Reading Roundup: September 2024

This month we read:

• Poor Charlie’s Almanac (2023 Edition) by Peter Kaufman

• Meet You in Hell: Andrew Carnegie, Henry Clay Frick, and the Bitter Partnership That Changed America by Les Standiford

• The Hard Thing About Hard Things by Ben Horowitz

• Unreasonable Hospitality: The Remarkable Power of Giving People More than They Expect by Will Guidara

• Confidence Game by Christine Richard

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Poor Charlie’s Almanac (2023 Edition) by Peter Kaufman

I’m not one to re-read most books, but Poor Charlie’s Almanac is an easy exception. I pretty much read it every year and I think you could read it multiple times each year and still pick up something new every time. As a side note, at Berkshire this year they came out with a new copy that is much easier to hold than the coffee table version, and I’d highly recommend it.

Munger always talked about acquiring “worldly wisdom” as a means to becoming better at whatever field you happen to be in, but his framework is particularly applicable to business and investing. He recommends that everyone try to master the cross disciplinary “big ideas” and that there are only a handful of these concepts that really carry the weight. Of course, Munger never spells out exactly what his list of big ideas are as that would ruin the fun for the rest of us in our quest to become a little more aware of how the world works.

That said, I tried to read the book this time with the lens of noting the big ideas from different fields that Munger talks about throughout his speeches. Below is a partial list of general fields and specific areas within them that are sure to help round out anyone looking for insights into how the world works. Where I could I also included some good books (non textbooks) off the top of my head that relate to each area.

• Math: compound interest, permutations and combinations (decision theory), basic algebra, probability and statistics. Resources: All of Nassim Taleb’s books, Against the Gods, Thinking in Bets

• Accounting and Investing: basic accounting principles and how to value a business. Resources: Quality of Earnings, Security Analysis, The Intelligent Investor, Snowball, The Price of Time

• Engineering: quality control, backup systems, breakpoints, critical mass. resources: The Toyota Way, Seeking Wisdom: From Darwin to Munger, How the World Really Works

• Hard Sciences: basics of thermodynamics, chemistry, electromagnetism, and Newtonian physics. Resources: A Short History of Nearly Everything, Guns, Germs and Steel, Chaos

• Biology and Evolution: Sapiens, The Selfish Gene, Factfulness

• Psychology: basic human biases (these are “ungodly important” as Munger says). resources: Thinking, Fast and Slow, Influence, Noise, Poor Charlie’s Almanac, Devil Take the Hindmost, A Short History of Financial Euphoria

• Economics: specialization, macro and micro economic principles. resources: Wealth of Nations, The General Theory of Employment, Interest and Money, 7 Powers, Competition Demystified, Berkshire Annual Letters

These are just a few areas worth exploring, but I think anyone can capture the basics of these ideas in just a year of consistent reading. We’re always trying to learn and re-learn the lessons Munger taught us, and the fun part is the learning never stops.

Dan

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Meet You in Hell: Andrew Carnegie, Henry Clay Frick, and the Bitter Partnership That Changed America by Les Standiford

Andrew Carnegie and Henry Clay Frick were two of the wealthiest men of their day. This book chronicles their rise in business, their partnership, and eventual falling out. It is a fast, riveting read. The author, Les Standiford, is a novelist, and his storytelling chops show.

Carnegie became the wealthiest man in the world selling his steel company to J.P. Morgan for $492 million in 1901, the equivalent of $309 billion in 2024 dollars. Imagine $309 billion in liquid assets! Frick was no slouch either, worth over $3 billion in today’s money. Author Les Standiford puts these numbers into further perspective:

“The value of a personal fortune is better understood in relation to the total gross national product of an individual’s era. By that measure, Carnegie was worth $112 billion in his day, far ahead of Bill Gates ($85 billion), Sam Walton ($42 billion), or Warren Buffett ($31 billion).”

Both men would go on to give away significant pieces of their fortunes. Carnegie in particular pioneered philanthropy on a scale that had never been done before.

The book gives an overview of Carnegie and Frick’s lives without getting bogged down in the weeds. There are plenty of lengthy Carnegie biographies for that. Standiford instead focuses on the interpersonal dynamic between Carnegie and Frick.

Steel was the high tech of its day. Carnegie started out working for a railroad. Back then everything was made of iron - rails, locomotives, cars, bridges, etc. It was expensive and rusted. Steel existed, but it was prohibitively expensive until the Bessemer Process came along. The Bessemer Process reduced the time to make steel from two weeks to fifteen minutes. Carnegie realized that demand would skyrocket.

Carnegie wanted to become extremely wealthy and realized that he’d never achieve it as a salary man. He quit his job at the railroad and vowed to put all of his eggs in one basket and watch that basket close. He chose steel.

Carnegie began building his first steel mill during the Panic of 1872. The surplus of labor and materials caused the plant to come in 25% under budget. Carnegie learned, “The best time to expand is when no one else dared to take the risk.”

Steel was a commodity business then, as it is now. The only way to gain an advantage was to have lower costs. Carnegie was fanatical about knowing his costs and constantly chipping away at them. Frick was of the same mind.

Most managers were satisfied knowing their aggregate cost of material and the value of finished product. Carnegie tracked costs down to the shift, supervisor, and laborer. The most efficient were promoted and the under-performers let go. As Charles Schwab put it, “Carnegie never wanted to know the profits. He always wanted to know the costs.” One of the reoccurring themes of the book is that profits, prices, and sales are cyclical but costs are knowable and controllable.

Frick was equally, if not more, ruthless about cutting costs. He was a workaholic who would not let anything stand between him and his goals. Once, during an 1877 strike Frick forcibly threw a striker of an embankment and into a creek, along with all of his personal belongings. When Carnegie told Frick to settle with the union, Frick offered his resignation instead. This was a harbinger of problems to come.

Carnegie and Frick kept their costs down by constantly investing in technology. If they could save a penny, they wouldn’t hesitate to invest. They viewed making steel as an ever evolving struggle, and never rested on their laurels. When given good news, Carnegie would respond, “Good, but let us do better.”

Carnegie was also notable for his incentive system. He believed in paying top dollar to get the best talent for key positions. He said, “There is no labor so cheap as the dearest in the mechanical field.” He believed in giving key employees an ownership interest in the business. Ownership binds an employee to the business tighter than a handsome salary, which can be outbid by a rival. While Carnegie’s incentive systems were ahead of their time, he would likely scoff at giving mid and low level employees stock like is common today.

The failure of Carnegie and Frick’s partnership shows than aligned incentives can only do so much. My key takeaway was to avoid going into business with anyone who is excessively stubborn or prideful. While these qualities can make them good at cutting costs and generating wealth, they also make them hard to work with and work for.

Overall I highly recommend this book for entertainment value and its historical perspective. If you’re on the fence, David Senra covered the book in Founders Podcast #73 and #284.

Matt

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The Hard Thing About Hard Things by Ben Horowitz

Before Ben Horowitz was a legendary venture capitalist (co-founder of Andreesen Horowitz) he was a founder/CEO of multiple successful technology businesses. Ben wrote The Hard Thing About Hard Things to try and be helpful to fellow entrepreneurs.

As opposed to the traditional how-to “rah-rah” positive book aimed at would-be founders, Horowitz’s book is focused on how he handled all of the inevitable business and personnel crises he encountered over the years. It’s not a feel good story but a practical memoire of how he handled the tough times.

One relevant idea that resonated with me was his concept of “lead bullets over silver bullets”. Horowitz explains that everyone is looking for a silver bullet (in business, in investing, and in life). Everyone wants one answer or approach to win whatever game it is you’re playing. The problem is, silver bullets don’t exist. Instead, you have to keep firing lead bullets at your problem. You have to be relentless and consistent to take down whatever you’re struggling with so don’t bother looking for the magic formula because it’s not out there. This idea is very applicable to our investment approach (lots of singles and doubles, no swinging for the grand slam on every pitch).

Another concept directly related to investing (though Horowitz uses the tech field in his analogy) is surviving long enough to get lucky. In his experience in the tech world, things are always changing and businesses are always adapting. If you can keep surviving and adapting long enough there’s a good chance you’ll get lucky and be able to ride on a highly profitable wave. The same is true in investing; don’t take yourself out of the game and don’t do anything stupid and you almost can’t help but get lucky.

Dan

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Unreasonable Hospitality: The Remarkable Power of Giving People More than They Expect by Will Guidara

I was a bit surprised how much I liked Unreasonable Hospitality. I expected to like it, of course, but it exceeded my expectations. It is well written and full of good stories and good advice.

Author Will Guidara ran the front of house at Eleven Madison Park, a highly regarded fine-dining restaurant in New York City where dinner for two with wine will run you a bit over $1,000. The book tells the story of how he and his partner, Chef Daniel Humm, turned it into one of the world’s best restaurants.

The books theme’s are challenging assumptions and norms, constant improvement, and aspiring to an unreasonably high standard. There is a lot of practical advice and examples about managing people with class and grace, even in tricky and stressful situations. Some of the most interesting bits were about culture - how to build and maintain performing culture and keep morale high.

Guidara wanted to create the best restaurant in the world. He wanted the fine dining experience, but without all the pretentious bits. He wanted your to feel like you were at a close friends home for dinner. For example, he got rid of the host’s podium at the entry. It feels transactional to walk in and be greeted by someone with an iPad. They moved the podium out of sight around the corner and would study the guest list each hour so they could be greeted by name.

Guidara wrote, “When you ask, “Why do we do it this way?” and the only answer is “Because that’s how it’s always been done,” that rule deserves another look.” Guidara doesn’t advocate being different for the sake of being different. You need to understand why something was done that way before you change it. Business owners should be wary about mindlessly adhering to traditions that don’t suit their goals.

Guidara was constantly refining and improving the restaurant. He never wanted anyone on the team to settle for “good enough.” After each shift they’d debrief to figure out where the pain points were. For example, there was often a long delay between a host seating a table and taking there water preferences (sparking/still) and the server delivering it. The delay was because the host had to find the server when they weren’t at another table to relay the preference. EMP sped up the process by developing a sign language system to relay messages. This made the guest experience better (faster service) and waiters more efficient. EMP alumnae brought this system to many other fine dining restaurants.

Guidara wanted to push the bounds well past hospitality into “unreasonable” territory to wow his guests. Monsish Pabrai has talked about being “unreasonable” as an investor, meaning, have the patience to wait for a high ROE business that trades at 1-2x earnings. Don’t settle for slightly cheap, wait for a generational bargain. This is easier said than done, but they do occur.

Guidara likewise didn’t want to settle for merely good service. One of the trickiest points of a meal is delivering the bill. The stark numbers can dampen the mood. Some diners like to get the bill fast, but others like to linger. You risk offending someone if you guess their preference wrong. Guidara decided EMP would deliver the bill with a full bottle of cognac. The waiter would pour each guest a glass and invite them to linger and drink as much as they wanted, on the house. And when they were ready, their bill was ready. This blew everyone’s expectations away. People were already full and had had plenty of wine, so few ever drank much. It wasn’t the cognac, but the generosity.

You can tell Guidara loves his restaurant, employees, and hospitality. He has turned hospitality into a craft. He wrote, “let you in on a little secret, one that the truly great professionals in my business know: hospitality is a selfish pleasure. It feels great to make other people feel good.” Its like Buffett and Munger have said, being an honest businessman isn’t just a nice thing to do, its also made them fabulously wealthy. Finding these win-wins is key to building a business and getting satisfaction out of it.

Matt

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Confidence Game by Christine Richard

It’s always instructive to read about the lead-up to the financial crisis, and Confidence Game is the detailed blow-by-blow of Bill Ackman’s six-year battle with bond insurer MBIA. Ackman caught on to MBIA’s flawed business model years before the regulators, rating agencies, or sell-side analysts, and he spent more than half a decade trying to publicly shed light on the inherent risks in MBIA’s business and in the bond insurance world in general. He expressed these views via a massive short position by owning credit default swaps against MBIA and was ultimately proven right when MBIA’s business imploded as the U.S. mortgage market and financial system melted down in 2008.

Every time I read about the complexities involved in mortgage-related derivatives during the 2005-2007 period it blows my mind. MBIA moved from plain vanilla bond insurance for municipalities that were virtually guaranteed to never go bankrupt into the complex world of insuring CDO’s backed by sub-prime mortgage bonds without being compensated for taking on this additional risk. On top of that, they were leveraged to the gills and almost totally reliant on maintaining a phony triple-A rating from the credit agencies. In the event of a credit downgrade MBIA would have been required to carry vastly more regulatory capital. By Ackman’s correct analysis any hiccup in the housing market and subsequent downgrade would mean a massive impairment of MBIA’s equity buffer because of the cascading impacts of CDO’s going bad. Not surprisingly, all of this came to fruition and MBIAs stock went from $73/share to $2.50/share from 2007 to 2009. The business and stock never recovered.

The book is not only a great reminder of why it’s so important to only invest in things you understand but also the perils of following sell-side analysts recommendations. These analysts have very conflicting priorities compared to individual investor as access to the companies they follow is dependent on them maintaining a rosy public posture. It’s for this reason all the analysts following MBIA defended the businesses practices until it was too late and investors had lost almost all their money.

Dan

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The Best of the Rest

• Memo from Howard Marks: Shall We Repeal the Laws of Economics? - “My purpose, of course, is not to promote or dismiss either candidate, but rather to illustrate that there is no “free lunch” in economics, despite candidates’ assertions to the contrary”

• WSJ: The Art Market Is Tanking. Sotheby’s Has Even Bigger Problems.

• Interview With Chris Pavese.

  • During the ‘70s, McDonald's was part of the Nifty 50. The business was trading at multiples in line with some of the higher multiples in the market today. The business continued to perform exceptionally! It was growing sales and earnings 20-25% annually for the next decade.

  • The stock still shed almost three quarters of its value because the price people were paying already more than reflected that growth.

  • Owning the best businesses in the world or the fastest-growing business in the world isn't necessarily going to translate into the best investment performance. The price you pay matters.

• Micro cap Club: A Conversation With Anthony Deden. “80% of the success or failure of a company comes from people.”

• In 1882, the UK built the world’s first coal-fired power plant. In September, the UK turned off its last coal-fired power plant. That is a decade ahead of the G7’s plan to phase out thermal coal.

• WSJ: U.S.’s Climate Plan Falters Amid Hurdles and Resistance. Renewable energy is growing faster than expected. But surging demand for power is sucking up much of that additional capacity and forcing utilities to burn fossil fuels, including coal, for longer than expected.

• Bloomberg: The Oil Price That Matters Now Is $50 a Barrel, Not $100

  • “First, OPEC+ has tacitly recognized that its $100 policy was boosting annual non-OPEC+ supply growth above trend demand. Sticking to its high prices strategy meant accepting an ever-declining market share.

  • Second, the cartel accepts that elevated crude levels hurt demand growth, and sustaining consumption is important in the face of the energy transition.

  • Third, the global economic cycle has turned, and oil, just like every other commodity, is sensitive; lower prices are the natural consequence of weaker growth.

  • Fourth, several OPEC+ members have invested billions of dollars in new production capacity and have pushed to pump more, challenging the strategy. To avoid a schism, the group has had to change its overall reaction function.”

• Bloomberg:  Knowing the Future Won't Make You Money 

  • Related paper: When A crystal Ball Won't Make You Rich

• WSJ: You Can’t Buy That Diesel Truck

  • Truckers aren’t buying electric big rigs because they can’t afford them even with $40,000 in federal tax credits. Electric trucks cost twice as much as diesel-powered rigs and have a limited driving range—150 miles on average, compared to between 1,000 and 1,500 for diesel trucks.

  • Yet under California’s rules, “dealers are restricted from selling a diesel truck unless they sell a ZEV truck,” the dealer group reports. The result: “New class 8 truck sales (ZEV and Diesel) were down 50 percent year-over-year in June 2024.” Truckers are driving older engines longer because they can’t buy newer diesel models, which results in more pollution. Dealers say trucks are piling up on their lots—electric models because truckers won’t buy them, and diesel rigs that dealers consequently aren’t allowed to sell. Dealers say they incur monthly interest penalties on unsold truck inventory.

• WSJ: Drug Distributors Go All In on Cancer Care. Distributors are paying through the nose because whoever controls the doctors gets to tap into all sorts of fees.

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