Links

“It is just as important to have studied men, as to have studied books.” — Baltasar Gracian (Source)

How Filter Bubbles Distort Reality: Everything You Need to Know (LINK)

Meet the woman who gives bridge tips to Warren Buffett and Bill Gates [H/T Linc] (LINK)

Tesla’s Big Reveal Shows a Rough Road Ahead - by Charley Grant (LINK)

A Dozen Lessons about Business and Investing from Poker - by Tren Griffin (LINK)

Coping With the “Foie Gras” Stock Market ($) [James Montier] (LINK)

Barron’s: Bonds are expensive, stocks are expensive. What’s an asset allocator to do? 

Montier: Things just don’t add up. One group has thrown in the towel and says, “If you can’t beat them, join them. I’m just going passive and be damned.” [Passive investing] is a very strange thing to do at this particular point in time. 

The U.S. market is at its second or third most expensive point in history. So people are saying, “I either don’t understand the world anymore, or I don’t think that valuation matters anymore,” which is a really weird thing to say. You’re giving up the one piece of information that you know helps determine your long-term returns. You cannot describe yourself as an investor if you are going passive. You are welcome to call yourself a speculator, but you honestly can’t say you care about expected returns if you are going passive at this time. 

For those standing against the tide, there are a couple of challenges. One, how much pain can you take? The U.S. has been an incredibly strong market for a number of years, so going passive is classic returns-chasing behavior. How do you manage the pain? Nothing in the precepts of being a value investor tells you about the path or the timing. It just tells you about the final destination. The light at the end of tunnel is that the more that people buy on the basis of market cap, the greater the opportunity for active managers. 

You have also taken Warren Buffett to task. 

All these years I have looked to Warren Buffett as a beacon of hope. Two months ago, he said that equities look cheap, relative to interest rates. It seemed like a dreadful thing to say. It might be true only if you believed there was absolutely no mean reversion—in that case you’d be looking at a 3% real return from equities, zero from bonds, and, say, minus 1% or 2% from cash. But here was a man who, using his favorite valuation indicator of market cap to gross domestic product, pointed to the tech bubble of 2000 and said it was insane. Using the same indicator, he pointed out when to buy equities in late 2008, early ’09. Here we are within a hair’s breadth of the levels in 2000, and he is saying equities are cheap. This is an unvaluelike statement, and I don’t think it’s true. There are plenty of reasons why interest rates are not related to performance—very low rates haven’t stopped a 50% decline in Japan. So I’m sticking to dead heroes now—Ben Graham and John Maynard Keynes. 

Valuing Tech's Titans (video) (LINK)

Are we basing companies' valuations on the right criteria? In this long-form conversation, Scott [Galloway] and NYU Stern colleague Aswath Damodaran discuss what the top digital companies are really worth.

How I Built This podcast -- Kickstarter: Perry Chen (LINK)

Grant’s Podcast: Summer breeze (LINK)

Masters in Business podcast: Rich Barton on Making Information Available to All (LINK)

a16z Video: A Brief History of Credit Cards (or, What Actually Happens When You Swipe) (LINK)

FT Alphachat podcast: Michael Pettis on the Chinese economy (LINK)

In the second of a two-part series, economist Michael Pettis joins the FT's Cardiff Garcia and Matt Klein to discuss the state of the Chinese economy.

Claude Shannon's lecture, "Creative Thinking" (March 1952) [H/T @mjmauboussin] (LINK)

Stoic reminders for everyday practice (LINK)

Book of the day [H/T @CGrantWSJ]: A Walk With Purpose: Memoir of a Bioentrepreneur

Links

"Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of good business conditions. The purchasers view the good current earnings as equivalent to "earning power" and assume that prosperity is equivalent to safety." -Benjamin Graham (The Intelligent Investor)

The Latticework Podcast: Elliot Noss on Intelligent Investing in a Changing World (LINK)

Under Elliot Noss, Tucows challenged how software was distributed in the 1990s and how domain names were offered and managed in the 2000s and is challenging how mobile phone service and fixed Internet are provided today. For nearly twenty years, Elliot has loved and championed the Internet as the greatest agent of positive change the world has ever seen. Through his role at Tucows, his involvement in ICANN and his personal efforts, he has lobbied, agitated and educated to promote this vision and protect an Open Internet around the world.

The Third Time is the Charm - by Eric Cinnamond (LINK)

How platforms transform traditional industries - by Sangeet Paul Choudary (LINK)

Adventures in Finance podcast: Let's Make Some F***ing Money (LINK)

Our season finale brings you three world-leading analysts and investors as they share their frameworks and favorite indicators, and help you to become a better investor. Featuring Jesse Felder of the Felder Report, Mark Yusko of Morgan Creek Capital Management, and Tian Yang of Variant Perception.

FT Alphachat podcast: Michael Pettis on the mechanics and politics of trade (LINK)

Economist Michael Pettis joins the FT’s Cardiff Garcia and Matt Klein to discuss the macroeconomic framework he introduced in his book The Great Rebalancing.

Decapitated Worms Get Better, See Again - by Ed Yong (LINK)

Links

"...it’s precisely when people can’t see what it is that could make things turn down that risk is highest, since they tend not to price in risks they can’t see." -Howard Marks 

Robert Shiller on CNBC (video) (LINK)

Wall Street Needs You to Borrow Against Your Stock ($) (LINK)

Goldman launches new online lending strategy for mass affluent (LINK)

Third Point's Q2 2017 letter (LINK)

Superinvestors and the Art of Worldly Wisdom podcast: William White on the Undesired Side Effects of Experimental Monetary Policy (LINK)

How I Built This podcat -- BuzzFeed: Jonah Peretti (LINK)

TED Talk -- The manipulative tricks tech companies use to capture your attention | Tristan Harris (LINK)

Freakonomics Radio (podcast): The Stupidest Thing You Can Do With Your Money (LINK)

Tell Me Something I Don't Know podcast -- Behavior Change: Ultra Egghead Edition (LINK)

The Tim Ferriss Show: How to Turn Failure into Success (LINK)

Revisionist History podcast: “State v. Johnson” (part one of a two-part story) (LINK)

Tardigrade genomes help explain how they survive without water (LINK)

Claude Shannon, the Las Vegas Shark (LINK)

Related book: A Mind at Play: How Claude Shannon Invented the Information Age 

Howard Marks Memo: There They Go Again...Again

Link to Memo: There They Go Again...Again

Some of the memos I’m happiest about having written came at times when bullish trends went too far, risk aversion disappeared and bubbles inflated.  The first and best example is probably “bubble.com,” which raised questions about Internet and e-commerce stocks on the first business day of 2000.  As I tell it, after ten years without a single response, that one made my memo writing an overnight success. 

Another was “The Race to the Bottom” (February 2007), which talked about the mindless shouldering of risk that takes place when investors are eager to put money to work.  Both of those memos raised doubts about investment trends that soon turned out to have been big mistakes. 

Those are only two of the many cautionary memos I’ve written over the years.  In the last cycle, they started coming two years before “The Race to the Bottom” and included “There They Go Again” (the inspiration for this memo’s title), “Hindsight First, Please,” “Everyone Knows” and “It’s All Good.”  When I wrote them, they appeared to be wrong for a while.  It took time before they were shown to have been right, and just too early. 

The memos that have raised yellow flags in the current up-cycle, starting with “How Quickly They Forget” in 2011 and including “On Uncertain Ground,” “Ditto,” and “The Race Is On,” also clearly were early, but so far they’re not right (and in fact, when you’re early by six or more years, it’s not clear you can ever be described as having been right).  Since I’ve written so many cautionary memos, you might conclude that I’m just a born worrier who eventually is made to be right by the operation of the cycle, as is inevitable given enough time.  I absolutely cannot disprove that interpretation.  But my response would be that it’s essential to take note when sentiment (and thus market behavior) crosses into too-bullish territory, even though we know rising trends may well roll on for some time, and thus that such warnings are often premature.  I think it’s better to turn cautious too soon (and thus perhaps underperform for a while) rather than too late, after the downslide has begun, making it hard to trim risk, achieve exits and cut losses. 

Since I’m convinced “they” are at it again – engaging in willing risk-taking, funding risky deals and creating risky market conditions – it’s time for yet another cautionary memo.  Too soon?  I hope so; we’d rather make money for our clients in the next year or two than see the kind of bust that gives rise to bargains.  (We all want there to be bargains, but no one’s eager to endure the price declines that create them.)  Since we never know when risky behavior will bring on a market correction, I’m going to issue a warning today rather than wait until one is upon us.

Links

Why the Scariest Nuclear Threat May Be Coming from Inside the White House - by Michael Lewis (LINK)

Donald Trump’s secretary of energy, Rick Perry, once campaigned to abolish the $30 billion agency that he now runs, which oversees everything from our nuclear arsenal to the electrical grid. The department’s budget is now on the chopping block. But does anyone in the White House really understand what the Department of Energy actually does? And what a horrible risk it would be to ignore its extraordinary, life-or-death responsibilities?

Some of the 2017 VALUEx Vail Presentations are available to view (LINK)

A Market History Lesson From Peter Bernstein - by Ben Carlson (LINK)

Investing in the Misunderstood - by Ian Cassel (LINK)

Boyar Value Group's Q2 Letter [H/T @chriswmayer] (LINK)

Microsoft's Monopoly Hangover - by Ben Thompson (LINK)

Invest Like the Best podcast: Compound Your Face Off, with Wes Gray (LINK)

a16z Podcast: The Curious Case of the OpenTable IPO (LINK)

The Ezra Klein Show (podcast): Julia Galef on how to argue better and change your mind more (LINK)

Are You a Carboholic? Why Cutting Carbs Is So Tough - by Gary Taubes [H/T Will] (LINK)

Related book: The Case Against Sugar

Bill Browder's Testimony to the Senate Judiciary Committee (LINK)

Related book: Red Notice; Related video: Bill Browder's Real Vision TV interview

Leonardo da Vinci’s Visionary Notebooks Now Online: Browse 570 Digitized Pages (LINK)

The Worst Birds - by Ed Yong (LINK)

The Great American Solar Eclipse of August 21, 2017 (Part 2)  - by Phil Plait (LINK)

The death of reading is threatening the soul [H/T Daniel] (LINK)

PBS FRONTLINE: Inside Yemen (video) (LINK)

The United Nations recently called what’s happening in Yemen the “largest humanitarian crisis” in the world. You might not have heard about it, though. In recent months, journalists have largely been prevented from entering the country to report firsthand on the devastation. 

But in May, FRONTLINE’s Martin Smith made it in. He and his team were the only foreign journalists given permission to enter the country at the time. What they saw unfolds in Inside Yemen, a documentary short that we've just released online: “People are not seeing what’s going on. We’re talking thousands of civilian dead,” Smith says.

Boyles Asset Management – Q2 2017 Letter Excerpt

Cockroaches, Margins of Safety, and Knowing Thyself

“In general, survival is the only road to riches. Let me say that again: Survival is the only road to riches.” --Financial historian, economist, and educator Peter L. Bernstein (2004 interview with Jason Zweig)

As he did in his 2007 book, A Demon of Our Own Design, Richard Bookstaber returns to the story of the cockroach with his 2017 book, The End of Theory.  The cockroach has survived and thrived for about 300 million years, thanks in large part to a simple survival mechanism.  As described by Bookstaber: 

...the cockroach simply scurries away when little hairs on its legs vibrate from puffs of air, puffs that might signal an approaching predator, like you.  That is all it does.  It doesn’t hear, it doesn’t see, it doesn’t smell.  It ignores a wide set of information about the environment that you would think an optimal system would take into account.  The cockroach would never win the “best designed bug” award in any particular environment, but it does “good enough” and makes it to the finish line in all of them.

This brings to mind the saying that in order to finish first, one must first finish.  But the broader point being made is that it is often simple, coarse rules that lead to survival advantages.  While these rules, or heuristics, may not be the optimal traits for an organism to reach its maximum potential for thriving in an environment, given a specific set of conditions, it allows the flexibility needed to stick around to see the finish line should the conditions change.  The observation credited to Charles Darwin about a surviving species being not the strongest nor the most intelligent, but the one most responsive to change is applicable here.  Uncertainty and change are inherent in nature, as they are in business and life in general, and it is often simple heuristics and ideas that, if pursued with discipline and consistency, can allow one to survive whatever the future may have in store. 

What are some of the candidates for an investing rule that rivals the survival rule of the cockroach?  It is probably a question that one could ask 10 different investors and get 10 different answers, but for those who follow a fundamental, value philosophy, the concept of margin of safety has to be one of the key contenders for a place at the top of any list.  Even the best investors over long periods of time make plenty of mistakes along the way, and so we as investors must accept that things won’t always turn out the way we expect them to, no matter how much effort we put into trying to understand something.  Building in some margin for error in our process can help us reach the long-term survival necessary for success. 

Another candidate for a key rule of survival comes from a more ancient piece of advice: know thyself.  At a recent Talk at Google, investor Mohnish Pabrai told a story about a dinner he attended with Charlie Munger.  At the dinner, Munger talked about the investment firm Capital Group, and an experiment it performed with its investment team. Capital Group assigned teams to manage different portions of its capital under management.  On several occasions, the firm set up a “best ideas fund,” in which it took the highest-conviction stock picks from each of its managers.  But each time it set up one of those funds, that fund underperformed and ultimately failed. After telling this story to his dinner guests, Munger asked the group if they could guess the underlying reason why those funds did not do well.  But dinner was then served, and the riddle was left unsolved. 

Years later, Pabrai remembered the story; when he was with Munger on another occasion, he asked about the Capital Group story.  It turned out that the reason the best ideas funds failed is because of the common feature among each manager’s pick: it was the idea that he or she had spent the most time studying. 

In a 2007 speech at the USC Gould School of Law, Munger warned against the dangers of drifting into intense ideologies, and made the point that as “you start shouting out the orthodox ideology, what you’re doing is pounding it in, pounding it in, pounding it in.”  And there’s a similar effect when it comes to investment research.  When there’s a decent story for a company to tell about its prospects, the more time one spends with it, the more likely one is to believe in its merits. 

The solution to this psychological tendency is not to spend less time on ideas.  We feel that one of the long-term advantages that we can have in the investment world is knowing more about the companies in which we are invested than almost anyone else.  Rather, the mechanism to fight this bias is to try to suspend judgment and opinion about a company’s investment merits until one can thoroughly state the cases both for and against that company’s prospects.  We need to be aware of our own psychology, and how it is affected by the ways in which we spend our time.  And if we ever catch ourselves spending too much time preaching about the ideas we’ve spent the most time on, or not spending enough time trying to understand the case against our best ideas, then—like the puffs of air hitting the hair on a cockroach’s legs—we need to recognize that there may be something amiss.

**********

Disclosure: I am a portfolio manager at Boyles Asset Management, LLC ("Boyles") and the fund managed by Boyles may in the future buy or sell shares of any stocks mentioned above and we are under no obligation to update our activities. This is for information purposes only and is not a recommendation to buy or sell a security. Please do your own research before making an investment decision.

Links

Phil Ordway's talk on human misjudgment (LINK)

Here is a copy of a talk I gave at John Mihaljevic's excellent conference in Zurich last month. The goal was to "update" Charlie Munger's famous talk "The Psychology of Human Misjudment" to include more recent examples and the work of Kahneman and Tversky. The best part is probably the contribution of Jason Zweig -- collaborator with Kahneman on his book and leading expert on all things behavioral and investing -- who was kind enough to share his thoughts. A big thank you to him for that and to John for hosting an excellent event.

[Related to the above, the Word file I'll probably update at some point to include a bunch of things Phil added to the research via his talk: Charlie Munger's "The Psychology of Human Misjudgment"]

Farnam Street: A Primer on Critical Mass (LINK)

Latticework of Mental Models: Echo Chamber Effect (LINK)

A Dozen Lessons on Investing from Ed Thorp - by Tren Griffin (LINK)

Related book: A Man for All Markets

Baupost Readies Dry Power Amid Frothy Markets (LINK)

Grant’s Podcast: An invigorating interview with Trey Reik of Sprott Asset Management (LINK)

Adventures in Finance podcast: The Hedge Fund That Almost Broke the World (LINK)

Before the hundreds of billions in corporate bailouts and trillions in central bank interventions, there was a time when we believed there was no way our financial models and investment strategies couldn’t be wrong. That was until a hedge fund came along that threatened to bring down the global financial system in 1998. 

Jesse Eisinger talks with Barry Ritholtz on the Masters in Business podcast (LINK)

The Tim Ferriss Show: When to Quit – Lessons from World-Class Entrepreneurs, Investors, Authors, and More (LINK)

Everything you need to know about the dichotomy of control - by Massimo Pigliucci (LINK)

The Success of Paying People to Not Cut Down Trees - by Ed Yong (LINK)

Humpback Whales Remix Their Old Songs - by Ed Yong (LINK)

The Great American Solar Eclipse of August 21, 2017 (Part 1) - by Phil Plait (LINK)

George Soros on recognizing mistakes, and forgiving oneself

"I recognize that I may be wrong...I am a very critical person who looks for defects in myself as well as in others. But, being so critical, I am also quite forgiving. I couldn't recognize my mistakes if I couldn't forgive myself. To others, being wrong is a source of shame; to me, recognizing my mistakes is a source of pride. Once we realize that imperfect understanding is the human condition, there is no shame in being wrong, only in failing to correct our mistakes." -George Soros

(Source)

Autonomy, mastery, and purpose...

From Drive: The Surprising Truth About What Motivates Us:

The best use of money as a motivator is to pay people enough to take the issue of money off the table: Pay people enough so that they’re not thinking about money and they’re thinking about the work. Once you do that, it turns out there are three factors that the science shows lead to better performance, not to mention personal satisfaction: autonomy, mastery, and purpose.

....................

H/T Rob Vinall of RV Capital on the above, which I had read before, but I enjoyed reviewing Pink's ideas, as well his TED Talk, RSA Animate video, and an old HBR podcast. I also enjoyed what Vinall wrote about the idea in his latest investor letter:

According to Dan what motivates people is autonomy (the sense of freedom to do what you want), mastery (the sense of getting better at something through practice), and, above all, purpose (the sense that there is a point in what you are doing). If you are still sceptical, imagine your parents’ reaction if you tossed them a tip after they finished preparing dinner for the family. 

A quick aside: if you are wondering which career path to go down or advising a younger person on the same question, I believe Dan´s mental model is a far more actionable one than the more traditional advice of “follow your passion”. If you have been playing the violin since the age of 5 and it is all you ever wanted to do, that is great. Back in the real world, if you have not got a clue what you want to do, look for a company that gives you autonomy, the opportunity to learn, and is doing something meaningful. Irrespective of what the company makes or what service it provides, the passion will come.

Links

Another great 2006 quote from Howard Marks, that is probably worth thinking hard about today:

The workings of free capital markets require that in order to overcome investors’ innate aversion to risk, seemingly riskier investments must offer the possibility of higher returns providing “risk premiums.” But when risk aversion is at cyclical lows, risk premiums needn’t be generous; people will invest anyway. Too many people trying to dine at the buffet simultaneously can lead to a disorderly process and skimpy portions. I recommend that you look twice at the cost of admission and – if you do decide to partake – proceed carefully.

Horizon Kinetics' Q2 Conference Call Slides [H/T @chriswmayer] (LINK) [And Commentary HERE.]

Where Are the Dips? The Weird, Unsettling Rise of Global Stocks This Year (LINK)

Stock markets go up and down: It is a fact of life. Except in 2017. 

Three major stock-market benchmarks in the U.S., Europe and Asia have avoided pullbacks this year, commonly defined as 5% declines from recent highs. Never in at least the past 30 years have all three indexes—the S&P 500, MSCI Europe and MSCI Asia-Pacific ex-Japan—gone a calendar year without falling at some point by at least 5%.

Bill Gross' July 2017 Investment Outlook (LINK)

It’s never too late to succeed: How this 60-year-old founder took her business from zero to $500 million in 6 years [H/T Matt] (LINK)

Related video: The RealReal's Julie Wainwright Had to Get Out of Town After Pets.com

The surest way to go broke in America today is to get sick. (LINK)

Related book: An American Sickness: How Healthcare Became Big Business and How You Can Take It Back

Graham Allison: "Destined for War: Can America and China Escape Thucydides’s Trap?" | Talks at Google (LINK)

Why I Hate Adverbs - by Jason Zweig (LINK)

HBR IdeaCast podcast: Nike's Co-founder on Innovation, Culture, and Succession (LINK)

Related book: Shoe Dog

Freakonomics Radio (podcast): These Shoes Are Killing Me! (LINK)

The human foot is an evolutionary masterpiece, far more functional than we give it credit for. So why do we encase it in "a coffin" (as one foot scholar calls it) that stymies so much of its ability — and may create more problems than it solves?

Revisionist History podcast: "The King of Tears" (LINK)

In this week's episode, I identify a musical divide in America - the sad song line. I wanted to know: why does half the country prefer rock n' roll music, while the other half prefers country? And what is it about some music that makes us so sad? 

The questions begged for answers. So I tracked down the King of Tears himself, a man who has written more sad songs than almost anyone else, to find out.

The Man Who Blew The Door Off The Microbial World - by Ed Yong (LINK)

Links

"While it's true that only large positions can get you into trouble, it's equally true that only large positions can make a big contribution. (This is one of the great dilemmas in investing.)" -Howard Marks (Source)

Apollo Asia Fund: the manager's report for 2Q17 (LINK)

We are patient with companies which are having short-term difficulties - perhaps to a fault, but when managers respond to each setback with sensible steps, the results are usually good in the end, and we sometimes learn more about the business characteristics during such periods. When our confidence dwindles, however, we pay more and more attention, and may trim; if it is lost, we try to exit completely, rather than trying to be too clever about the price.

Conversations with Tyler (podcast): Atul Gawande on Priorities, Big and Small (LINK)

How Digital Platforms Increase Inequality (LINK)

Waking Up podcast: Sam Harris talks with Geoffrey West (LINK)

Related book: Scale

Waking Up podcast: Sam Harris talks with Scott Adams (LINK)

The Tim Ferriss Show: Morning Routines and Strategies (podcast) (LINK)

This is a special episode of the podcast. After more than 200 conversations with the world's top performers, you start to spot certain patterns. These are the shared habits, hacks, philosophies, and tools that are the common threads of success, happiness, health, and wealth. These commonalities were the premise of my most recent book, The New York Times #1 bestseller Tools of Titans -- a compilation of my favorite lessons, routines, and tips of many of my guests. In this episode, I've gathered some of the best advice from past guests about morning routines.

Links

"There is nothing reliable to be learned about making money.  If there were, study would be intense and everyone with a positive IQ would be rich." -John Kenneth Galbraith

Mark Yusko on the Superinvestors and the Art of Worldly Wisdom podcast (LINK)

Invest Like the Best podcast: Rishi Ganti - Esoteric Assets (LINK)

Ryan Holiday talks about his new book, Perennial Seller: The Art of Making and Marketing Work that Lasts, with James Altucher (podcast) (LINK)

Danny Meyer says this is the biggest challenge facing the restaurant industry [H/T Matt] (LINK)

Aswath Damodaran on CNBC (video) [H/T Matt] (LINK)

Turning Baker’s Yeast Into a Disease Sensor - by Ed Yong (LINK)

Links

"A new type of thinking is essential if mankind is to survive and move toward higher levels.... Past thinking and methods did not prevent world wars. Future thinking must prevent wars." -Albert Einstein

Tom Russo on WealthTrack (video) [H/T ValueWalk] (LINK)

Ed Thorp talks with Barry Ritholtz on the Masters in Business podcast (LINK)

Related book: A Man for All Markets

Grant’s Podcast: Hits and misses (LINK)

How I Built This podcast -- Aden + Anais: Raegan Moya-Jones (LINK)

FT Alphachat podcast: Tim Harford talks to Cardiff Garcia about his book Fifty Inventions That Shaped the Modern Economy (LINK)

Amazon Prime and other Subscription Businesses: How do you Value a Subscriber? - by Tren Griffin (LINK)

Greenlight Capital's Q2 Letter (LINK)

A Bird in the Hand is Worth…Two Marshmallows? - by Frank Martin (LINK)

GMO White Paper: Revisiting the Traditional Emerging Market Equities Allocation Framework (LINK)

From $2 Billion to Zero: A Private-Equity Fund Goes Bust in the Oil Patch ($) [H/T @williamgreen72] (LINK)

Tencent Dominates in China. Next Challenge Is Rest of the World [H/T @BaseHitInvestor] (LINK)

Counterintuitive Behavior of Social Systems - by Jay Wright Forrester (1971 paper) [H/T Adam Robinson] (LINK)

When Slower Communication Enables Faster Growth (LINK)

A History of Japan, in 9 minutes (video) [H/T Recomendo] (LINK)

Why fast birds, fish and animals are never too small or big (LINK)

What Would It Take to Completely Sterilize the Earth? - by Ed Yong (LINK)

Books of the day:

A Mind at Play: How Claude Shannon Invented the Information Age [Released tomorrow]

Crash Early, Crash Often [Kindle book]

Wishcraft: How to Get What You Really Want

"If you feel a negative emotion, including fear, your attention is on the wrong place.  Your attention should be focused on one of two things: the task at hand, or other people." -Adam Robinson (Source)

Mohnish Pabrai Lecture at Univ. of California, Irvine (UCI), June 7, 2017

In his talk at the University of California at Irvine’s Paul Merage School of Business, Mohnish discusses five decisions by Warren Buffett and Charlie Munger over a 20-year period (1968 – 1988) that moved the needle for Berkshire. Mohnish also talks about some of the intense difficulties that Warren Buffett and Charlie Munger faced along the way. No pain, no gain!

Link to video

Seneca quote (seize the day)

Via The Daily Stoic:

“Let us therefore set out whole-heartedly, leaving aside our many distractions and exert ourselves in this single purpose, before we realize too late the swift and unstoppable flight of time and are left behind. As each day arises, welcome it as the very best day of all, and make it your own possession. We must seize what flees.” -Seneca

Links

"It’s all in how you perceive it. You’re in control. You can dispense with misperception at will, like rounding the point. Serenity, total calm, safe anchorage." - Marcus Aurelius (Meditations)

Berkshire Aims for Fast Regulatory Action on Oncor Deal [H/T Linc] ($) (LINK)

Berkshire Hathaway Energy Co. is racing to get Texas regulators to sign off on its takeover of Oncor in an effort to outpace Elliott Management Corp., a hedge fund with its own designs on the energy-grid business. 

Warren Buffett uses this simple psychological trick to be persuasive and so can you, says influence expert [H/T Daniel] (LINK)

Bob Cialdini dissects what the "Oracle of Omaha" does that makes us want to believe in him.

Herb Allen’s Sun Valley Retreat: General Lori Robinson Gets Five Stars From Attendees [H/T Linc] (LINK)

The other session that had people talking was this morning’s session where well-known hedge fund manager Stanley Druckenmiller and Baupost Group’s Seth Klarman (also a hedge fund manager) told the executives that many people confuse the performance of the stock market with the health of our economy, but that is not necessarily a great indicator.

Bank for International Settlements: 87th Annual Report [H/T Barry Ritholtz] (LINK)

Related video: Claudio Borio: How much do we really know about inflation?

The Dark Side of Globalization: An Update on Country Risk! - Aswath Damodaran (LINK)

Publishers and the Pursuit of the Past - by Ben Thompson (LINK)

A Man in a Hurry: Claude Shannon’s New York Years [H/T The Browser] (LINK)

By day, Claude Shannon labored on top-secret war projects at Bell Labs. By night, he worked out the details of information theory

A Conversation with Malcolm Gladwell: Revisiting Brown v. Board [H/T The Browser] (LINK)

Revisionist History podcast: The Prime Minister and the Prof (LINK)

How does friendship influence political power? The story of Winston Churchill’s close friend and confidant — an eccentric scientist named Frederick Lindemann — whose connection to Churchill altered the course of British policy in World War II. And not in a good way.

Ravens Can Plan for the Future - by Ed Yong (LINK)

Links

"To have a true investment there must be present a true margin of safety. And a true margin of safety is one that can be demonstrated by figures, by persuasive reasoning, and by reference to a body of actual experience." -Benjamin Graham, The Intelligent Investor [H/T Jason Zweig]

Warren Buffett’s Berkshire Moves Away From Stock Picking (LINK)

Visa Takes War on Cash to Restaurants (LINK)

Visa Inc. has a new offer for small merchants: take thousands of dollars from the card giant to upgrade their payment technology. In return, the businesses must stop accepting cash. 

The company unveiled the initiative on Wednesday as part of a broader effort to steer Americans away from using old-fashioned paper money. Visa says it is planning to give $10,000 apiece to up to 50 restaurants and food vendors to pay for their technology and marketing costs, as long as the businesses pledge to start what Visa executive Jack Forestell calls a “journey to cashless.”

A New Record High for U.S. Consumer Debt (LINK)

Raoul Pal talks with Jesse Felder on the Superinvestors and the Art of Worldly Wisdom podcast (LINK)

Left or Right? Thoreau Wouldn’t Have Understood the Question (LINK)

Thoreau at 200: Reflections on "Walden" (video) (LINK)

Ten things you don’t know about asteroids (and impacts thereof) - by Phil Plait (LINK)

Scientists Can Use CRISPR to Store Images and Movies in Bacteria - by Ed Yong (LINK)

Links

Transcript: June 29, 2017, Fairholme Capital Management Public Conference Call [H/T Linc] (LINK)

An Interview with Famed Value Investor Guy Spier (podcast and transcript) [H/T Linc] (LINK)

NYC based venture capitalist Jerry Neumann talks with Patrick O'Shaughnessy (podcast) (LINK)

a16z Podcast: The Golden Era of Productivity, Retail, and Supply Chains (LINK)

Related books: 1) An Extraordinary Time; 2) The Great A&P; 3) The Box

Cialdini Asks: Richard Thaler (video) [H/T ValueWalk] (LINK)

Edge 495: Things to Hang on Your Mental Mug Tree - A Conversation With Rory Sutherland (LINK)

Sea Spiders Pump Blood With Their Guts, Not Their Hearts - by Ed Yong (LINK)

It's a Mistake to Focus Just on Animal Extinctions - by Ed Yong (LINK)

One Man's Plan to Make Sure Gene Editing Doesn't Go Haywire - by Ed Yong (LINK)

Cardigan's Commencement Address by Chief Justice John G. Roberts, Jr.

Link to video (transcript)

Links

Tom Russo talks with Ted Seides on the Capital Allocators podcast (LINK)

Walt Mossberg talks with Charlie Rose (video) (LINK)

Related article (Mossberg's last weekly column): The Disappearing Computer

It’s the Little Things That Can Color an Investor’s Outlook - by Jason Zweig (LINK)

The Widening of Amazon’s Moat - by John Huber [H/T ValueWalk] (LINK)

Tesla Sales Fall to Zero in Hong Kong After Tax Break Is Slashed ($) (LINK)

Tesla Inc.’s sales in Hong Kong came to a standstill after authorities slashed a tax break for electric vehicles on April 1, demonstrating how sensitive the company’s performance can be to government incentive programs. 

Not a single newly purchased Tesla model was registered in Hong Kong in April, according to official data from the city’s Transportation Department analyzed by The Wall Street Journal. 

In March, shortly after the tax change was announced and ahead of the April 1 deadline, 2,939 Tesla vehicles were registered there—almost twice as many as in the last six months of 2016. 

...As a result of the new policy, the cost of a basic Tesla Model S four-door car in Hong Kong​has effectively risen to around $130,000 from less than $75,000.

Tesla’s Skid Is Coming at the Worst Time ($) (LINK)

When the story of Tesla is finally written, this week will be seen as a crucial juncture. On Friday, the electric car company started production on its highly anticipated Model 3, one day after its stock briefly fell into a bear market. 

The week’s 13% share-price decline as of Friday morning brings the company’s financial position into fresh focus given its historic reliance on the equity market. At first glance, the company has plenty of cash on hand—more than $4 billion as of March 31. But that is likely to go quickly. 

Tesla’s free cash outflow was $622 million in the first quarter. Since Tesla delivered fewer cars in the second quarter than in the first, there is a decent chance that number will worsen. Tesla said Friday that about 3,500 cars were in transit to customers at the end of June, the lowest tally in five quarters.

How to Live Without Limits – Kyle Maynard (The Tim Ferriss Show) (LINK)

***

On sale for $0.99 today (Kindle): Startup Opportunities: Know When to Quit Your Day Job

Books of the day [H/T Rick Bookstaber]:

The Financial Crisis Inquiry Report (free PDF HERE)

Wall Street and the Financial Crisis (free in Kindle format, and free PDF HERE)

Links

Elliott explores bid to challenge Buffett's Oncor deal [H/T Linc] (LINK)

Berkshire Wastes No Time Wooing Texas to Close Oncor Deal (video plays) [H/T Linc] (LINK)

How to Create a Successful Business Model in a Dozen Easy Steps (Fake advice! Not possible.) - by Tren Griffin (LINK)

Ben Horowitz On Career Moves and Business Leadership (video) (LINK)

Chiropractors are Bullshit [H/T Barry Ritholtz] (LINK)

[I'm sure there are also plenty of chiropractors out there that give good advice, but this article did remind me of Charlie Munger's comment about chiropractors:

You've got to have models in your head. And you've got to array your experience—both vicarious and direct—on this latticework of models. You may have noticed students who just try to remember and pound back what is remembered. Well, they fail in school and in life. You've got to hang experience on a latticework of models in your head.

What are the models? Well, the first rule is that you've got to have multiple models—because if you just have one or two that you're using, the nature of human psychology is such that you'll torture reality so that it fits your models, or at least you'll think it does. You become the equivalent of a chiropractor who, of course, is the great boob in medicine.

It's like the old saying, “To the man with only a hammer, every problem looks like a nail.” And of course, that's the way the chiropractor goes about practicing medicine. But that's a perfectly disastrous way to think and a perfectly disastrous way to operate in the world.]

***

For Audible members, the latest $4.95 sale has some titles that stood out to me:

To Rule the Waves: How the British Navy Shaped the Modern World

Gandhi & Churchill

What Do You Care What Other People Think?

The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns Everything

The War of Art

HBR's 10 Must Reads on Leadership

The Wisdom of Success: The Philosophy of Achievement by Andrew Carnegie & Napoleon Hill

Mistakes Were Made (But Not By Me): Why We Justify Foolish Beliefs, Bad Decisions and Hurtful Acts

Man's Search for Meaning

Links

"We live on a planet of inexperience, with an unknown future, forced to make decisions based only on the past, a past that may prove to be a limited guide to the future. On this planet we are drawn away from strict optimization and toward heuristics." -Richard Bookstaber (The End of Theory)

Buffett's Berkshire Hathaway Nears $18 Billion Deal for Oncor (LINK)

Berkshire Hathaway's Clayton Buys Oakwood Homes [H/T Linc] (LINK)

Central Banks’ Reversals Signal the End of One Era and the Beginning of Another - by Ray Dalio (LINK)

What I Believe Most - by Morgan Housel (LINK)

Normalizing Earnings and Real Rates - by Eric Cinnamond (LINK)

Forget an IPO, Coin Offerings Are New Road to Startup Riches ($) (LINK)

Two obscure companies with no sales raised nearly $400 million combined in recent days from outside investors. How did they do it? Via a new, unregulated fundraising method that has no connection to Wall Street and is based in the world of cryptocurrencies. 

These fundraisings, called “Initial Coin Offerings,” are exploding in value. So far this year, companies have raised more than $1 billion this way. That is 10 times the amount raised in 2016, according to Smith & Crown, a digital-currency research firm.

Revisionist History podcast: "The Foot Soldier of Birmingham" (LINK)

The Bipartisan Fight for Quieter Oceans - by Ed Yong (LINK)

Coarse rules and survivability...

As he did in his 2007 book, A Demon of Our Own Design, Richard Bookstaber returns to the story of the cockroach with his 2017 book, The End of Theory. The excerpt below really made me think, and as I read more of the book, I'm beginning to think just as his 2007 work was the antithesis to central banker comments along the lines of "At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained." (Bernanke, 2007); his 2017 work will go down an the antithesis to the confidence of today's central bankers, portrayed recently by Janet Yellen's comment about believing that another financial crisis is not likely to occur in our lifetimes.

Now, onto Bookstaber and the cockroach:

The Omniscient Planner and the Cockroach 

If you were omniscient, if you could pierce through these limits to knowledge, how would you design a creature to survive in a world with radical uncertainty? That is, suppose that you have an omniscient view of the future and you know all the types of risks that a species will face and you can give that creature rules in order to give it the best chance of survival, not just in the current environment but in the face of all that will cross its path over the course of time. But you have one critical constraint: your rules don’t allow communication of any information regarding the unknown future states or solutions to those things that the creature would not be able to perceive in its nonomniscient state. (This is a bit like Star Trek’s Prime Directive.) 

Before setting down the rules, you might want to do some background work and see what the species that have faced this sort of world have done that have allowed them to survive. Species that have existed for hundreds of millions of years can be considered, de facto, to have a better rule set than those that have been prolific in one epoch but became extinct as crises emerged. So it makes sense to start there. 

If you take this route, you can’t do much better than to look at the cockroach. The cockroach has survived through many unforeseeable (at least for it) changes: jungles turning to deserts, flatland giving way to urban habitat, predators of all types coming and going over the course of three hundred million years. This unloved critter owes its record of survival to a singularly basic and seemingly suboptimal mechanism: the cockroach simply scurries away when little hairs on its legs vibrate from puffs of air, puffs that might signal an approaching predator, like you. That is all it does. It doesn’t hear, it doesn’t see, it doesn’t smell. It ignores a wide set of information about the environment that you would think an optimal system would take into account. The cockroach would never win the “best designed bug” award in any particular environment, but it does “good enough” and makes it to the finish line in all of them. 

Other species with good track records of survivability also use escape strategies that involve coarse, simple rules that ignore information. The crayfish, another old branch in the evolutionary tree that has been around in one form or another for more than one hundred million years, uses a winner-take-all escape mechanism: a stimulus triggers a set of neurons, each dictating a pattern of action, and one variant of behavior then suppresses the circuits controlling the alternative actions. That is, although a number of different stimuli are received and processed, all but one of them are ignored. 

These sorts of coarse rules are far removed from our usual thinking on how to make decisions because they ignore information that is virtually free for the taking. Yet if we look around further we see that coarse rules are the norm. They are not only seen in escape mechanisms, where speed is critical. They are also used in other decisions that are critical to survival such as foraging and mate selection. The great tit is a bird that does not forage based on an optimization program that maximizes its nutritional intake; it will forage on plants and insects with a lower nutritional value than others that are readily available, and will even fly afield to do so. The salamander does not fully differentiate between small and large flies in its diet. It will forage on smaller flies even though the ratio of effort to nutrition makes such a choice suboptimal. This sort of foraging behavior, although not totally responsive to the current environment, enhances survivability if the nature of the food source unexpectedly changes. 

For mate selection, the peahen uses a take-the-best heuristic: she limits herself to looking at three or four males, and then picks the one with the most eyespots. She ignores both other males and other features. A red stag deer also has a take-the-best strategy, challenging another deer for his harem by running through a range of behavioral cues until he finds one that is decisive, and stops at that point. The first can be done at a nonthreatening distance: the challenger roars and the harem holder roars back. If the challenger fails on this test, it’s game over. Otherwise, the challenger approaches the alpha male more closely and the two deer walk back and forth to assess their relative physical stature. If this showdown does not solve matters, they move on to direct confrontation through the dangerous test of head butting. 

The heuristic is a simple one, winner-take-all, where the first cue that makes a difference is determinant, but in this case the cues occur sequentially, going from the one that requires the least information (it can be done at a distance without even having a clear view of the opponent) to the most direct and risky. The underlying heuristic remains one that is as coarse and simple as possible, where the first cue that can differentiate makes the decision. 

Foraging, escape, and reproduction are the key existential activities, and we see that heuristics are at their core. And we also see a movement toward coarse behavior for animals when the environment changes in unforeseeable ways. For example, animals placed for the first time in a laboratory setting often show a less than fine-tuned response to stimuli and follow a less discriminating diet than they do in the wild. In fact, in some experiments, dogs placed in a totally unfamiliar experimental environment would curl up and ignore all stimuli, a condition called experimental neurosis. 

The coarse response, although suboptimal for any one environment, is more than satisfactory for a wide range of unforeseeable ones. In contrast, an animal that has found a well-defined and unvarying niche may follow a specialized rule that depends critically on that animal’s narrow perception of its world. If the world continues as the animal perceives it, with the same predators, food sources, and landscape, then the animal will survive. If the world changes in ways beyond the animal’s experience, however, the animal will die off. So precision and focus in addressing the known comes at the cost of reduced ability to address the unknown. 

It is easier to discuss heuristics as a response to radical uncertainty when we are focused on less intelligent species. We are willing to concede that nature has surprises that are wholly unanticipated by cockroaches and our other nonhuman cohabitants. A disease that destroys a once-abundant food source and the eruption of a volcano in a formerly stable geological setting are examples of events that could not be anticipated by lower life forms even in probabilistic terms and therefore could not be explicitly considered in rules of behavior. But the thought experiment of the omniscient planner provides insight into what heuristics are doing in our decision making as well. It is not that we take on heuristics solely because of limits in our cognitive ability to solve the problem with the full force of optimization methods. It is because some problems simply cannot be solved by optimization methods even absent cognitive constraints. Absent our being omniscient, we cannot apply optimization methods to the real-world problem we face, and if we try to do so, we simply have to make things up.

Links

"How we look at the world, even how we understand what someone else is saying, depends on context, and context changes with our experience and with circumstance. In the day-to-day world, these changes usually move slowly—though they do change: what we want for our lives, what we strive for and sacrifice for, are different at ages fifteen and fifty. The changes that come slowly with life experience speed up during a crisis. And having lived through one crisis, we will be a different person and come to the next one differently." -Richard Bookstaber (The End of Theory)

Human Misjudgment and the American Revolution (LINK)

Lessons Learned After Almost a Year (of podcasting) - by Patrick O'Shaughnessy (LINK)

Grant’s Podcast: Big, dumb Japanese banks (LINK)

How the iPhone Built a City in China (LINK)

Learning from Ed Thorp (LINK)

Related book: A Man for All Markets

Is America Encouraging the Wrong Kind of Entrepreneurship? (LINK)

Arthritis is the price for our ancestors surviving the Ice Age, say scientists (LINK)

Why 2,000 Year-Old Roman Concrete Is So Much Better Than What We Produce Today (LINK)

How The Democratic Republic of Congo Beat Ebola In 42 Days - by Ed Yong (LINK)

Links

"It is a deeply held conviction within economics that our world can be reduced to models that are founded on the solid ground of axioms, plumbed by deductive logic into rigorous, universal mathematical structures. Economists think they have things figured out, but our economic behavior is so complex, our interactions are so profound that there is no mathematical shortcut for determining how they will evolve. The only way to know what the result of these interactions will be is to trace out their path over time: we essentially must live our lives to see where they will go. There is no formula that allows us to fast-forward to find out what the result will be. The world cannot be solved; it has to be lived." -Richard Bookstaber (The End of Theory)

Walter Isaacson talks with David Rubenstein about Leonardo da Vinci (video) (LINK) ["Smart people are a dime dozen. The people who matter are the creative people."]

Related book (to be released in October): Leonardo da Vinci – by Walter Isaacson

The Knowledge Project podcast: Marc Garneau on The Future of Transportation (LINK)

Masters in Business podcast: Chris Anderson and the Long Tail (LINK)

Related books: 1) The Long Tail; 2) Free; 3) Makers

Brent Beshore talks with Vishal Khandelwal (LINK)

Jim Chanos: U.S. Economy is Worse Than You Think [H/T @vitaliyk] (LINK)

Mutual Fund Observer, July 2017 (LINK)

The Absolute Return Letter, July 2017 (LINK)

A Dozen Things I’ve Learned About Startups from Hunter Walk - by Tren Griffin (LINK)

The Lost Art of Thinking - by Frank Martin (LINK)

Related book (back in print): The Art of Thinking – by Ernest Dimnet

The Alternative to Thinking All the Time (LINK)

When railroads were the disruptive technology...

From The End of Theory by Richard Bookstaber:

We can make a start in understanding the limitations in the current standard economic approach to financial crises, and what to do about them, by looking at the path Jevons took in mid-nineteenth-century England.  

This economic revolution was driven by a technical one. The railroad was the disruptive technology. It reached into every aspect of industry, commerce, and daily life, a complex network emanating from the center of the largest cities to the remotest countryside. Railroads led to, in Karl Marx’s words, “the annihilation of space by time” and the “transformation of the product into a commodity.” A product was no longer defined by where it was produced, but instead by the market to which the railroad transported it. The railroad cut through the natural terrain, with embankments, tunnels, and viaducts marking a course through the landscape that changed perceptions of nature. For passengers, the “railway journey” filled nineteenth-century novels as an event of adventure and social encounters.  

Railroads were also the source of repeated crises. Then as now, there was more capital chasing the dreams of the new technology than there were solid places to put it to work. And it was hard to find a deeper hole than the railroads. Many of the railroad schemes were imprudent, sometimes insane projects, the investments often disappearing without a trace. The term railway was to Victorian England what atomic or aerodynamic were to be after World War II, and network and virtual are today. When it came to investments, the romantic appeal of being a party to this technological revolution often dominated profit considerations. Baron Rothschild quipped that there are “three principal ways to lose your money: wine, women, and engineers. While the first two are more pleasant, the third is by far more certain.” Capital invested in the railway seemed to be the preferred course to the third. Those with capital to burn were encouraged by the engineers whose profits came from building the railroads, and who could walk away unconcerned about the bloated costs that later confronted those actually running the rail. A mile of line in England and Wales cost five times that in the United States. The run of investor profits during the manias of the cycle were lost in the slumps that unerringly followed.

....................

Starting Bookstaber's new book also reminded me of a short post he did back in 2014, which is interesting to review given recent developments around the company: Uber: What could possibly go wrong.