, it would be greatly appreciated (valueinvestingworld@gmail.com).]

The first 4 video replays of Grant Williams' 2020 Hmmminar Series are available online (LINK) [Marc Cohodes is the latest one from last night, and the next one is scheduled for tonight, with John Hussman.]

FUNDSMITH Annual Shareholders' Meeting - 25th February 2020 (video) (LINK)

Apple, Amazon, and Common Enemies -  by Ben Thompson (LINK)

Invest Like the Best Podcast: Sarah Tavel - Consumer & Marketplace Investing (LINK)

The Daily Podcast: A Kids’ Guide to Coronavirus (LINK)

The Peter Attia Drive (podcast): #104 - COVID-19 for kids with Olivia Attia (LINK)

Recode Decode Podcast: Niall Ferguson: How viruses (and fake news stories) spread, and how America screwed up its coronavirus response (LINK)

TED Connects: Why sleep matters now more than ever | Matt Walker (video) (LINK)

The Gene | Part 1: Dawn of the Modern Age of Genetics | PBS (video) (LINK) [A Ken Burns documentary, inspired by Siddhartha Mukherjee's book The Gene.]

WHO must answer serious questions before it is trusted with leading a Covid-19 inquiry - by Matt Ridley (LINK)

The Shelves Are Empty, the Test Swabs Are Gone - by Michael Lewis (LINK)

Some of Warren Buffett’s comments on inflation over the years (LINK)

Book of the day (PDF): Dying of Money: Lessons of the Great German and American Inflations - by Jens O. Parsson

Links

"Accepting that we cannot predict the future⁠—i.e., that there will always be unexpected and highly consequential events⁠—is the first step in becoming less fragile and more adaptable. People should be highly skeptical of anyone's, including their own, ability to predict the future, and instead pursue strategies that can survive whatever may occur." --Seth Klarman (Source)

The Art of (Not) Selling [Akre Capital Management] (LINK)

The Future of America’s Contest with China - by Evan Osnos (LINK)

7 Reasons Why Video Gaming Will Take Over - by Matthew Ball (LINK)

⁠Are You Undervaluing Your Customers? [H/T @BrentBeshore] (LINK)

Amazon Has Long Ruled the Cloud. Now It Must Fend Off Rivals. ($) (LINK)

In Carlos Ghosn’s Escape, Plotters Exploited an Airport Security Hole ($) (LINK)

Railroads are cutting workers at a pace not seen since the Great Recession [H/T Linc] (LINK)

What Will Happen In The 2020s - by Fred Wilson (LINK)

“What is Happening to US Shale Production?” [H/T Linc] (LINK)

The Acquirers Podcast: Gregory Zuckerman on Renaissance / Rentech (LINK)

Capital Allocators Podcast: Gregory Zuckerman – Decoding Renaissance Medallion (LINK)

Related book: The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution

EconTalk (podcast): Melanie Mitchell on Artificial Intelligence (LINK)

Hidden Forces Podcast: Range: Why Generalists Triumph in Today’s Specialized World | David Epstein (LINK)

Related book: Range: Why Generalists Triumph in a Specialized World

Odd Lots Podcast: Why So Many Emerging Markets Are Blowing Up Right Now (LINK)

OPIS Crash Course Podcast: IMO 2020 Is Here! Refinery Impacts and Oil Price Analysis (LINK)

Sean "Diddy" Combs Has A Next-Level Conversation W/ Mentor Ray Dalio (video) [H/T Linc] (LINK)

***

Chart of the day (with description), via John Hussman's "One Tier and Rubble Down Below":

As I’ve noted before, individual price/revenue ratios aren’t clear indications of value in and of themselves. Typically, low ratio stocks include retail, grocery, and banking companies, while high ratio stocks include technology and emerging growth companies. What’s more important is the comparison of each group with its own norms, as well as dispersion across the behavior of different groups. 

 

Presently, it’s clear that except for the most expensive 10% of stocks, every other decile is at valuations 10-50% more extreme than those observed at the 2000 market peak.

Links

"The unthinkable can always happen, and you have to run your affairs accordingly." --Peter Bernstein

On Jack Bogle (1929-2019) - by Jason Zweig (LINK)

A Lifetime of Systems Thinking - by Russell Ackoff (1999) [H/T @pcordway] (LINK)

Clayton Christensen: After 40 years studying innovation, here is what I have learned (LINK)

Exponent Podcast: Inverted Pyramids (LINK)

The Insulin Wars [H/T @Atul_Gawande] (LINK)

GMO White Paper: Is the U.S. Stock Market Bubble Bursting? A New Model Suggests 'Yes' (LINK)

• A new model suggests that from early 2017 through much of 2018, the U.S. stock market was a bubble.
• Driven by negative changes in sentiment, the bubble started to deflate in the fourth quarter of 2018, in spite of strong fundamentals.
• Our advice, consistent with our portfolio positions established in Q1 2018 – as usual, we were early – is to own as little U.S. equity as your career risk allows.

Questions we hear a lot - by John Hussman (LINK) [And if you're not one to read the economic analysis, the talk by Martin Luther King Jr., "Loving Your Enemies," attached to the end is always a worthwhile read.]

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"While  it  is always tempting to try to time the market and wait for the bottom to be reached (as if  it  would  be  obvious  when  it  arrived), such a strategy has proven over the years to  be  deeply  flawed.  Historically,  little volume transacts at the bottom or on the way back up, and competition from other buyers  will  be  much  greater  when  the markets  settle  down  and  the  economy begins  to  recover.  Moreover,  the  price recovery from a bottom can be very swift. Therefore, an investor should put money to work amidst the throes of a bear market, appreciating that things will likely get worse before they get better." --Seth Klarman [2008 investor letter]

I Used to Write for Sports Illustrated. Now I Deliver Packages for Amazon. (LINK)

How Allbirds Became A $1.4 Billion Sneaker Start-Up (video) [H/T @ayushmitt] (LINK)

Citron Research report on Facebook [H/T @ivan_brussels] (LINK)

The Fast and the Furious - by John Hussman (LINK) [Published early this morning.]

While we don’t presently observe conditions to indicate a “buying opportunity” or a “bottom” from a full-cycle standpoint, we do observe conditions that are permissive of a scorching market rebound, even if it only turns out to be the “fast, furious, prone to failure” variety. I say “permissive” because there is no certainty about a rebound, and we wouldn’t dream of removing our safety nets against a market decline that I continue to expect to draw the S&P 500 toward the 1000 level by the completion of this cycle. Still, we’ve prepared for the possibility of unusual volatility here, most likely including one or more daily moves in the range of 4-6%, potentially to the upside. Yes, that means one or more daily moves on the order of 100-150 points on the S&P 500 and 900-1300 points on the Dow. You think I’m kidding.

EconTalk Podcast: Mariana Mazzucato on the Value of Everything (LINK)

Related book: The Value of Everything: Making and Taking in the Global Economy

a16z Podcast: How the Internet Happened (LINK)

Related book: How the Internet Happened: From Netscape to the iPhone

Adam Robinson chats with Shane Parrish on the The Knowledge Project Podcast (Part 2) (LINK)

Sam McBride: "Building RXBAR" | Talks at Google (LINK)

The Relentlessness of Modern Parenting (LINK)

99 Good News Stories You Probably Didn’t Hear About in 2018 [H/T @AlexRubalcava] (LINK)

How to Develop Better Habits in 2019 - by Ryan Holiday (LINK)

Links

End of an era: M&T's Robert Wilmers, force in community, dies at 83 [H/T Linc] (LINK)

David Einhorn | Full Q&A | Oxford Union (video) [H/T ValueWalk] (LINK)

Your Mom’s Basement TO A $600 Million Payday IN 4 Years (LINK)

Human Behavior and The Panic of 1907 - by John Huber (LINK)

The Story of Shorting Home Capital | Marc Cohodes Outtake | Real Vision Video (LINK)

Three Delusions: Paper Wealth, a Booming Economy, and Bitcoin - by John Hussman (LINK)

How I Built This Podcast -- LearnVest: Alexa von Tobel (LINK)

Richard Dawkins, Sam Harris, and Matt Dillahunty (audio/podcast) (LINK)

Links

John Hussman made a 19-minute video with his thoughts on the proposed tax bill (LINK)

The Senate’s tax bill is a sweeping change to every part of federal health care [H/T @Atul_Gawande] (LINK)

Would all Industry Titans of the 19th Century be in Prison Today? - by Ian Cassel (LINK)

Leithner Letter No. 215-221 (LINK)

Related book: The Bourgeois Manifesto

Tyler Cowen chats with Douglas Irwin whose book, Clashing over Commerce: A History of US Trade Policy, Cowen thinks is the best history of American trade policy ever written (podcast) (LINK)

Freakonomics Radio (podcast): Are We Running Out of Ideas? (LINK)

Economists have a hard time explaining why productivity growth has been shrinking. One theory: true innovation has gotten much harder – and much more expensive. So what should we do next?

“Light Touch”, Cable, and DSL; The Broadband Tradeoff; The Importance of Antitrust - by Ben Thompson (LINK)

a16z Video: The API Economy (LINK)

The new generation of computers is programming itself | Sebastian Thrun and Chris Anderson (video) (LINK)

Authors@Wharton Speaker Series presents Sir Richard Branson (video) [H/T ValueWalk] (LINK)

Gary Taubes talks with Shane Parrish on The Knowledge Project Podcast (LINK)

Related book: The Case Against Sugar

Hummingbirds Are Where Intuition Goes to Die - by Ed Yong (LINK)

Valuations, interest rates, and corporate profitability...

As I was re-reading some old letters from Seth Klarman, I thought the below paragraphs were worth sharing once again. Given Mr. Buffett's recent comments about interest rates and valuations, and how those comments have been discussed in the media, as well as Berkshire's growing cash balance and difficulty finding bargains in today's market, history seems to be rhyming a bit. The paragraphs below from Klarman were published in June of 1998. 

You might think that the increasing percentage of investor funds managed by professional ("professional"?) money managers would serve as a check on market excess. If you did, you would be seriously wrong. Very few professional investors are willing to give up the joy ride of a roaring U.S. bull market to stand virtually alone against the crowd, selling overvalued securities without reinvesting the proceeds in something also overvalued. The pressures are to remain fully invested in whatever is working, the comfort of consensus serving as the ultimate life preserver for anyone inclined to worry about the downside. As small comfort as it may be, the fact that almost everyone will get clobbered in a market reversal makes remaining fully invested an easy relative performance decision. Isn't this what always happens at the top of historic bull markets? The answer, of course, is of course.  

Investors and the financial media, always eager to grasp at straws, however slim and brittle, jumped on the year-end shareholder letter of legendary investor Warren Buffett as fodder for the bull case. The Dow immediately rallied 200 points. What Buffett, Chairman of Berkshire Hathaway, said is that at today's level of interest rates, and assuming prevailing levels of corporate profitability, in his view U.S. equities as a whole are not overvalued (and, just as assuredly, not undervalued.) Virtually no one explored his real message, equally prominent, suggesting that today's unprecedented level of corporate profitability may well be unsustainable; future profits may fall far short of today's lofty expectations. The U.S. stock market is extremely vulnerable to disappointments; nothing short of perfection is built into today's prices. And Buffett confesses that it has become increasingly difficult for him to find bargains in the current market environment. 

And the comments referenced above from Buffett in the 1997 Berkshire letter (published in February of 1998) are below: 

Though we don't attempt to predict the movements of the stock market, we do try, in a very rough way, to value it. At the annual meeting last year, with the Dow at 7,071 and long-term Treasury yields at 6.89%, Charlie and I stated that we did not consider the market overvalued if 1) interest rates remained where they were or fell, and 2) American business continued to earn the remarkable returns on equity that it had recently recorded. So far, interest rates have fallen -- that's one requisite satisfied -- and returns on equity still remain exceptionally high. If they stay there -- and if interest rates hold near recent levels -- there is no reason to think of stocks as generally overvalued. On the other hand, returns on equity are not a sure thing to remain at, or even near, their present levels. 

In the summer of 1979, when equities looked cheap to me, I wrote a Forbes article entitled "You pay a very high price in the stock market for a cheery consensus." At that time skepticism and disappointment prevailed, and my point was that investors should be glad of the fact, since pessimism drives down prices to truly attractive levels. Now, however, we have a very cheery consensus. That does not necessarily mean this is the wrong time to buy stocks: Corporate America is now earning far more money than it was just a few years ago, and in the presence of lower interest rates, every dollar of earnings becomes more valuable. Today's price levels, though, have materially eroded the "margin of safety" that Ben Graham identified as the cornerstone of intelligent investing.

And for a more extensive analysis and opinion on valuations and interest rates, see John Hussman's Why Market Valuations are Not Justified by Low Interest Rates.

Links

"It is obvious that the information age, by homogenizing our tastes, is causing the unfairness to be even more acute—those who win capture almost all the customers." - Nassim Taleb, Fooled by Randomness

The Science Behind Mona Lisa’s Smile - by Walter Isaacson (LINK)

Related book: Leonardo da Vinci

Why Market Valuations are Not Justified by Low Interest Rates - by John P. Hussman (LINK)

Tax Reform, 2017: Promise of Plenty or Poisoned Chalice? - by Aswath Damodaran (LINK)

The Tail Risks Optimizer’s Dilemma: Taleb Vs Spitznagel - by Frank K. Martin (LINK)

Procter & Gamble vs. Nelson Peltz: A Battle Over the Future of Big Brands (LINK)

CNBC's full interview with billionaire investor Nelson Peltz (video) (LINK)

The Truth Is Catching Up With Tesla (LINK)

A Dozen Lessons about Business from Anthony Bourdain - by Tren Griffin (LINK)

Adventures in Finance podcast -- Battlegrounds: From Warfare to Wall Street with Preston Pysh (LINK)

'Our minds can be hijacked': the tech insiders who fear a smartphone dystopia (LINK)

How Smartphones Hijack Our Minds ($) (LINK)

Jony Ive’s iConcern (LINK)

Books of the day:

The Art of Stillness: Adventures in Going Nowhere 

Fortune's Children: The Fall of the House of Vanderbilt [H/T @morganhousel]

"One who is too insistent on his own views, finds few to agree with him." - Lao Tzu [H/T CIO]

Links

"Traditionally the investor has been the man with patience and the courage of his convictions who would buy when the harried or disheartened speculator was selling." -Benjamin Graham & David Dodd, Security Analysis

Don’t Compare Yourself To Others - by Ian Cassel (LINK) [“To be a disciplined investor you have to be willing to stand by and watch other people make money on things that you passed on” – Howard Marks]

Perpetual Beta - by Chris Pavese (LINK)

How to Be Your Own Quant - by Jason Zweig [H/T Linc] (LINK)

Hussman Weekly Market Comment: Being Wrong in an Interesting Way (LINK)

Exponent podcast: Episode 116 — Blockchain Beauty Contest (LINK)

Why Flamingos Are More Stable on One Leg Than Two - by Ed Yong (LINK)

Why Did the Biggest Whales Get So Big? … and perhaps more importantly: when? - by Ed Yong (LINK)

How Zika Conquered the Americas - by Ed Yong (LINK)

Neil deGrasse Tyson talks with Charlie Rose about his latest book, Astrophysics for People in a Hurry (LINK)

***

On a separate note.... I've been doing a lot of walking (slowly) over the last few days, and these are probably my favorite pair of shoes I've owned, for those that may be interested (and who like the thin, barefoot-style sole): Merrell Men's Vapor Glove 2 Trail Running Shoe

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Getting caught back up after a little time away...

Disturbing New Facts About American Capitalism - by Jason Zweig (LINK)

Explaining a Paradox: Why Good (Bad) Companies can be Bad (Good) Investments! - by Aswath Damodaran (LINK)

A Dozen Lessons about Minimum Viable Products - by Tren Griffin (LINK)

Oaktree Insights: The Power of Credit (LINK)

This Special Edition Insights relays a discussion between a group of investment professionals about the state of the credit markets and the key risks facing their respective investment strategies.

Ian Schapiro, Portfolio Manager of Oaktree's Power Opportunities and Infrastructure Investing strategies, discusses the subsectors that are attracting capital at SuperReturn International (short video) (LINK)

Jim Chanos Interview With Capitalize For Kids (LINK)

Lauren Templeton: "Investing the Templeton Way" | Talks at Google (video) (LINK)

Related book: Investing the Templeton Way

John Hussman's commentary was worth the read this week, even if one may not agree with it all: The Most Broadly Overvalued Moment in Market History (LINK)

Edge #488: Closing the Loop - A Conversation With Chris Anderson (LINK)

The Uber Conflation - by Ben Thompson (LINK)

Exponent Podcast: Episode 106 — To Be an Outlaw (LINK)

Culture and Revolution - by Ben Horowitz (LINK)

We know that culture is important. We even think we know what it is. But culture isn’t perks like dogs and snacks in the workplace — nor is it a defining personality, like, say, “googleyness”. Culture is the collective behavior of an organization… and whether or not you go about creating one, you’re going to get one anyway, argues a16z cofounder Ben Horowitz. “Unless you set it, it’ll just be what it is.” 

So how should founders building companies (or leaders trying to turn their company around, address disruption, beat competition, and so on) go about creating a true winning culture? Horowitz shares key takeaways from the only successful slave revolution in the history of humanity — the Haitian revolution led by Toussaint L’Ouverture in 1791 — in this keynote first given at a16z’s inaugural summit event. How did this 18th century leader essentially “re-program” an entire culture to win?

a16z Podcast: The Business of Healthcare (LINK)

Philip Zimbardo on The Tim Ferriss Show (LINK)

Tony Robbins on the James Altucher podcast (LINK)

Related book: Unshakeable: Your Financial Freedom Playbook

Peter Attia talks with Patrick O’Shaughnessy on the Invest Like the Best podcast (LINK) [I also listened to and enjoyed Attia on the Jocko Podcast from a couple of months ago, HERE.]

Links

"A wise man seeks wisdom; a madman thinks that he has found it." 

-Persian proverb (via A Calendar of Wisdom)

The video of Warren Buffett and Bill Gates on Charlie Rose (LINK)

'Becoming Warren Buffett' Goes Beyond a $74 Billion Fortune [H/T Linc] (LINK)

‘Becoming Warren Buffett’ is a timely reassurance that some billionaires have a heart [H/T Linc] (LINK)

The $99 Billion Idea: How Uber and Airbnb Won (LINK)

Related book (released tomorrow): The Upstarts: How Uber, Airbnb, and the Killer Companies of the New Silicon Valley Are Changing the World - by Brad Stone

James Grant on WealthTrack (video) (LINK)

The Hidden Fees Inside Managed-Future Funds - by Jason Zweig (LINK)

Everyone Poops and has Customer Churn (and a Dozen Notes) - by Tren Griffin (LINK)

Billionaire Steve Wynn: Building Las Vegas (2014 video) [H/T @iancassel] (LINK) ["We never risked the firm. Never risked the firm. My responsibility to my employees, my stockholders and such; that I can't promise to be right all the time. No one can. You make calls. Sometimes they're right, sometimes they're wrong. But capital structure allows you to survive the inevitable cycles of business, which go up and down as surely as sunrise and sunset, except we don't know the timing. They allow you to survive your own miscalculations. Capital structure, I learned at a young age, thanks to Mike Milken who taught me this story; capital structure is everything. And I've always had a capital structure that was bulletproof."] [Wynn's answer about building a good company culture from the 33:50-40:58 mark is also worth a close listen.]

Hussman Weekly Market Comment: On Governance (LINK)

Those who aspire to “right speech” often measure their words with four questions: Is it true? Is it kind? Is it necessary? Is it the right time? Right speech should not escalate conflict, but it doesn’t retreat from necessary truth, and criticisms don’t always seem kind. The question of right speech is the question of how one might best serve others. Criticism with the intent to offend is not constructive, but silence is equally detrimental when it quietly endorses a pattern of offense, or encourages the silence of others. 

Those of you who have followed my work over the decades know that I look at the world holistically in terms of the interconnection and responsibility we have toward others, and I’ve never been much for separating “business” from those larger values. After all, most of my income regularly goes to charity, and nearly everything that remains follows our own investment discipline. Whether my comments on matters like peace, civility, economic policy or governance are well-received or not (and I'm grateful that they have been over the years), there are moments when one has the responsibility to speak if one has a voice.

How Mark Sisson grew a loyal tribe before launching a niche health food line (podcast) (LINK)

Related book: The New Primal Blueprint

Amor Fati: The Immense Power of Learning To Love Your Fate (LINK)

Related previous post: Friedrich Nietzsche quotes on amor fati ("love of fate")

Book of the day (mentioned by Warren Buffett at Columbia): Essays In Persuasion – by John Maynard Keynes

Links

Part 2 of Mohnish Pabrai on The Investors Podcast (LINK)

Why is it so Hard to Forecast the Future? - by Tren Griffin (LINK)

Data Driven Business: Customer centricity in the platform revolution - Sangeet Paul Choudary (video) (LINK)

Related book: Platform Revolution

Last Lifelines Crumble for Many Greek Families as New Conflict With Creditors Looms [H/T @rationalwalk] (LINK)

For Shale Drillers, Rising Oil Prices Also Come With Rising Costs (LINK)

John Hussman's Weekly Market Comment, especially the non-investing section "On Peace", is worth a read this week (LINK)

It’s often imagined that peace is the result of sufficiently crushing one’s opponent; of inflicting so much injury and suffering that they surrender. There’s little doubt that conflicts can be ended in this way, but only at terrific cost, and with deep scars that feed later hatreds and conflicts. Others somehow come to imagine that waging peace requires one to lay down defenseless. It’s just not so. Peace doesn’t mean that one doesn’t defend oneself, or refrain from criticism. Peace doesn’t demand the absence of strength. It asks each side to see and understand the suffering of the other, whether that suffering is rooted in reality or misperception. It asks us to refrain from needlessly provoking the adversary, or to insult them in order to boost our pride. It asks us to look to address their suffering in ways that are consistent with our own security. If peace demands anything from us, it is to refrain from being infected by hatred. Dr. King recognized that: 

"Darkness cannot drive out darkness; only light can do that. Hate cannot drive out hate; only love can do that. I have decided to stick with love. Hate is too great a burden to bear." 

Even in the midst of a fight, one can still remember that the goal is reconciliation.

"Why the next generation has trouble running the corporation Daddy founded" [H/T @paulg] (LINK)

Paul Graham on charisma and power (LINK)

Obama’s Secret to Surviving the White House Years: Books [H/T @williamgreen72](LINK)

Links

Kindle edition on sale for $1.99 today: Antifragile: Things That Gain from Disorder - by Nassim Nicholas Taleb

Malcolm Gladwell’s latest article: Daniel Ellsberg, Edward Snowden, and the Modern Whistle-Blower (LINK)

Brian Moynihan on Charlie Rose (video) (LINK)

Sohn London Conference Notes 2016 (LINK)

Hussman Weekly Market Comment: Economic Fancies and Basic Arithmetic (LINK)

The past several weeks have brought an enormous amount of loose economic analysis encouraging investors to expect a meaningful surge in economic growth and corporate profits. Most of this hope rests on projections of higher deficit spending and increased domestic investment. It might benefit investors to consider these arguments more closely, and with greater focus on a century of economic evidence than on the verbal arguments of enthusiastic talking heads. 

While there is a strong correlation between growth in gross domestic investment and growth in real GDP, the slope of that relationship is only about 0.2, meaning that even if the growth rate of real gross domestic investment was driven from the recent growth trend of zero all the way back to the previous post-war growth rate of 3.5%, the overall impact on real GDP growth would only be about 0.7% annually, placing the level of U.S. real GDP about 2.8% higher 4 years from today than it would otherwise be. That’s not an annual growth rate, but a cumulative gain. 

Granted, if even a 0.7% boost to annual GDP growth was sustained, it would have a major impact on long-term living standards over a 20-30 year period. But investors have a screw loose if they believe that the overall prospects for GDP growth over the coming 4 years have changed significantly. 

Let’s do some arithmetic here. The primary determinants of GDP growth over time are 1) growth in total employment plus 2) growth in real output per hours worked. There’s a little bit of cyclical variation due to changes in average hours worked, but that difference only shows up meaningfully during recessions. In practice, nearly all of the variation in GDP growth over time is explained by the sum of employment growth plus productivity growth. 

Let’s look at each.

a16z Podcast: The Internet Is Your Movement (LINK)

The Endgame at Saturn Begins (LINK)

The Cassini spacecraft has been orbiting Saturn since 2004, and is one of the most successful missions NASA has ever done. We’ve learned vast amounts of knowledge about the gigantic planet, its moons, and its rings. 

But all good things … after more than a decade of Cassini sending back data and devastatingly beautiful images, NASA has decided to end the mission. With its final days approaching, NASA has decided to take more chances with it. The spacecraft has been sent into a series of risky trajectories, passing over Saturn’s north pole, then diving through the ring plane just outside the rings. These will be the closest approaches to the rings since Cassini first arrived at Saturn.

PBS Documentary on nuclear weapons (2015): The Bomb (video) (LINK)

It began innocently enough. In 1938, two German chemists accidentally discovered how to split the nucleus of the uranium atom: nuclear fission. Einstein’s E=mc2 equation predicted that the amount of energy released from just one atom would be enormous. 

Physicists all over the world immediately realized that fission might make a bomb of extraordinary power — and that Nazi Germany might be capable of creating one. The fear of Adolph Hitler getting a nuclear weapon led to a race to deter him by developing such a bomb first. Thus began a chain of events that would lead inexorably to Hiroshima, the nuclear arms race, the hydrogen bomb, the Cuban Missile Crisis and some of the greatest fear and tension ever in world history.

Links

The Chessboard Fallacy (LINK)

Latticework of Mental Models: Scarcity Bias (LINK) [Also from Vishal: Mental Models, Investing, and You (Special E-Book)]

The Fight to Keep It Simple (LINK)

Related previous post: If it's not simple, then I'm not interested...

Comments on investment philosophy - part one -- by John Hempton (LINK)

The ~30-minute CNBC video interview with Bruce Berkowitz [H/T Will] (LINK)

Why Getting Rich Quick Doesn’t Sound Crazy - by Jason Zweig (LINK)

Self-made billionaire Jim Koch says this book taught him more than Harvard did [H/T Matt] (LINK)

Related book: How to Master the Art of Selling

Peter Diamandis’s 9 Rules For Building A Successful Business (LINK)

Snapchat Releases First Hardware Product, Spectacles (LINK)

What’s the Best Safe Haven for Investors? - by Mark Spitznagel [H/T Jim] (LINK)

Hussman Weekly Market Comment: Structural Growth and Dope Dealers on Speed-Dial (LINK)

Presently, the Shiller CAPE stands at close to 26, which is already well above historical norms, and above anything seen prior to the sequential bubbles (and collapses) of recent cycles. But the CAPE only captures part of the risk, because that 10-year average of inflation-adjusted earnings actually embeds the highest profit margin in history. By accepting the CAPE at face-value, investors are quietly assuming that profit margins will remain at this level permanently. On the basis of normalized profit margins, which systematically produce a more reliable valuation measure across history, the CAPE would presently be at 36.

Richard Duncan posted the final chapter of his book The Dollar Crisis, written in December 2004, which was interesting to read nearly 12 years later (LINK) [And if you want to subscribe to Richard Duncan's Macro Watch newsletter, you should also still be able to use the coupon code 'valueinvestingworld' to get 50% off.]

Exponent podcast: Episode 089 — Move On from the 80s (LINK)

The Cato chronicles, part I: young Cato (LINK)

Related book: Rome's Last Citizen: The Life and Legacy of Cato, Mortal Enemy of Caesar

How To Overcome Addiction And Make Lasting Changes In Your Life [H/T @AdamMGrant] (LINK)

Links

Jeremy Miller visits Google to talk about his excellent book, Warren Buffett's Ground Rules [currently $2.99 on Kindle] (video) (LINK)

Six secrets to true originality (LINK)

Related book (this Kindle version is on sale today only for $4.99): Originals: How Non-Conformists Move the World

Farnam Street Mental Model: Bias from Conjunction Fallacy (LINK)

A Bored Investor Is a Dangerous Thing - by Jason Zweig (LINK)

A Dozen Things I’ve Learned About the Music Business (and Businesses Like It)  - by Tren Griffin (LINK)

What Fiat Chrysler chief Sergio Marchionne told us over lunch [H/T @Kevin_Holloway] (LINK)

Hanjin Shipping Seeks to Protect Assets World-Wide (LINK)

Horizon Kinetics: Under the Hood - 5000 Years of Interest Rates (Part II) (LINK)

Raghuram Rajan: The independence of the central bank (LINK)

George Cooper talks to Juliette Foster about his book Fixing Economics (audio) (LINK)

Why are you doing? - by Derek Sivers (LINK)

9 Things Ridiculously Productive People Do Every Day (LINK)

See incredible footage from a National Geographic explorer's encounter with a 13-foot leopard seal while diving in Antarctica (video) (LINK)

Links

Siddhartha Mukherjee on Charlie Rose discussing his book The Gene (LINK)

Richard Feynman on Teaching Math to Kids and the Lessons of Knowledge (LINK)

Latticework of Mental Models: Wisdom of Crowds (LINK)

Buffetts’ Berkshire Hathaway Wants More Wells Fargo (LINK)

Warren Buffett’s Berkshire Hathaway (BRK.A) has petitioned the Federal Reserve to add to its position in Wells Fargo (WFC). 

Wells Fargo’s stock price jumped to a session high ($47.28) after headlines about the application hit newswires, though it finished Friday down 0.6% at $47.04. Berkshire owns almost exactly 10% of shares outstanding and, according to Bloomberg, the Fed must authorize transactions that put any investor over the 10% mark.

China: The Next Crisis - Kyle Bass (video) [H/T ValueWalk] (LINK)

Mutual Fund Observer, July 2016 (LINK)

The Absolute Return Letter, July 2016 (LINK)

FT Alphachat podcast: Fact-checking Brexit claims with Tim Harford (LINK)

Hussman Weekly Market Comment: Head of the Snake - The Poisonous Gap Between Paper Wealth and Real Wealth (LINK)

Following the British referendum to exit the European Union, the paper value of global assets briefly fell by about $3 trillion. This decline in the market capitalization immediately garnered headlines, suggesting that some destruction of “value” had occurred. No. The value of a security is embodied in the future stream of cash flows that will actually be delivered into the hands of investors over time. What occurred here was a paper loss. While the recent one was both shallow and temporary, get used to such headlines. In the U.S. alone I fully expect that $10 trillion of paper wealth will be erased from U.S. equity market capitalization over the completion of the current market cycle. 

While any given holder can sell their securities here, somebody else has to buy those same securities. The fact that valuations are obscene doesn't mean that the economy has created more wealth. It just means that existing holders of stocks and long-term bonds have a temporary opportunity to obtain a wealth transfer from some unfortunate buyer. Whoever ends up holding that bag will likely earn total returns close to zero on their investment over the coming 10-12 year horizon, with profound interim losses on the way to zero returns.

Exponent podcast: Episode 085 — Ballots Versus Guillotines (LINK)

A book I'm excited to read is now available for pre-order: Intelligent Fanatics Project: How Great Leaders Build Sustainable Businesses

Book of the day [H/T CIO]: Seven Brief Lessons on Physics - by Carlo Rovelli

Links

On an investment note, if you're looking to be greedy when others are getting a little fearful in the U.K. micro-cap land, valuations and volumes in some nicely positioned small companies are back at attractive levels. I can't discuss much here at the current time given that we are active in the space at Boyles, but just wanted to point it out as an area of potential opportunity for those interested.

Farnam Street: Why Are No Two People Alike? (Part 2) (LINK)

Related book: No Two Alike

Fluent Innovation: Using Behavioural Science to Make Your Next Big Idea a Success (video) (LINK)

Quantum Computing: A Primer (video) (LINK)

When You Dial 911 and Wall Street Answers [H/T @koster13] (LINK)

Hussman Weekly Market Comment: Brexit and the Bubble in Search of A Pin (LINK)

First things first. While the full attention of financial market participants is focused on “Brexit” - last week’s British referendum to exit the European Union - the singular factor to recognize here is that the vulnerability of the financial markets to steep losses has very little to do with Brexit per se. Rather, years of yield-seeking speculation, encouraged by central banks, had already brought the financial markets to a precipice prior to last week’s vote. It’s not entirely clear whether Brexit is a sufficient catalyst to burst the bubble, as we recall that the failure of Bear Stearns in early-2008 was followed by a period of calm before the crisis was sealed by Lehman's failure, and numerous dot-com stocks had already been obliterated by September 2000, when the tech bubble began its collapse in earnest. We’ll take the evidence as it comes, but we’re certainly defensive at present, for reasons that have little to do with Brexit at all.

Links

George Washington’s Practical Self-Education (LINK)

Related book: A Powerful Mind: The Self-Education of George Washington

The $3.5 Million Buffett Lunch Special (LINK)

Warren Buffett’s Dicey Power Play [H/T Will] (LINK)

Henry Kravis Q&A: ‘Worry About What You Might Lose on the Downside’ [H/T @iancassel] (LINK)

One Unspoken Reason Behind the LinkedIn Sale [H/T Linc] (LINK)

Microsoft and Apple Double Down - by Ben Thompson (LINK)

Leithner Letter Nos. 200-204 (July-October 2016) (LINK)

Non-GAAP Measures: An Investor Perspective (CFA Webinar) (LINK)

German 10-Year Government Bond Yields Dip Below Zero for First Time (LINK)

Hussman Weekly Market Comment: Like Water Out of a Sponge (LINK)

Last week, the 10-year Treasury yield dropped to just 1.6%. Technician Walter Murphy noted that his index of global 10-year yields also plunged to an all-time low. The overall structure of global bond yields is undoubtedly the outcome of years of aggressive monetary easing, though the break to fresh lows among European bank stocks may convey some additional information content. Of course, the compression of prospective investment returns isn’t limited to bonds. On the basis of the valuation measures best correlated with actual subsequent S&P 500 total returns across history, prospective 10-12 year S&P 500 nominal total returns have declined to just 0-2% by our estimates, with negative real expected returns on both horizons.

a16z Podcast: Move Fast But Don’t Break Things (When It Comes to Computational Biology) (LINK)

On Reading Issues of Wired from 1993 to 1995 (LINK)

Malcolm Gladwell: Why mass shootings, like Orlando's club attack, keep happening (video) (LINK)

Related Gladwell article from last year: THRESHOLDS OF VIOLENCE

Links

Charlie Munger Q&A at the Berkshire Hathaway Annual Meeting [H/T ValueWalk] (LINK)

Importance of ROIC: “Reinvestment” vs “Legacy” Moats (LINK)

Middleby Corporation (MIDD): Case Study of an Intelligent Fanatic Led 100-Bagger - by Ian Cassel (LINK)

The Remarkable Iscar Story [H/T Linc] (LINK)

Related book: Habit of Labor: Lessons from a Life of Struggle and Success

Ajit Jain’s Memo About the New CEO at Berkshire’s Gen Re [H/T Linc] (LINK)

To understand something, write about it (LINK)

Related book: All I Want To Know Is Where I'm Going To Die So I'll Never Go There

Bill Gates: 5 Books to Read This Summer (LINK)

The books: 1) Seveneves; 2) How Not to Be Wrong; 3) The Vital Question; 4) The Power to Compete; 5) Sapiens

Jeff Bezos wants to see an entrepreneurial explosion in space (LINK)

8 Big Ideas from a Super Investor: Philip Fisher (LINK)

Latticework of Mental Models: Winner’s Curse (LINK)

Latticework of Mental Models: Pari-mutuel System (LINK)

A Dozen Things Learned from Steven Crist About Investing and Handicapping Horses (LINK)

Chris Davis on WealthTrack (video) [H/T Will] (LINK)

Uber as a predatory lender (LINK)

FT Alphachatterbox podcast: The life and times of Paul Volcker (Part 1, Part 2)

Ryan Holiday talks to Shane Parrish on The Knowledge Project podcast (LINK)

Related books: The Obstacle Is the Way; Ego Is the Enemy

Google’s Go-to-Market Gap - by Ben Thompson (LINK)

Exponent Podcast: Episode 079 — Twerk the Algorithm (LINK)

Talks at Google - James Grant discusses The Forgotten Depression: 1921: The Crash That Cured Itself (video) (LINK)

Talks at Google - Steve Case discusses The Third Wave: An Entrepreneur's Vision of the Future (video) (LINK)

Talks at Google - Chris Anderson discusses TED Talks: The Official TED Guide to Public Speaking (video) (LINK)

Niall Ferguson's BBC series based on his book Civilization (videos) (LINK)

Hussman Weekly Market Comment: The Coming Fed-Induced Pension Bust (LINK)

Last week, I observed that based on the most reliable measures we identify (those having the strongest correlation with actual subsequent 10-12 year investment returns across history as well as in recent cycles), “the expected return on a traditional portfolio mix is actually lower at present than at any point in history except the 1929 and 1937 market peaks. QE has effectively front-loaded realized past returns, while destroying the future return prospects of conventional portfolios, at least as measured from current valuations. As a result, the coming years are likely to see a major pension crisis across both corporations and municipalities because the illusory front-loading of returns has encouraged profound underfunding.” 

On Thursday, Chicago’s Municipal Employees Annuity and Benefit Fund reported that its net pension liability soared to $18.6 billion, from $7.1 billion a year earlier, as a result of new accounting rules that prevent governments from using aggressive investment return assumptions (thanks to my friend Mike Shedlock for his post on this news). But here’s the kicker - the rules only apply after pension funds go broke. In Chicago’s case, pension return assumptions had been optimistically set at 7.5%, and the city had vastly underfunded its obligations. Still, this isn’t a Chicago problem. It’s a national, even global problem, and it’s going to get much worse. See, Chicago’s assumptions were actually below the national 7.62% average. The following chart is from the National Association of State Retirement Administrators (NASRA). Chicago is essentially the rule, not the exception.

.....

While on vacation, I listened to the book When Breath Becomes Air, which I highly recommend. I also started the book The Gene, which was recently released and should be a good addition to the mental model bookshelf.

Links

If you want to be like Warren Buffett and Bill Gates, adopt their voracious reading habits [H/T @jasonzweigwsj] (LINK)

Bruce Greenwald: The Death of Manufacturing (video) [H/T ValueWalk] (LINK) [The full video of that session at the 2016 Minsky Conference is available HERE. And more videos from the conference are avalaible HERE.]

Jim Chanos and the art of short-selling (27-page transcript PDF) [H/T @BarbarianCap] (LINK) [Or you can also listen to the audio of this Alphachatterbox podcast HERE.]

The Most Important Question We Never Ask: And then what? (LINK)

Less is more: what does mindfulness mean for economics? (LINK)

Hussman Weekly Market Comment: Lessons From The Iron Law of Equilibrium (LINK)

It’s largely forgotten that during the 2000 top formation, the S&P 500 lost 12% from July-October 1999, recovered to fresh highs, retreated by nearly 10% from December 1999 to February 2000, recovered to fresh highs, experienced another 10% correction into May, recovered to a new high in total return (though not in price) on September 1, 2000, retreated 17% by December, and by January 2001 had recovered within 10% from its all-time high, and was unchanged from its level of June 1999. 

Likewise, during the 2007 top formation, the S&P 500 corrected nearly 10% from July to August, recovered to a fresh high in October, corrected over 10% into November, recovered nearly all of it by December, followed with a 16% loss, and by May 2008 had recovered within 9% of its all-time high, and was unchanged from its level of October 2006. 

In 1954, John Kenneth Galbraith offered a similar narrative of the top-formation leading up to the 1929 crash: “The temporary breaks in the market which preceded the crash were a serious trial for those who had declined fantasy. Early in 1928, in June, in December, and in February and March of 1929 it seemed that the end had come. On various of these occasions the Times happily reported the return to reality. And then the market took flight again. Only a durable sense of doom could survive such discouragement. The time was coming when the optimists would reap a rich harvest of discredit. But it has long since been forgotten that for many months those who resisted reassurance were similarly, if less permanently, discredited.” 

I continue to have little doubt that the current market cycle will be completed by a 40-55% market collapse, with near-zero total returns for the S&P 500 on a 10-12 year horizon. Meanwhile, however, we have to accept that central banks have wreaked havoc on the ability of the financial markets to usefully allocate capital toward productive ends. Relevant warning signs that would normally prevent misallocation and malinvestment have been repeatedly disabled in the advancing half-cycle since 2009.

Book of the day: The Wit and Wisdom of Lee Kuan Yew