Reading Roundup: March 2022
At EPC, we do a lot of reading. We’ve designed our business and our lifestyles to allow for lots of undistracted time to read and think and follow our curiosity. Since we started this blog to show our work we’ve decided to start sharing a few of the most provocative books and articles we read each month.
The Pendulum In International Affairs by Howard Marks, March 23, 2022
Marks compares Europe’s dependence on Russian energy with America’s dependence on cheap foreign manufacturing. America’s dependence on Taiwanese semiconductors is not so different from Germany’s dependence on Russian gas.
Globalization has been in vogue since the end of WW2 because it maximized incomes. But everything has trade offs and globalization made some countries vulnerable to supply chain disruptions and changing foreign policies.
The pendulum may now be swinging from globalization to on-shoring. The US and China are both building new semiconductor foundries within their own borders. Germany may reactivate its nuclear reactors in order to produce more power domestically. Countries and companies alike want to be self reliant.
Psychology swings like a pendulum from one extreme to another. It rarely spends time at the happy medium. How far the pendulum swings from globalization to on shoring will depend on how soon the current situations are resolved and which force wins: the need for dependability and security or the need for cheap sourcing.
Meditations: The Annotated Edition by Marcus Aurelius, Trans. by Robin Waterfield
Marcus Aurelius was the Emperor of Rome between 161-180 and a lifelong student of stoic philosophy. Meditations is a collection of personal journals written near the end of his life. At the time, Marcus was waging war on the empire’s frontiers. Meanwhile, the Antonine Plague was ravaging Rome. The backdrop of war and plague makes Meditations particularly relevant today.
It is a common misperception that Stoics don’t feel emotions. They do. Stoics don’t try to eliminate their emotions. That’d be a fool’s errand. Stoics try to control their reaction to their emotions.
Marcus Aurelius wrote, “If you are distressed by anything external, the pain is not due to the thing itself, but to your estimate of it; and this you have the power to revoke at any moment.”
Shakespeare said the same thing in Hamlet: “There is nothing either good or bad but thinking makes it so.”
Haruki Murakami distilled it further in What I Talk About When I Talk About Running: “Pain is inevitable. Suffering is optional.”
Psychologist and holocaust survivor Viktor Frankl similarly concluded in Man's Search for Meaning: “Between stimulus and response there is space. In that space is our power to choose our response.”
We can’t control the world around us but we can control how we react to it. How we respond to our emotions is our choice. Controlling our reactions isn’t easy, but it gets easier with practice.
The Innovation Stack by Jim McKelvey
Jim McKelvey co-founded Square with Jack Dorsey in 2009, and in this book he describes how Square went from zero to an $80B+ company. Square is a payment processing company that carved out a niche by serving merchants who were too small to accept credit card payments prior to Square’s solution.
McKelvey profiles what he calls “innovation stacks” and how companies in any industry can use their innovation stock to ward off competitors. Besides detailing the early days of Square, and how their innovation stack fended off direct competition from Amazon, McKelvey profiles IKEA, Bank of America, and Southwest Airlines as three other examples of innovation stacks.
Often when an upstart is disrupting an industry the incumbents attempt to copy what they believe to be the key to the challengers business model. They usually fail. The reason is, a successful new business often builds up a stack of decisions, say 10 or 15 key elements, that intertwine together to form the backbone of the company. If an incumbent copies one or two aspects of the business, they fail to fully replicate the upstart’s offering and are unsuccessful. To break into the payments industry Square was forced to innovate around 14 key elements that were hard to replicate, even for Amazon.
Even if a behemoth like Amazon has a 75% chance of successfully replicating each layer of the stack, the odds of them getting all 14 elements right is less than 2%. Investors should seek to spot and understand innovation stacks to grasp competitive moats and their potential duration.
Genghis Khan and the Making of the Modern World by Jack Weatherford
The Mongols built one of the most underrated empires in the history of humanity. In only four decades Genghis Khan rose to rule an area that would now encapsulate more than 3 billion people. The commonly accepted savagery of the Mongol people is a narrative that has been fit ex post facto. Reality is far more nuanced.
Beyond being one of history’s great generals, Genghis Khan is the father of modern day globalization. The Mongols did not invent much, but they took what worked from China to Iraq to Europe and copied it. The Mongols were among the first major adopters of freedom of religion, meritocracy-based leadership, economic specialization, paper currencies, rules of property rights, and a less harsh penal code. The modern world has Genghis Khan’s fingerprints all over it.
Interestingly, globalization and the Mongol empire were ultimately derailed by the black plague pandemic as territories walled off foreigners in fear of the plague. This rhymes to some extent with how the COVID pandemic has disrupted globalization today.
As Yen Liow loves to point out, investors can also learn from Mongol military tactics. The Mongol cavalry was almost always smaller and had far less equipment than those that they conquered. They overcame these shortfalls by never fighting a fair fight. They would redirect rivers to flood key areas of towns, fake retreats to lure enemies into a trap, and were incredible agile and adaptable on the battlefield. They picked their battles carefully and always tilted the odds in their favor.
We try to only fight unfair fights in the stock market by buying monopolies and oligopolies, looking for prices that offer attractive asymmetric returns, and having longer time horizons than others. We think of this as fishing in stocked ponds.
The Best Of The Rest
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