Reading Roundup: April 2024
This month we read:
The Price of Time: The Real Story of Interest by Edward Chancellor
Leadership In Turbulent Times by Doris Kearns Goodwin
The Forgotten Depression: 1921: The Crash That Cured Itself by James Grant
Radical Hamilton: Economic Lessons from a Misunderstood Founder by Christian Parenti
There’s Always Something to Do: The Peter Cundill Investment Approach by Christopher Risso-Gill
13 Hours: The Inside Account of What Really Happened In Benghazi by Mitchell Zuckoff
The Price of Time: The Real Story of Interest by Edward Chancellor
The Price of Time is about the history of interest rates and, more specifically, the impact of extraordinarily low interest rates on economies and markets during certain periods of time over the last several hundred years.
It’s always amusing to me to listen to people complain about interest rates - they are either too high or too low - because the level of interest rates is so far beyond any of our control. That said, their impact is undoubtedly critical for investors to understand and prepare for.
Unsurprisingly, the main takeaway from Chancellor’s book is that artificially low interest rates are not a good thing. His motto could be summarized as “do not give me a low rate, give me a true rate”. Chancellor looks back at periods of time when rates were depressed and concludes that, time and again over the last several centuries, when interest rates on government debt approach 2% or lower, things start to get weird.
Chancellor explains the views of early economist Walter Bagehot:
“Bagehot intuitively understood how people were habituated to a certain return on their investments and how, when the accustomed income was not available, investors were inclined to take more risk…whenever money becomes very cheap, experience teaches us to expect that it will be misspent. John Bull, as it has been wisely observed, can stand a good deal, but he cannot stand two per cent.”
After the financial crisis economists and politicians were perpetually perplexed at how growth could be so sluggish when interest rates were so low. After all, low rates were meant to stimulate the economy! An interesting section of the book explains that, counterintuitive to how economists are trained, the low rates coming out of the financial crisis likely depressed growth. When savers earn nothing on their money, they are less likely to feel secure and spend, which hampers the growth of the economy. Further, low rates tend to support “zombie companies” and reduce the hurdle for invested capital, meaning money is wasted on sub-optimal projects. This again is bad for growth.
Taking it a step further, it surprised almost everyone that when the Fed rapidly raised rates in 2022 and 2023 the economy did not falter as everyone expected. It actually strengthened. Why? Because rates were returning to a normal and fair level, savers could earn money on fixed income again, and rationality returned to the world. Paradoxically, the first several percentage point increases in interest rates was likely stimulative, not restrictive. This is very counter to what we are taught in school and I find it fascinating.
When rates are too low, savers are harmed, and people have no choice but to reach for yield. Financial folly almost always ensues, asset inflation and bubbles form, and prospective investment returns come way down. This has always been the case and always will be, and I find it helpful to read about these periods - from one of which we just emerged - in order to prepare for the next time rates become artificially depressed.
Dan
Leadership In Turbulent Times by Doris Kearns Goodwin
Doris Kearns Goodwin is a Pulitzer-prize winning presidential biographer. This book is a synthesis of her work on Abraham Lincoln, Teddy Roosevelt, Franklin Roosevelt, and Lyndon Johnson.
While the book ostensibly aims to provide broadly useful leadership advice (“Anticipate contending viewpoints,” “Rally support around a strategic target”), these feel generic and interrupt the flow of Goodwin’s masterful storytelling.
The book’s real value is in showing that “There was no single path that four young men of different background, ability and temperament followed to the leadership of the country.”
Leadership is divided into three sections: ambition and early recognition of leadership ability; adversity and growth; and how they led during crises in their presidencies. Each section has a chapter about each president. An epilogue touches on each man’s death and legacy.
Goodwin focuses on her subjects' personalities, upbringing, and human relationships. She gives an emotional depth to each president so that they feel human and relatable.
Investors can learn a lot from Lincoln’s temperament, patience, and sense of timing. Buffett has long preached that temperament is more valuable to investing than IQ.
“Success in investing doesn’t correlate with IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing”
Lincoln refused to allow resentment, jealousy, or envy to fester. He was just as vulnerable to these emotions and anyone, but made a daily effort to confront them when they appeared. In the absence of these negative emotions, Lincoln’s logic and reason could shine.
One technique Lincoln used was writing “hot” letters:
“When angry at a colleague, Lincoln would fling off what he called a “hot” letter, releasing all his pent wrath. He would then put the letter aside until he cooled down and could attend the matter with a clearer eye. When Lincoln’s papers were opened at the turn of the twentieth century, historians discovered a raft of such letters, with Lincoln’s notation underneath; “never sent and never signed.” Such forbearance set an example for the team.
One evening, Lincoln listened as Stanton worked himself into a fury against one of the generals. “I would like to tell him what I think of him,” Stanton stormed. “Why don’t you,” suggested Lincoln. “Write it all down.” When Stanton finished the letter, he returned and read it to the president. “Capital,” Lincoln said. “Now, Stanton, what are you going to do about it?” “Why, send it of course!” “I wouldn’t,” said the president. “Throw it in the waste-paper basket.” “But it took me two days to write.” “Yes, yes and it did you ever so much good. You feel better now. That is all that is necessary. Just throw it in the basket.” And after some additional grumbling, Stanton did just that.”
Lincoln’s technique reminds me of Tom Murphy’s advice to Warren Buffett:
"He said, 'Warren, you can always tell someone to go to hell tomorrow.'
It was such an easy way of putting it. You haven't missed the opportunity. Just forget about it for a day. If you feel the same way tomorrow, tell them -- but don't spout off in a moment of anger."
Lincoln was unimaginably patient. Lincoln painstakingly built support for the Emancipation Proclamation among his cabinet and Congress, waited patiently for a strong Union victory to reveal it publicly, and then delayed enacting it for six months to give the South every opportunity to negotiate.
Lincoln reminds me of Berkshire’s 1984 letter where Buffett discusses “masterly inactivity.” It also reminds of Victor Hugo’s quote: “Nothing else in the world…not all the armies…is so powerful as an idea whose time has come.” Lincoln waited patiently until the ideas time had come, and then struck. Likewise in investing, it is not enough for a thesis to be correct. It must also be timed properly. Being early is indistinguishable from being wrong. (The best investments have staying power to account for the chance that their time has not quite come yet).
Lyndon Johnson also had a sense of timing. He understood that there was going to be a brief window of national unity following Kennedy’s assassination he could use to pass his civil rights bill. As Chuchill said, “Never let a good crisis go to waste.”
Johnson, like Lincoln, had a tremendous work ethic. “From his early twenties,” Goodwin writes, “Lyndon Johnson had operated upon the premise that if “he could get up earlier and meet more people and stay up later than anybody else,” victory would be his.” This reminds me of Peter Lynch’s idea that “The person that turns over the most rocks wins the game.”
Goodwin’s chapters on FDR focus on how he confronted the great depression. His fireside chats leveraged new technology (the radio) to talk directly to the American people. He explained in simple terms what the problem was, why it happened, and how he was going to fix it. He spoke in a folksy, familiar tone, much like Buffett’s letters, to make his policies understandable and create trust. As Lincoln said, “With public sentiment, nothing can fail. Without it nothing can succeed.”
Goodwin spent five years writing this book and a similar period on each of her prior four full-length biographies. She distilled twenty years of research into 497 pages that you can buy for $9.46. If that’s not a bargain I don’t know what is.
Matt
The Forgotten Depression 1921: The Crash That Cured Itself by James Grant
There have been so many good books written about the Great Depression that it’s easy to forget there was another depression that kicked off the 1920’s. It’s an instructive time to read about as the response, or non-response, from the government can be contrasted with what happened during the early 1930s and after each subsequent downturn over the ensuing 100 years.
World War I caused the U.S. economy to boom and commodity prices to sky rocket. This resulted in tremendous inflation for the first few years after the war ended. Farmers projected that price appreciation of their crops would continue well into the future and bankers lent on these rosy projections. As new supply came to the market prices across the board started to crash and inflation quickly turned to deflation.
As prices of goods across sectors came falling back to earth, businesses reacted quickly by cutting costs in an effort to maintain some semblance of profitability. This resulted in mass layoffs, cratering stock prices, and rapidly climbing unemployment. Banks all over the country that made dumb loans began to fail. Needless to say, this was not a pleasant experience. What did the government do? Not much of anything, as they trusted capitalism to fix the problem for them.
Benjamin Strong, the governor of the New York Fed, wrote a letter explaining that he was, out of necessity, going to let the rug get pulled out from the American economy:
“this must be accompanied by some rather serious losses because our increased prices have occurred in a country enjoying exceptional prosperity in which merchants and manufacturers have unfortunately maintained too large stocks of goods as compared with their foreign competitors. I believe that this period will be accompanied by a considerable degree of unemployment, but not for very long, and that after a year or two of discomfort, embarrassment, some losses, some disorders caused by unemployment, we will emerge with an almost invincible banking position, with prices more nearly at competitive levels with other nations, and be able to exercise a wide and important influence in restoring the world to normal and livable conditions.”
Grant explains that:
“implicit in these words was a deep faith in the self-correcting nature of markets…he meant to inflict no pain on the unemployed. The depression he anticipated was a necessary evil. Wages, like prices, were distorted.”
Low and behold this hands off approach worked. There was no secular depression or prolonged panic. From peak to trough a year and a half went by, prices normalized, the stock market crashed 45% (but only 35% in real terms) and subsequently recovered, and unemployed returned to historical levels in short order. The American economy went on to enjoy years or steady growth.
I’m not arguing that the Fed should never intervene in financial markets or we should hope the economy dives into depressions to fix inflation. The economy was also far different and less complex a hundred years ago and the government’s “do nothing” response may not have the same result today. On the other hand, I always favor less tinkering with capital markets except at the extremes, and the 1920-1921 period is a great example of the self-correcting behavior of free markets.
Dan
Radical Hamilton: Economic Lessons from a Misunderstood Founder by Christian Parenti
President Biden has given America its first overt industrial policy in decades. “Bidenomics” may seem novel, but Alexander Hamilton’s 1791 Report on the Subject of Manufactures invented it. Fun fact: Hamilton’s report is the first use of the word “capitalist” in the English language (it was used in French first).
An industrial policy encourages domestic production in specific sectors. It’s accomplished through tariffs, tax breaks, subsidies, or direct government investment. Biden is offering tax breaks for semiconductor fabs and tariffs on steel and aluminum.
As aide-de-camp to General Washington, Hamilton witnessed firsthand the disorder of the Federal government. Under the Articles Of Confederation, states were essentially sovereign, tied together by a loose security pact. Congress couldn’t levy taxes, build roads, or create a national bank.
When the Revolutionary War ended, Hamilton became concerned with national security. Without a strong army and navy, America could be conquered by a foreign power. Without a cohesive federal government, the states might fragment and dissolve into civil war.
Hamilton’s solution was to transition from an agrarian to an industrial economy as fast as possible. Domestic manufacturing would end America’s reliance on imported foreign good and provide it the industrial might to defend itself. Sound familiar?
The crux of the book is that Hamilton believed that the federal government needed to jump start the nation’s industrialization. Waiting for Adam Smith’s invisible hand to show up would take too long.
Adam Smith also argued from a point of national security. Smith thought countries that forged close trading bonds were unlikely to go to war as their economies were mutually dependent. Former German Chancellor Angela Merkel seemed to buy into this approach when she allowed the German economy to become dependent on cheap Russian natural gas.
In The Wealth Of Nations Smith explains that a nation at war would be compelled to borrow to meet its needs. Hamilton agreed and called for a “funded debt.” He wanted America to have a permanent federal debt it serviced to demonstrate that it was credit worthy so that it could borrow in times of need. The debt needed to be well covered so that it was “good as gold” and a substitute for money. His model was the Bank of England, established in 1694.
Hamilton wasn’t against free trade. He was against subordination to a foreign power. He wanted tariffs to protect “infant industries” and government incentives to help critical industries develop.
Hamilton felt Smith underestimated the competitive advantage established industrial powers like the Great Britain had over upstarts like the US. Hamilton also worried that private markets would naturally concentrate the American economy in a narrow range of sectors. He did not want the US to become too focused on agricultural exports and need to import everything else. An un-diversified and highly specialized economy would make the US fragile. Modern Argentina’s struggles embody Hamilton’s fears. The country is highly dependent on agricultural exports and became distressed after a series of poor harvests.
When laissez-faire economics were appropriate, like the cotton market, Hamilton wanted the state to define the bounds of competition. Pure competition would become anarchy.
Hamilton was the first to call for a Constitutional Convention. He wanted to replace the Articles of Confederation with a constitution that granted the federal government more power. The states resisted until Hamilton’s fears manifested: trade wars broke out between the states and class warfare broke out between coastal elites and yeoman farmers (Shay’s Rebellion).
Hamilton lobbied for a strong federal government at the convention. He pushed for a federal right to tax citizens and build roads and canals. Back then interstate roads were typically rivers that the government made navigable.
As Treasury Secretary, the US Treasury assumed the states’ Revolutionary War debts in exchange for the states’ western land claims. Back then the states didn’t have firm western boundaries. Hamilton financed the debt by borrowing in Europe at 4% when the going rate was 3%.
Hamilton also pushed for a central bank, a government planning board, and even the abolition of the states themselves. Some of these never panned out. Not all of Hamilton’s ideas were good.
Parenti argues that industrialization always requires an “activist” government. The idea that the American economy sprang up purely from free trade and entrepreneurship is a myth. Japan, China, Singapore, and South Korea all industrialized under an activist government. Wars have often been a catalyst for government activism in industrialization, as seeing in the US during WWII, when government spending pulled the US out of the Great Depression. The American defense industry is still planned and controlled by the Pentagon.
This book challenged many of my beliefs about the virtues of a small government and laissez-faire economics. It’s a niche subject that won’t have wide appeal and isn’t something I’d recommend broadly. If you’d prefer an overview, Bloomberg’s Odd Lots podcast did an episode about it.
Matt
There’s Always Something to Do: The Peter Cundill Investment Approach by Christopher Risso-Gill
Peter Cundill was an excellent investor who generated outsized returns in the Cundill Value Fund for decades before stepping away in the mid 2000s. There’s Always Something to Do was written by Christopher Risso-Gill, one of his long time friends and a board member of his fund. The book walks through case studies and examples of successes and mistakes over the course of Cundill’s long career.
Cundill was rare in that he maintained a balance sheet focused approach (adhering to the classic Ben Graham style of value) long after it had gone out of favor with other investors. While he had plenty of success and on balance his investment approach worked very well, it’s still instructive to study some of the investments that gave Cundill the most problems throughout his career.
It’s evident from the book that some of his biggest losers arose when he looked solely to the balance sheet (or asset value) for his margin of safety, and ignored the fact that some of his investments were in businesses of sub-par quality. While we vehemently agree that a margin of safety should be the cornerstone of any investment, we like to incorporate both a quantitative and qualitative assessment into our margin of safety. Said another way, we never make an investment just because of a cheap valuation without also being comfortable with the business quality. Cundill’s biggest losses, including some telecom investments in the early 2000s, further reinforce the importance of business quality and valuation.
Another concept I love is Cundill’s idea that smart people are just as likely to fail in the investment world as anyone else. Here is an excerpt from his journal:
“Just as many smart people fail in the investment business as stupid ones. Intellectually active people are particularly attracted to elegant concepts, which can have the effect of distracting them from the simpler, more fundamental truths.”
It’s easy to get enamored with complex or interesting investment theses when usually it’s best (at least for us) to stick to simple investments that only require being right on a few points. It reminds me of the Richard Feynman quote “The first principle is that you must not fool yourself and you are the easiest person to fool.”
Dan
13 Hours: The Inside Account of What Really Happened In Benghazi by Mitchell Zuckoff
13 Hours is the true story of the American security force that was overrun by hostile militants at the US Embassy’s annex in Benghazi, Libya in 2012. Michael Bay turned it into a movie in 2016 staring John Krasinski. The book focuses on the men and their mission and leaves out the politics as best as it can.
The book is a good read if you’re in the mood for an action thriller or, like me, was unaware exactly what happened in Benghazi. Below are a few quotes I picked out of the book:
“People in America get up and go to their nine-to-five jobs every day and are oblivious to all these battles and wars and people dying every minute all over the world. This is life. This is how other countries live. This is a daily occurrence in some places.”
“The attackers had used one of the oldest and most potent weapons of warfare: surprise.”
Matt
The Best Of The Rest
Memo from Howard Marks: The Indispensability of Risk:
“Most investors are capable of accomplishing “a” and most of “b.” The challenge in investing lies in the pursuit of some version of “c.” Earning high returns – in absolute terms or relative to other investors in a market – requires that you bear meaningful risk – either the possibility of loss in the pursuit of absolute gain or the possibility of underperformance in the pursuit of outperformance. In each case, the two are inseparable. As Ashley says, no risk, no reward. No pain, no gain.”
John Huber: Graham's "Unpopular Large Caps" Part 2: Thoughts on Diversification. “The minimum level of diversification you need is the level that allows you to "zoom out", meaning the level that allows you to behave in a rational manner at all times.”
Bloomberg: Weight-Loss-Drug Users Pay Up for Help Ditching the Pricey Meds. “A study from 2022 showed that patients regained two-thirds of the weight they’d lost a year after quitting—even after embracing healthier lifestyles while on the medications. And there’s a lot of churn among users: One study by pharmacy benefit manager Prime Therapeutics LLC released in 2023 found that 68% of patients who started taking GLP-1 drugs for weight loss were no longer on them after a year.”
Jason Zweig (WSJ): The Psychologist Who Turned the Investing World on Its Head. “Noting that the stocks people sell outperform the ones they buy, Danny joked that ‘the cost of having an idea is 4%.’”
See also: Zweig’s 2001 profile of Kahneman.
Andrew Walker on Restaurant Brands International (QSR). “The set up here is incredible: put it all together, and you’ve got a quality company backed by a famous investor in an industry where he’s “never lost money” and run by a highly incentivized management team with a history of creating enormous value who has literally just laid out their path to double digit annualized returns (or better)!”
See our write-up on QSR from June 2020 — Restaurant Brands International: What’s The Secret Sauce?
The Diff: Most Financial Phenomena are Older than they Look.
Barron’s: Plastic Is Everywhere. Now Big Oil Companies Are Producing Even More of It. “Consumers don’t think of oil rigs when they pull on their polyester pants. Those pants—along with the bumper on your car, the rug in your office, and the PVC pipes in your home—will be much harder to replace than gasoline.
Vanguard: A Framework For Allocating To Cash. “From 1901 to 2022, global equities had an annual premium of about 6% over cash, while the average annual premium for bonds compared with cash was 1.6%… The longer an investor’s time horizon, the more likely the investor is to capture the risk premium… Stocks are risky—and so is avoiding them.”
Do you have a “stranded” 401k from a past job that is neglected and unmanaged? These accounts are often an excellent fit for Eagle Point Capital’s long-term investment approach. Eagle Point manages separately managed accounts for retail investors. If you would like to invest with Eagle Point Capital or connect with us, please email info@eaglepointcap.com.
Disclosure: The author, Eagle Point Capital, or their affiliates may own the securities discussed. This blog is for informational purposes only. Nothing should be construed as investment advice. Please read our Terms and Conditions for further details.