Reading Roundup: December 2023
This month we read:
Buffett: The Making of an American Capitalist by Roger Lowenstein
Same as Ever: A Guide to What Never Changes by Morgan Housel
The Creative Act by Rick Rubin
The Robert Fairchild Series by Matthew McCleary (The Shipping Man, Viking Raid, Exit Strategy)
Heroes: From Alexander the Great and Julius Caesar to Churchill and de Gaulle by Paul Johnson
Do you have a “stranded” 401(k) from a past job that is neglected and unmanaged? Eagle Point offer separately managed accounts to retail investors, and 401(k) rollovers are often a good fit for our long-term approach. If you would like to invest with Eagle Point Capital or connect with us, please email info@eaglepointcap.com.
Buffett: The Making of an American Capitalist by Roger Lowenstein
I started the year with reading Snowball (one of the definitive accounts of Buffett’s life) so thought it fitting to end the year with Buffett by Roger Lowenstein (one of my favorite authors). Both books are exceptional and I would consider must-reads for anyone who wants to learn about business, let alone investing.
Buffett is a less lengthy but no less interesting and helpful account of Buffett’s life from the time he was a child through the mid-90s, when Lowenstein first published it. We write a lot about Buffett so I won’t rehash too much in an effort to avoid repetition, so here are just a few of my favorite parts.
Buffett’s willingness to not reach for every extra point of return - whether it be via underleveraging Berkshire, or avoiding very high prospective return situations due to excessive risk being involved - is a common thread throughout his career. Counterintuitively, Buffett has amassed the best overall record of all time by not trying to maximize returns in any given year. It has caused him to consistently have good years, occasional great years, but never any terrible ones. The below quote encapsulates this approach.
“When I am dealing with people I like, in businesses I find stimulating (what business isn’t?), and achieving worthwhile overall returns on capital employed (say 10-12%), it seems foolish to rush from situation to situation to earn a few more percentage points.”
Obviously Buffett’s returns were much better than the 10-12% returns on capital he referenced, but his willingness to be OK with returns like that allowed him to be patient and not force things. This idea of being patient and accepting good results often leads to upside surprises and, more importantly, really allows compounding to take hold and work its magic. It’s a subtle idea, but extremely important. On the flip side, investors claiming to aim for 20%+ annual returns often end up severely disappointing, if not outright imploding, due to reaching for returns.
Lowenstein also does a great job summarizing why, on occasion, individual stocks (or the stock market in general) become cheap, even when no one disputes that they are cheap. The example below is of the market in the early 1970s when Buffett was buying the Washington Post but it can just as easily apply to individual stocks today or the stock market at various times over the past few years:
“People selling – professional fund managers – would not have disputed those numbers. Why, then, were they selling? Quite simply, they were afraid that the shares would drop further. They were afraid that other people might sell.
As Buffett analyzed the Post, sweetly and in his lonesome, he saw it as that all too rare opportunity. Mr. Market had turned gloomy…in such times, stock prices bore no relation to underlying values.”
Every six months or so it seems we run into a scenario where almost everyone agrees a stock is cheap but everyone is waiting for the coast to be clear before buying. Unfortunately, you don’t get paid to wait until the coast is clear and in fact, it rarely is. If it’s cheap in relation to value, we don’t wait just because it might get cheaper - we buy it.
Dan
Same as Ever: A Guide to What Never Changes by Morgan Housel
Morgan Housel is one of my favorite financial writers so I was quick to buy his latest book upon release. I like Housel’s writing style as much as his content. He uses short, simple sentences to tell folksy stories to make his point.
While Psychology Of Money focused on personal finance, Same As Ever is broader, focusing on human nature. Wars, governments, investments, and technology come and go but human nature always stays the same.
Housel makes this point with a story about Buffett.
I once had lunch with a guy who’s close with Warren Buffett.
This guy – we’ll call him Jim (not his real name) – was driving around Omaha, Nebraska with Buffett in late 2009. The global economy was crippled at this point, and Omaha was no exception. Stores were closed, businesses were boarded up.
Jim said to Warren, “It’s so bad right now. How does the economy ever bounce back from this?”
Warren said, “Jim, do you know what the best-selling candy bar was in 1962?”
“No.” Jim said.
“Snickers,” said Warren. “And do you know what the best-selling candy bar is today?”
“No,” said Jim.
“Snickers,” Warren said.
Then silence. That was the end of the conversation.
The financial media is obsessed with predictions, especially around this time of year. Predictions are more about entertainment than money. As Yogi Berra once observed, "It is difficult to make predictions, especially about the future."
The real money is made focusing on what doesn’t change, as Jeff Bezos once wrote.
But that alone is insufficient. Investors also need to maintain a margin of safety against the inevitable but unpredictable events that create short-term disruptions for the world. A margin of safety is crucial for bridging the gap from short-term negatives to long-term positives.
The trick in any field—from finance to careers to relationships—is being able to survive the short-run problems so you can stick around long enough to enjoy the long-term growth…An important lesson from history is that the long run is usually pretty good and the short run is usually pretty bad. It takes effort to reconcile those two and learn how to manage them with what seem like conflicting skills. Those who can’t usually end up either bitter pessimists or bankrupt optimists.
There are two types of risks. The first are knowable risks, like hurricanes and pandemics. They’ll inevitably happen, we just don’t know when.
The second are unknowable risks. These are what Nassim Taleb calls Black Swans. Unlike hurricanes and pandemics, unknowable risks have no presidents. They come out of nowhere and blindside the market, like the terrorist attacks on 9/11 and the rise of the internet.
Black Swans dominate our history books, and yet there is no way to predict them. If they were able to be predicted or anticipated, they wouldn’t make such an impact on history.
Preparedness, not prediction, can mitigate both types of risks.
Knowable risks are easier to prepare for because they have precedents. The State Of California knows a major earthquake will happen someday, but it has no idea when, where or of what magnitude. So California has emergency crews ready and building codes designed to withstand major earthquakes.
Unknowable risks are more difficult to prepare for because they’re more abstract. Housel, like Buffett, advises keeping a little more cash on hand than you think is necessary. Housel writes:
In personal finance, the right amount of savings is when it feels like it’s a little too much. It should feel excessive; it should make you wince a little.
Extra cash will look suboptimal until a Black Swan happens. Then it is worth its weight in gold.
A little extra cash is a metaphor for a little extra slack or margin for error in a system. Any system, whether it is a supply chain or your family’s balance sheet, can benefit from a margin of safety. Same As Ever explains that we should learn to prepare for the unexpected.
Matt
The Creative Act by Rick Rubin
Rick Rubin is a legendary American record executive who co-founded Def Jam Recordings and is co-President of Columbia Records. Last year he wrote The Creative Act: A Way of Being with the intention to help artists put themselves in a position to make better art. It turns out it is (surely unintentionally) one of the most relevant investing books I’ve read in some time.
The book is comprised of dozens of short chapters, almost all of which have various takeaways for how to be better at whatever craft you happen to practice. Below are a few of my favorite parallels with investing.
Rubin talks about how you can’t go “looking” for great art. You have to develop “antennae for creative thought” and take in your surroundings to pick up signals that may aid in the creative process. It’s the same with investing. You (or at least I) cannot just decide one day to go out and find a great investment opportunity just because I’m looking. It has to come to us and we have to be prepared when it does. We prepare by studying as many businesses as we can understand and that meet our investment criteria. After that, we have to wait for one to become attractive. We can’t force it.
Another helpful idea is the concept that “you are what you read”. Rubin says:
“If you make the choice of reading classic literature every day for a year, rather than reading the news, by the end of that time period you’ll have a more honed sensitivity for recognizing greatness from the books than from the media…This applies to every choice we make. Not just with art, but with the friends we choose, the conversations we have, even the thoughts we reflect on…They help us determine what’s worthy of our time and attention.”
If you spend your time scrolling Twitter madly searching for investment ideas, watching CNBC anchors pontificate as to why he market is up or down 50 basis points that day, or take to heart the many doomsayer articles written every day, odds are you’ll have a very hard time building a successful long-term focus and track record in the investment world. Not to mention you’ll likely drive yourself crazy in the process.
There are probably a dozen other helpful lessons for investors in Rubin’s book and I’d highly recommend anyone interested in investing pick up a copy.
Dan
The Robert Fairchild Series by Matthew McCleary (The Shipping Man, Viking Raid, Exit Strategy)
Over the holidays I was in the mood for a light but educational read. McCleery’s three novels hit the spot. The short novels tell the story of Robert Fairchild, a fictional hedge fund manager from New York City who stumbles into the opaque world of ocean shipping and is forced to learn quickly in a trial by fire.
The books are full of suspense which makes them quick and easy reads. Beyond entertainment they also provide an overview of the challenges facing shipowners and their financiers. Conceptually these books remind me of Jake Taylor’s novel The Rebel Allocator which is about a college student who learns to become a value investor.
Author Matthew McCleery is uniquely qualified to write these novels because he is the President of Marine Money, a trade journal for the industry. He is also the Managing Director of Blue Sea Capital where he advises shipowners and investors on ship financing and investment transactions.
Shipping is an interesting industry because it affects us all everyday, but is easily taken for granted. It operates with zero barriers to entry and almost perfect competition. It involves the largest machines man has ever built and far flung locales. It is viciously cyclical and earns low through-cycle returns on capital, but, for brief periods of time, can mint money.
Shipping reminds me of Nassim Taleb’s options trading strategy. It breaks even or loses a small amount of money most of the time but occasionally wins big. Likewise, shipping benefits from disorder and shipowner’s profits tend to correlate with black swans.
Below are some of my favorite quotes, organized by theme.
On commodity businesses:
In his mind, ocean shipping was no different from a global rugby scrum. After all, it involved billions of dollars worth of ships owned by thousands of independent shipowners who fought like dogs to buy the same vessels and fix the same cargoes.
There are only three ways to get an advantage over your competitors in this business.” “What are they?” Robert asked. “Pay less for your ships, pay less to operate them or pay less for your capital. In a commodity business like shipping, the only thing that really matters is price. Even the grain houses and oil companies will charter-out the ships they own to other people if they think they can charter-in ships cheaper from someone else.
The thing is, my friend, that there is an infinite amount of money available to the shipping industry. Governments have money, oil companies have money, grain houses have money, traders have money, shipowners have money, private equity funds have money, and capital markets have money. There is no shortage of money.
This is what I mean: there is more money than there are good deals,” Spyrolaki explained.
On volatility:
Over time, average charter rates were probably in line with logical returns on the capital required to own and operate a vessel, but in the meantime fortunes were made and lost in the whipsaw of the short-term market.
On cyclicality:
“That’s the funny thing about ships. They are actually more attractive to buy at 20x EBITDA, or even negative cash flow, than they are at 4x EBITDA,” Coco said. “What?” “Making the real money in shipping depends on how much you pay for the ship. When a ship is losing money, or breaking even, the valuation is likely to be attractive,” Coco said.
On human nature:
The valuation of ships is an art and not a science. The answer you get depends on to whom you ask the question. To whom you ask depends on what answer you would like to receive.”
There were two reasons for doing it in his PA, both of which were at the root of every decision ever made by any human being whether they knew it or not – fear and greed.
On pricing:
“Shipping is often best when the world is least stable.”
“The spot market does not care if you are big or small. And there are no economies of scale in the shipping business, not beyond a fleet of 10 ships. That is the perfect sized fleet. You can capture the rest of the efficiencies by being the big client of a third-party ship manager.”
“How about charters?” Robert asked. “Don’t they help?” “Not really,” he said and shook his head back and forth pathetically. “Much of the time they are the sucker’s bet. They are an illusion, a fantasy for people who don’t have the stomach for shipping risk.” “Why?” “Because charter rates and ship prices are linked and they end up at the same residual value. If the market goes up the charter keeps the upside and if the market goes down, they are likely to default or come back to you and restructure, at which point you have zero leverage because the market is weak.”
Matt Levine recently wrote about two examples of this in the real world:
“Venture Global LNG, an LNG producer in Louisiana that entered into long-term fixed-price contracts to sell its gas to customers like BP and Shell, and then — when LNG prices went up a lot — decided to instead sell its gas on the spot market to other buyers at much higher prices.
“Gunvor Group Ltd. and Eni SpA entered into long-term LNG supply contracts with Pakistan, obligating them to deliver gas to Pakistan at fixed prices over multi-year terms, and then started missing deliveries when the spot price of LNG shot up.”
Matt
Heroes: From Alexander the Great and Julius Caesar to Churchill and de Gaulle by Paul Johnson
I picked up Heros after David Senra mentioned it was his favorite Paul Johnson book.
Heroes is a collection of biographical essays. Each chapter covers heroes from a point in history. The book moves chronologically from the Homeric age to the 1980s, covering many of the obvious suspects: Alexander, Caesar, Washington, Wellington, Lincoln, Churchill, etc. There were a few surprises too: Joan of Arc, Wittgenstein, and Mae West, among others. The book’s style reminds me of Plutarch’s Parallel Lives, which I am a big fan of.
What makes someone a hero? Johnson identifies four characteristics of heroes:
I would distinguish four principal marks.
First, by absolute independence of mind, which springs from the ability to think everything through for yourself, and to treat whatever is the current consensus on any issue with skepticism.
Second, having made up your mind independently, to act—resolutely and consistently.
Third, to ignore or reject everything the media throws at you, provided you remain convinced you are doing right.
Finally, to act with personal courage at all times, regardless of the consequences to yourself.
All history teaches, and certainly all my personal experience confirms, that there is no substitute for courage. It is the noblest and best of all qualities, and the one indispensable element in heroism in all its different manifestations.
To do something great you must do something different (and be right). The same goes for generating above-average investment returns. It is no wonder that heroes, from Abraham Lincoln to Charlie Munger, had a predisposition to critically examine the consensus and the courage to act when their convictions differed from it.
For example, military doctrine in the late 1700’s was to have soldiers face the enemy, standing in tight formation and fully exposed, during a cannon bombardment.
This didn’t pass Wellington’s sniff test. He directed his men to lie down on the reverse slope of a slight hill during a bombardment, which sheltered them. This maneuver saved lives and boosted morale. It was lauded as a major innovation in infantry tactics. Wellington said, “When one is strongly intent on an object, common sense will usually direct me to the right means.”
One common thread among Johnson’s heroes was superior map reading abilities. Wellington wrote:
The ability to read a map is essential…. The secret of success in war is learning what lies on the other side of the hill.
Investors may not need to know what’s on the other side of a hill, but we do need to know how a balance sheet represents a business. How may investors correctly interpreted the risks at Lehman Brothers or Silicon Valley Bank after reading their 10-K? How many investors even read 10-Ks? Not many, but imagine a general refusing to read his map. The best investors know that the map is not the territory and yet use maps, like accounting, to get the most accurate view of reality as possible.
Many of Johnson’s heroes used their writing and words to control the narrative about them. De Gaulle and Churchill agreed that “in the end, words last longer than anything else.” There may, therefore, be a survivorship bias among history’s heroes.
Alexander arranged for writers to tell his story. Caesar wrote about his conquest of Gaul himself.
[Caesar] aimed to conquer posterity as well as the world he lived in, and he knew that to do this he must get in his own version of events in good time—and what better way to do it than to write it yourself?
Caesar’s simplicity was deliberate. He wrote not to show off or astonish but to get his point across. He said you should “avoid an unfamiliar word as a ship avoids a reef.”
Churchill took it even further.
After his electoral defeat Churchill buckled down to the task of his war memoirs straight away, and by the time he returned to power at the end of 1951, the bulk of the work had been done.
Reagan did not write his memoirs, but used his words to preemptively deflect and disarm criticism.
His advanced age, his laziness, his stupidity, his ignorance and his general unfitness for office were all turned by him deftly into jokes. He thus took the detonator out of the most telling criticism before it could be fired.
Indeed, he turned his weaknesses into virtues. Thus, on his age, he loved to explain how wage and price controls by government had never worked ever since they had first been tried under the Roman emperor Diocletian, adding: “I’m one of the few persons old enough to remember that.”
Buffett has similarly used self-deprecating humor, folksy wisdom, and simple writing to convey his ideas and deflect critics. His words will continue to live on and influence investors long after he is gone.
Buffett’s writing has done a great service to Berkshire’s investors because, in many cases, his writing gave shareholders the conviction to hold for decades and benefit from compounding. Few businesses or investment companies do this, but it is one of many reason’s Dan and I blog.
Matt
The Best Of The Rest
WSJ: Gas, With a Side of Pizza. Casey’s General Stores is a chain of midwestern gas stations that happens to also be the country’s fifth largest pizza purveyor by number of stores. The difference between c-stores and QSRs is increasingly narrowing.
Rare footage of Ben Graham’s Q&A at Columbia Business School in the 1950s. The students’ questions and concerns are remarkably similar to modern investors — taxes, inflationary policies, high valuations, etc. In retrospect, these were not the “right” questions to be asking about. They’re probably not the right ones today, either.
FT: The $100m oil trader Andy Hall finally sticks his oar in. An old article (2019) that covered the last 30 years in oil from 10,000 feet and details some of Andy Hall’s most profitable trades.
Bloomberg: The Peak in Gasoline Demand Turns Out to Be a Mirage. “Outside wealthy neighborhoods, the internal combustion engine still reigns supreme; in middle- and working-class areas, the energy transition remains a distant prospect.”
“The trend of higher-for-longer demand has three important lessons for understanding the energy transition.
First, the stylized forecasts showing sustained demand declines rarely survive the passage of time – not just years later, but often as soon as a few months after publication.
Second, announcements of peak demand generate lots of headlines, but when consumption surges past those peaks, the public rarely hears about it, providing a misleading picture of the pace of the transition.
Third, the shift away from fossil fuels will take longer than many had expected.”
Bloomberg: The Harsh Truth: We're Using More Oil Than Ever. This summer global oil demand quietly eclipsed its 2019 peak. “The IEA has called the recent surge in gasoline consumption a “swan song” – perhaps, but the fuel’s obituary has been written before.”
WSJ: China’s Campaign For More Babies Meets Resistance. “With the number of babies in free fall—fewer than 10 million were born in 2022, compared with around 16 million in 2012—China is headed toward a demographic collapse. China’s population, now around 1.4 billion, is likely to drop to just around half a billion by 2100, according to some projections.”
Do you have a “stranded” 401(k) from a past job that is neglected and unmanaged? Eagle Point offer separately managed accounts to retail investors, and 401(k) rollovers are often a good fit for our long-term approach. If you would like to invest with Eagle Point Capital or connect with us, please email info@eaglepointcap.com.
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Great list! I will be adding Heroes to my audiobook list. Thanks
Yes, Warren's folksy demeanor has disguised his monopolistic business tactics.