Links

"If you make yourself a very reliable person and stay reliable all your life, faithfully doing whatever you engage to do, it will be very hard for you to fail at anything you want."  --Charlie Munger (2007)

Looking for a Financial Planner? The Go-To Website Often Omits Red Flags - by Jason Zweig and Andrea Fuller ($) (LINK)

Universal Laws of the World - by Morgan Housel (LINK)

The Investing City Podcast: 32 - CEO of Sarah Cannon, Dee Anna Smith: Doing the Rounds (LINK)

Venture Stories Podcast: The State of Fintech in 2019 with Seth Rosenberg and Sheel Mohnot (LINK)

Radiolab Podcast: G: The World’s Smartest Animal (LINK)

Bugged By Insects? 'Buzz, Sting, Bite' Makes The Case For 6-Legged Friends [H/T Linc] (LINK)

Related book: Buzz, Sting, Bite: Why We Need Insects

Why the Placental Microbiome Should Be a Cautionary Tale - by Ed Yong (LINK)

Links

"There are lots of things in life that come to you where you have no option to not consider the issue. But where it’s voluntary, like choosing one investment from many, then the 'too difficult' pile is a marvelous way of sifting your daily grist." --Charlie Munger (2007)

Horizon Kinetics 2Q 2019 Portfolio Update - July 17, 2019 (audio) (LINK) [If anyone at Horizon Kinetics reads this blog, it would be fantastic if you make these podcasts available for download on Overcast, etc.]

Claire Barnes' Q2 report for the Apollo Asia Fund (LINK)

Is CVS A Value Trap Or A Fallen Angel Ready To Rise Again? - by Jonathan Boyar (LINK)

GMO White Paper | Risk and Premium: A Tale of Value - by John Pease (LINK)

The performance of U.S. value over the last decade has led many to wonder whether the value premium has been completely eroded. We analyze this question by decomposing the relative returns of cheap stocks in order to understand what has driven this change in performance. Our return decomposition suggests value stocks’ performance erosion can be evenly attributed to a reduction in the value premium and a widening of the value spread. Though value might deserve to trade at a greater discount today due to the market’s current dynamics, we believe that cheap stocks are still likely to deliver a premium and are therefore well-positioned to outperform the broad market.

Passive investing boom could be causing a market bubble, but not in the stocks you would expect (LINK)

Critics of passive investing argue it is inflating the prices of high-flying stocks such as Amazon and creating a bubble in those names. However, data compiled by Ned Davis Research shows the bubble may be forming elsewhere. 

The firm found that real estate and utilities stocks are the two sectors that have benefited the most from the rise of passive investing vehicles including exchange-traded funds. ETFs hold more than 11% of the real estate sector and 9.8% of the utilities sector. 

At the individual stock level, Tanger Factory Outlet Centers, a real estate company that invests in shopping centers, has had nearly 32% of its available stock, or float, taken over by ETFs, by far the most of any stock.

With Stocks at Fresh Highs, Investors’ Portfolios Look Alike ($) (LINK)

A rally in stocks has triggered unusual circumstances for some of Wall Street’s biggest investors—they are holding many of the same companies. 

A list of the market’s most crowded trades includes Mastercard Inc., Microsoft Corp., Amazon.com Inc., Abbott Laboratories and PayPal Holdings Inc., according to analysts at Bernstein, who tracked institutional ownership, price momentum, earnings forecasts and valuations. 

The overlap in the top 50 stockholdings between mutual funds and hedge funds—two types of investors whose styles typically differ—now stands at near-record levels, a study by Bank of America Merrill Lynch found.

Hidden Networks: Network Effects That Don’t Look Like Network Effects (LINK)

Albert Wenger: World after Capital | Rise of AI conference 2019 (video) (LINK)

BIS Annual Economic Report 2019 (LINK)

Invest Like the Best Podcast: Brian Christian – How To Live With Computers (LINK)

North Star Podcast: Tren Griffin: The Love of Learning (LINK)

Hidden Forces Podcast: Raoul Pal | The Fourth Turning: Generational Theory and the Future of Global Money (LINK)

5 Mindsets that Create Success - by Mark Manson (LINK)

They Found 43,130 of Her Relatives Before Solving Her Cold Case - by Sarah Zhang (LINK)

Industry growth and competition...

"Investors have consistently lost money by assuming that if they invest in the equity of companies engaged in a growth market it is logical that they must make money. They should take a leaf from the book of US investors in the 1970s who correctly identified air travel as a growth market and then underperformed the market by investing in airline stocks. How? Because they missed the point that the link between growth in air travel and the profitability of airlines was about to be broken by the intervention of a force called deregulation. More air miles were flown, but at lower and lower fares." --Terry Smith ("Accounting for Growth")

"Any time you get more and more people competing in any given area, generally, the economics deteriorate. And the economics have deteriorated for newspapers, although they’re still enormously profitable in relation to tangible equity employed, but they do not have the same economic prospects, if you look at the future stream of earnings, that it looked like they had 20 or 30 or 40 years ago. And television, again, the margins have been maintained surprisingly well, but the audience keeps going down.... So, that has to erode economics over time. Cable was thought to operate pretty much all by itself, and the telecoms come in. Very few businesses get better because of more competition." --Warren Buffett (2006)

"It’s simplicity itself. It will be a rare business that doesn’t have a way worse future than it had a past." --Charlie Munger (2006)

"There’s industries we know that may have a wonderful future, but we don’t have the faintest idea who the winners will be, so we don’t think about those.... So there’s a whole lot of things we don’t think about. Charlie and I have a number of filters that things have to get through very quickly before we’re willing to think about them. And sometimes we’re thought of as rude...because people will call us and they start explaining some idea to us, and it just doesn’t make it through the first filter or two. So we...think we’re saving their time if we just politely say, you know, that we just have no interest, and we don’t want to have you finish the sentence."  --Warren Buffett (2012)

"We have found in a long life that one competitor is frequently enough to ruin a business." --Charlie Munger (2012)

Links

"Most powerful is he who has himself in his own power." --Seneca

A Few Gentle Thoughts on Journalism - by Jason Zweig (LINK)

What You Gain—and Lose—When You Lock Money Up for the Long Run - by Jason Zweig ($) (LINK)

America’s Public Pensions Are Stuck In The Clouds ($) (LINK)

Beyond Ridiculous (LINK)

Oaktree Insights: Structured Credit Primer & Commentary (LINK)

Paradigm Shifts - by Ray Dalio (LINK)

Kyle Bass on CNBC last week (video) (LINK)

Value Investing with Legends Podcast: Connecting Theory and Practice Through The 5x5x5 Student Investment Fund (LINK)

Today’s conversation is with Tom Russo, the master of consumer brand investing, and two of our best students, Jeffrey Johnson '19 and Michael Allison '19. We’re talking about the 5x5x5 Student Investment Fund and having a deep discussion about some of the specific stocks in the portfolio. The concept for the 5x5x5 fund came out of Tom’s concern that conventional investment funds for students offered limited learning potential due to their short-term nature and was made possible by a generous gift given by him and his wife, Georgina.

a16z Podcast: The Search for the Secret Metal that Powers All Our Devices (LINK)

Revisionist History Podcast: Dr. Rock’s Taxonomy (LINK)

Radiolab Podcast: G: Unnatural Selection (LINK)

This past fall, a scientist named Steve Hsu made headlines with a provocative announcement. He would start selling a genetic intelligence test to couples doing IVF: a sophisticated prediction tool, built on big data and machine learning, designed to help couples select the best embryo in their batch. We wondered, how does that work? What can the test really say? And do we want to live in a world where certain people can decide how smart their babies will be?

Should the Rich Be Allowed to Buy the Best Genes? - by Walter Isaacson (LINK)

What Tick Saliva Does to the Human Body - by Sarah Zhang (LINK)

The Stump That Didn’t Die - by Ed Yong (LINK)

Through underground connections with its neighbors, it somehow stays alive. What does that say about the concept of a tree, or the future of forests?

Book of the day: The Bubble that Broke the World - by Garet Garrett

Audible also has some notable titles currently on sale for $5....

The Fifth Risk - by Michael Lewis

Skunk Works - by Ben R. Rich and Leo Janos

The Crusades - by Thomas Asbridge

The Invention of Nature: Alexander von Humboldt's New World - by Andrea Wulf

The Sixth Extinction - by Elizabeth Kolbert

Cosmos - by Carl Sagan

Howard Marks Memo: On the Other Hand

Link to Memo: On the Other Hand

Expectation that the Federal Reserve will cut interest rates has been a primary factor driving investor sentiment and actions in recent months. It should be noted, though, that the considerations and actions of the Fed are part of a complex ecosystem that has financial, political and behavioral components that come with considerable uncertainty. In his latest memo, Howard Marks addresses what the Fed's actions are predicated on, whether low rates are permanently a good thing, and how investors should view the Fed's rate management.

Links

"We don’t formally have discount rates. Every time I start talking about all this stuff, Charlie reminds me that I’ve never prepared a spreadsheet. But, in effect, in my mind I do. We are going to want to get a significantly higher return, obviously — in terms of cash produced relative to the amount we’re outlaying now — for a business than we are from a government bond. That has to be the yardstick at a base. And how much more do we want? Well, if government bond rates were 2 percent, we’re not going to buy a business to earn 3 or 3 1/2 percent expectancy over the years. We just don’t want to commit our money that way. We’d rather sit around and wait a little while. If they’re 4 3/4 percent, you know, what do we hope to get over time? Well, we want to get a fair amount more than that. But I can’t tell you that we sit down every morning and I call Charlie in Los Angeles and say, 'What's our hurdle rate today?' I mean, we’ve never used the term. We want enough so that we feel very comfortable if they closed down on the stock market for a couple of years, if interest rates go up another hundred basis points or 200 basis points, we’re still happy with what we’ve bought. I know it sounds kind of fuzzy, but it is fuzzy." --Warren Buffett (2007)

"The concept of a hurdle rate makes nothing but sense, and yet a lot of terrible errors are made by people who are talking about hurdle rates. Just because you can measure something and guess it, doesn’t mean that it’s the controlling variable in what you’re dealing with in a messy world. And I don’t think there’s any substitute for thinking about a whole lot of investment options and thinking about why one is better than another and what the likely returns are from each, et cetera, et cetera. And the trouble with the hurdle rate concept — not that we don’t have one, in a sense — is it doesn’t work as well as a system of comparing things. In other words, if I have something available that I think will give me 8 percent for sure and I can buy all I want of it, and you’ve got a perfectly good investment that I think will earn 7, I don’t have to waste 5 minutes with you. You’re like the mail order service offering the bride through the mail and she’s got AIDS. You know, I can go on to some different subject. The concept of opportunity cost is so little taught in investment. They teach it in the freshman course in economics in all the major universities, but when you get to the corporate finance departments and so forth, it doesn’t lend itself with the kind of mathematics they want to use, so they ignore it. But in the real world, your opportunity costs are what you want to make your decisions based on." --Charlie Munger (2007)

"Yeah. And even if you had something you were really familiar with and were very sure on the 8 percent, 8 1/2 wouldn’t tempt you if somebody came along, as a practical matter." --Warren Buffett (2007)

***

A list of Q2 2019 Investment Letters & Reports (LINK)

A History and Overview of Visa (Part 1, Part 2)

The Fed is Always Looking For Risk, But These Officials Seek The Unimaginable Ones (LINK)

Amazon partners with Realogy, sending the real-estate brokerage giant’s shares soaring (LINK)

Stansberry Investor Hour: 109: How to Be an Above-Average Investor [with Chris Pavese, ~26:09 mark] (LINK)

The School of Greatness Podcast: Mark Sisson: Building a $200 Million Dollar Personal Brand [Starting ~6:32 mark] (LINK)

The Quietly Changing Consensus on Neutering Dogs (LINK)

Book of the day: Novacene: The Coming Age of Hyperintelligence - by James Lovelock [Via Stewart Brand on Twitter: "The most thrilling book I have read in years.... It’s short, easy to read twice. Maybe necessary to read twice."]

Links

"If the business is good enough, it will carry a lousy manager. And the converse case, where a really good manager gets in a really lousy business, he’ll ordinarily have a very imperfect record. In other words, it’s a rare person that can take over a textile business, totally doomed—which is what Warren [Buffett] did in his youthful folly— and turn it into what’s happened here. You should not be looking for other Warrens on the theory they’re under every bush." --Charlie Munger (2007)

The Amazon dilemma: how a tech powerhouse that fulfills our every consumer need still lets us down (LINK)

Related podcast (new): Land of the Giants

How I Spotted A Fraud (Before It Was Too Late) (LINK)

Game of Tongues: How Duolingo Built A $700 Million Business With Its Addictive Language-Learning App [H/T @ChrisPavese] (LINK)

How Disruptive Innovation addresses 3 of education’s most critical issues today (LINK)

The Investing City Podcast: 31 - Alex Rubalcava: Seed Stage Investing (LINK)

Invest Like the Best Podcast: Eric Sorenson - How Quant Evolves (LINK)

Big Questions with Cal Fussman (podcast): David Griffin: How Good People Influence Your Life (LINK)

Bill Gates reviews “Blueprint: The Evolutionary Origins of a Good Society” by author Nicholas Christakis. (LINK)

A summary of Peter Wohlleben's The Hidden Life of Trees (LINK)

A summary of Richard Hamming's book The Art of Doing Science and Engineering: Learning to Learn (LINK)

PS – The book is expensive and hard to find but here is a PDF copy of the book and if you’re more of an auditory learner, here are Hamming’s “Learning to Learn” lectures

Links

"You have to keep learning that you don’t know, because you find models that work, ways to make money, and then they blow sky-high. There’s always somebody around who looks very smart. I’ve learned that the people who are the most smart aren’t going to make it. What’s great about this business is that you keep learning. In fact, I don’t know anybody who left investing to become an engineer, but I know a lot of engineers who left engineering to become investors. It’s just so infinitely challenging. You just have to be prepared to be wrong and to understand that your ego had better not depend on being proven right. Being wrong is part of the process. It’s really why the market fluctuates." --Peter Bernstein  [Source]

The Psychology of Prediction - by Morgan Housel (LINK)

Billionaire’s 2005 ‘Almanack’ of sage advice finds an audience in S.F. tech world (LINK)

Related book: Poor Charlie's Almanack

Blind Spots in Investing (LINK)

The Amazing Story of Guidewire Software (LINK)

Horizon Kinetics' 2nd Quarter Commentary (LINK)

The Mirage of Cloud Gaming (And How to Reach the Oasis) - by Matthew Ball (LINK)

Cloud game delivery and "Netflix of Gaming" are the big new "things" in media today. But they're unlikely to deliver the player or playtime growth that many expect.

D.I.Y. Private Equity Is Luring Small Investors (LINK)

Amateur investors are setting up high-risk, high-return deals on their own, but the key to success varies.

This Banker Gets to Drink Wine All Day ($) (LINK)

China’s Built a Railroad to Nowhere in Kenya [H/T @wolfejosh] (LINK)

Acquired Podcast: Huawei (LINK)

Retirement Is A State Of Mind (LINK)

Notre-Dame came far closer to collapsing than people knew. This is how it was saved. [H/T @morganhousel] (LINK)

The Human Brain Project Hasn’t Lived Up to Its Promise - by Ed Yong (LINK)

Book of the day: The Moon: A History for the Future

Links

"Volatility is not a measure of risk.... Risk comes from the nature of certain kinds of businesses. It can be risky to be in some businesses just by the simple economics of the type of business you’re in, and it comes from not knowing what you’re doing. And if you understand the economics of the business in which you are engaged, and you know the people with whom you’re doing business, and you know the price you pay is sensible, you don’t run any real risk." --Warren Buffett (2007)

"One of the reasons we’ve been able to do pretty well is that we early recognized that very smart people do very dumb things. And we tried to figure out why. And we also wanted to know who, so we could avoid them." --Charlie Munger (2007)

Financial Twitter Loses a Source of Humility and Wisdom, but Good Voices Remain - by Jason Zweig (LINK) [And a big thank you to @jasonzweigwsj, an ultimate must-follow, for including me in his list.]

Twitter isn’t just a megaphone for bragging about yourself and insulting your enemies, real or imagined. All investors should appreciate that some financial thinkers have turned the social-media site into a force for enlightenment and fun—if you follow the right people. 

That’s never been clearer than it was a few days ago, when the person behind the @Nonrelatedsense account died, prompting an outpouring of love and grief in the financial quadrant of Twitter known as FinTwit. (Although I know who he was and where he worked, I’m honoring the wishes of his family and friends to preserve his anonymity.) 

Those who followed him, even without meeting him in real life, felt as if we had lost one of our smartest friends.

The Meb Faber Show (podcast): #165 - Chris Mayer - I Do Think The Biggest Challenge…Is Keeping It, Holding On To It (LINK)

Related books: 1) 100 Baggers: Stocks That Return 100-to-1 and How To Find Them; 2) 100 to 1 in the Stock Market: A Distinguished Security Analyst Tells How to Make More of Your Investment Opportunities - by Thomas W. Phelps

Revisionist History Podcast: The Standard Case (LINK)

If You’re Angry, You’re Part of the Problem, Not the Solution - by Ryan Holiday (LINK)

Blurring Offline and Online: More on the Potential of Long Tail Social Media - by Cal Newport (LINK)

The Future of the City Is Childless - by Derek Thompson (LINK)

America’s urban rebirth is missing something key—actual births.

Apollo 11 at 50 (LINK)

The Disturbing Sound of a Human Voice - by Ed Yong (LINK)

Hearing people talk can terrify even top predators such as mountain lions, with consequences that ripple through entire ecosystems.

The WHO Finally Sounds Its Loudest Alarm Over Ebola in the Congo - by Ed Yong (LINK)

The ongoing outbreak is the second worst in history and has proved to be unusually difficult to contain.

David Abrams on the “Great Illusion of the Stock Market"

From his introduction to Part VII of Security Analysis: Sixth Edition (published in 2008):

I am optimistic about the future of value investing. To be sure, there are many bright and savvy people in the financial markets employing Graham and Dodd’s techniques, but the markets themselves have grown exponentially. The chunk of capital being invested by the value-investing crowd is a small percentage of the overall capitalization of global financial markets. Having observed the markets for more than two decades, my sense is that, rather than a glut of Graham and Dodd acolytes picking through scarce opportunities to find a place for their cash, money is ever more prone to sloshing around in giant waves, flowing from one fad to the next. If anything, it seems that the people controlling these megasums have become less intelligent and less sophisticated over time. The last decade alone has brought incredible extremes in valuation, starting in 1999 and 2000 with the high-altitude Internet bubble that was followed in short order by the utter collapse of the tech market. In the summer of 2002, we witnessed a tremendous corporate debt meltdown. But soon, these excessively low valuations were pushed off the front pages by the most generous and lax lending standards of all time. Now, as I write this introduction, the mortgage market is imploding, creating perhaps yet another new set of opportunities. That we’ve seen the last of these extreme swings seems doubtful. 

What is driving this manic phenomenon? The explanation is something I call the “Great Illusion of the Stock Market.” Investing looks easy, particularly in a world of inexpensive software and online trading. Buying a stock is no more difficult than buying a book on Amazon.com. And because a great many people have gotten wealthy in the stock market, lots of others have come to believe that anyone can get rich with very little effort. They are wrong. All the people I know who’ve built wealth in the stock market have worked very hard at it. Graham and Dodd understood the effort it took to be successful in the market. They wrote: 

Since we have emphasized that analysis will lead to a positive conclusion only in the exceptional case, it follows that many securities must be examined before one is found that has real possibilities for the analyst. By what practical means does he proceed to make his discoveries? Mainly by hard and systematic work. (p. 669) 

So, yes, you can get rich buying and selling stocks, but, as the authors well knew, it takes hard work and patience. Nevertheless, the Great Illusion persists, maybe because, like Woody Allen’s film character Zelig, the market is a chameleon that changes its appearance to suit the times. Sometimes, it shows up as a tech stock bubble. Other times, it manifests itself as a ludicrously overvalued stock market as seen in the late 1980s in Japan. In a current incarnation, a raft of financial institutions across America are trying to emulate the success of David Swensen and his colleagues who manage Yale University’s endowment by allocating large percentages of the capital to “alternative investment managers.” 

But the Great Illusion is just that—an illusion. If you want to get wealthy in the financial markets, you’ll need to engage in “hard and systematic work.”