Reading Roundup: December 2024
This month we read:
Sam Walton: Made in America by Sam Walton
Ways and Means: Lincoln and His Cabinet and the Financing of the Civil War by Rodger Lowenstein
Lords of Finance: The Bankers Who Broke the World by Liaquat Ahamed
On the Edge: The Art of Risking Everything by Nate Silver
The Obstacle is the Way by Ryan Holiday
Sam Walton: Made in America by Sam Walton
We like to follow retail businesses and have previously and continue to own the stocks of a number of what we consider “specialty retailers”. I can’t think of a better person to learn about the retailing industry from than Sam Walton himself. Walton’s book provides a firsthand look into why Walmart was able to come out of nowhere and become the world’s leading retailer, enriching shareholders for decades along the way.
Walmart did not benefit from a first mover advantage in its big box retailing concept; Kmart had a similar strategy and had 250 stores to Walmart’s 19 in the early days. So how did they win? As always it’s less about one silver bullet and more about a lot of little things, but there were a few big ideas that helped propel Walmart to dominance.
First, Walton’s laser focus on ignored and overlooked markets was critical. In the early 1960’s no one believed a big box general store could make it in a small rural market; there simply wasn’t going to be enough demand. Walton quickly proved this wrong with his wild success selling everyday goods for rock bottom prices across Arkansas.
Still, he flew under the radar and remained focused on serving this niche for years before the big guys caught on, and by then it was too late as the benefits of scale were starting to take hold. Many other businesses who have focused on serving small town America have found similar success, and it’s always surprising how much business is out there to be had in every corner of America.
Perhaps even more importantly than the tactical decision to focus on small rural towns was Walton’s cultural decision about how to incentivize his team. Just as Buffett has done at Berkshire, Mark Leonard at Constellation, Bernie Marcus at Home Depot, and so many other exceptional managers in other businesses, Walton stilled an extreme culture of ownership at the store level. How did he get store managers and employees to act like owners? Simple; he made them owners.
Every time Walton brought on a store manager to run a new location he allocated a few percent of the equity (each store was it’s own entity in the early days) to the store manager. He also let them buy their way in to larger ownership positions each year. Later, Walton created a generous stock ownership program open to the hourly associates. These programs worked WONDERS for the stores. Managers and employees were discerning with spending, treated the customers well, and generally behaved as if they were operating with their own money; because they were.
Walton explained how taking care of his employees in ways like this was Walmart’s single biggest advantage:
“Many (competitors) started with more capital and visibility than we did, in larger cities with much greater opportunities. They were bright stars for a moment, and then they faded. I started thinking about what really brought them down, and why we kept going. It all boils down to not taking care of their customers, not minding their stores, not having folks in their stores with good attitudes, and that was because they never really even tried to take care of their own people. If you want the people in the stores to take care of the customers, you have to make sure you’re taking care of the people in the stores. That’s the most important single ingredient of Wal-Mart’s success.”
Walton unfortunately passed away shortly after writing his memoire, but it is an excellent looked inside one of the greatest retailers the world has ever seen.
Dan
Ways and Means: Lincoln and His Cabinet and the Financing of the Civil War by Rodger Lowenstein
I continued to dive deeper into Lincoln and the Civil War this month, following up Team of Rivals in October and Demon Of Unrest in November with Ways And Means in December. I like to start with a big picture view and then drill into more niche sub-topics.
This book is ostensibly about how Lincoln and his cabinet financed the civil war. In reality it focuses on treasury secretary Salmon P. Chase (the “Chase” in J.P. Morgan Chase) and has little about Lincoln. While a story about financing a war might sound dull, it is a fascinating read because of how much the US economy and government changed during the Civil War. The foundations of our current government and banking systems were laid during those four years.
For example, the Union implemented an income tax during the war to help pay for it. Direct taxation was a novel and largely untested idea at that time. Chase also built a federal banking system and a national bank that issued a fiat currency. The US had not had one since the days of Andrew Jackson. The currency issued was known as the greenback and is the currency we still use today. Last, Chase marketed interest-paying bonds directly to ordinary citizens. These were likely many middle class people’s first financial investments.
During the American Revolution Jefferson and Hamilton debated the merits of a loose confederacy of agricultural states versus a strong federal government that could implement an industrial policy. Lincoln and Chase’s actions created a strong federal government to organize the war effort, settling the debate for good. During the war Congress passed the Homestead Act, Pacific Railway Act, Land-Grant College Act, and created the Agriculture Department, all which had a profound impact on the nation’s trajectory after the war.
The south chose to stick to its “state’s rights” rallying cry and did not centralize as much power. They voluntarily withheld their cotton exports, the bedrock of their economy, assuming that idled factories in Great Britain and France would force those great powers to intervene on the South’s side. In fact the price of cotton shot up, incentivizing higher production elsewhere in places like Egypt. Deprived of their primary economic good, the south resorted to printing money which led to hyperinflation.
This book drove home the idea that necessity is the mother of invention. During normal times there is time to debate every detail of a policy which slows down the pace of change. During normal times, it often feels like nothing much happens. But during a crisis, like Covid or the Civil War, rapid and radical action must be taken. Even when the measures are supposed to be temporary, there rarely are and often leave a lasting impact.
Matt
Lords of Finance: The Bankers Who Broke the World by Liaquat Ahamed
There is so much to learn from businesses and markets in the early 1900s through WWII, and I love reading about people and institutions from this period. Lords of Finance profiles the central bankers of the 1910s - 1930s and how their actions impacted the world economy and ultimately significantly contributed to the Great Depression. It’s hard to pick just one or two threads to follow from the book given the breadth of the subject matter.
The main themes throughout the book relate to the gold standard, its limitations and inadequacies, the shifting global power balance between the UK, the U.S., France, and Germany as a result of World War I and the Depression, and the learnings of how central banks should and should not to respond to financial crises. Many of the themes have been repeated and will continue to be repeated in years to come.
There were two massive errors that central banks seemed to have learned the most from over the past 100 years. First, in 1927 amidst a very strong and starting to look speculative stock market, the U.S. Fed decided to cut interest rates. This flew in the face of logic given how buoyant capital markets were. Fed Chairman Benjamin Strong elected to lower rates as a way of helping prop up Sterling in the UK; he was good friends with the UK’s central banking chief and they were experiencing a run on the currency due to a strong dollar and weak Sterling. The results were disastrous:
“ in his wildest imagination he could not have foreseen the extent of the drunken ride that was to come…following the Fed cut in rates, the market immediately took off. By the end of the year, the Dow had risen of 20 percent…in January 1928 the Fed revealed that the volume of broker loans had risen to a record…(historians) argue that by artificially depressing interest rates in the United States to prop up the pound, the Fed helped fuel the stock bubble that subsequently led to the crash two years later.”
It is central bankers job to pull the punch bowl away when the party gets too out of control, and instead Strong added a whole lot more vodka to it, and ignited a speculative orgy that got out of control quickly. It’s clear subsequent Fed chiefs have taken note and tried to avoid this outcome (though not always with success).
The other interesting takeaway is almost a mirror image of the problem the Fed caused by making money too easy in the late 1920s. During the Depression, believing a balanced budget must be achieved no matter the outside conditions, many central banks in Europe cut employment benefits and raised interest rates into the teeth of falling price and high unemployment. Needless to say, this only made the crises far worse by exacerbating a deflationary spiral. It wasn’t until the U.S. finally took Lord Keynes’ advice and broke from the gold standard, devalued the currency, and spurred inflation that it become clear that stimulative action and deficit spending were sometimes necessary to resuscitate capitalist economies.
There is so much to learn reading about this crazy periods that I highly recommend everyone pick up this book.
Dan
On the Edge: The Art of Risking Everything by Nate Silver
Nate Silver of FiveThirtyEight fame divides people into one of two groups - "Riverians" who embrace risk and think probabilistically, and "Villagers" who prefer stability and conventional thinking. I thought the metaphor was a little tortured, but I get the distinction. If you are reading this, you’re probably from “the river”.
Riverians think probabilistically in uncertain situations and take calculated risks. They use the concept of expected value to decide when they have an edge and change their bet size accordingly.
The Village thinks in absolutes and is risk adverse. They gravitate towards payouts with low volatility. They may be seduced into a lottery type payout (like a NFL parlay or crypto scheme) that has negative expected value but risks a little to potentially make a lot.
Buffett, the mayor of The River, summed up the difference between the river and the village when he wrote in his 1990 letter, “Charlie and I always have preferred a lumpy 15% return to a smooth 12%.”
The book shows how an analytical, probabilistic, data-driven approach to thinking can be applied to various fields, including sports betting, poker, financial markets, predicting elections, and AI. Of course the sky is the limit - this stuff works everywhere - but Silvers sticks to the areas he knows best.
At times the book felt like an excuse for Silver, who is known for his election forecasts, to show that he has far broader interests. He plays poker at a high level, built a system to beat the Las Vegas basketball line, and interviewed SBF about his rise and fall. The connection between it all felt tenuous. There are some entertaining anecdotes in the book but if you already understand the concept of expected value you probably won’t learn a lot.
Matt
The Obstacle is the Way by Ryan Holiday
Ryan Holiday’s books are great to mix in as a way of breaking up my reading about business or history, and I always come away better off from spending time with his ideas. The Obstacle is the Way is probably my favorite book I’ve read so far on Stoicism. Holiday is one of the leading authorities on how to practically apply the Stoic methodologies that have served so many people well over the centuries.
The main idea of this book is that we should not live our lives looking for ways to avoid obstacles or impediments or taking the easy way. This is both a waste of time - because obstacles are going to come up so you might as well be ready - and a lot less rewarding. Instead, we should be focusing on turning obstacles into opportunities and seeking out problems that we enjoy solving.
Didn’t get the job you wanted? Great opportunity to sharpen your skills for the next one. The stock you bought went down 50%? What a great chance to improve your process to be more robust for the next investment. Your stuck in bed healing from knee surgery? It’s a gift to be able to sit quietly, think, read, and mentally prepare for what is ahead. Mindset is everything, and no one can take your mindset away from you; it’s the one thing that is purely within your control so don’t waste it.
While I’m not sure I’ve heard Buffett directly address the ideas of Stoicism, he is the ultimate Stoic. It’s hard to think of a great investor that isn’t stoic, considering the mental fortitude that is required to be a successful long term investor (i.e. plenty of things are going to go wrong, that’s part of the game). My favorite recent example happened when Buffett was talking about an investment that Berkshire lost money on, he described to shareholders last May that he came away from the experience “smarter and poorer”. What a great way to go through life.
For anyone interested in delving into the Stoic mindset further, outside of Holiday’s books I’d highly recommend Vitaliy Katsenelson’s book Soul in the Game. In addition to a superb investor, Vitaliy is also a practicing Stoic, and in his most recent book he dedicates a whole section to Stoicism. It’s well worth a read and is a great primer on Stoic practices.
Dan
The Best Of The Rest
Bloomberg: Rolex Hikes Watch Prices by as Much as 8% After Gold Surges
While the latest price increases may relate to the rise in gold, currency fluctuations have been a driver in the past. Rolex raised prices twice in the UK and Europe in 2022 as the Swiss franc soared against the British pound and the euro.
Dirt Cheap Stocks: Case Study - 3x Earnings, 20% of Net Cash, Repurchasing Stock
Bloomberg: The House Of Arnault
“You have people all over the world, in countries plugging into the global economy, making a lot of money, getting significantly richer and needing reassurances that they are now in a better position,” says Luca Solca, an analyst at Bernstein. “This is the deep-seated insecurity that luxury is trying to address.”
Jacobin: The Rise of the French Fry Cartel
Four firms control 97 percent of the $68 billion frozen potato market.
Howard Marks: On Bubble Watch.
There’s a strong relationship between starting valuations and subsequent annualized ten-year returns. Higher starting valuations consistently lead to lower returns, and vice versa. There are minor variations in the observations, but no serious exceptions.
Today’s p/e ratio is clearly well into the top decile of observations.
In that 27-year period, when people bought the S&P at p/e ratios in line with today’s multiple of 22, they always earned ten-year returns between plus 2% and minus 2%.
Ryan Holiday: This Habit is Making You Miserable
One of the most powerful things we can do as human beings in our hyperconnected, 24/7 digital media world is to turn our attention to things that last, to get out of the hellscape of noise and go to truth. It’s a transgressive act, I think, to pick up a book these days—better yet, an old book. If you wish to understand the present moment, you’ll gain more clarity by studying the past than you will from following the breathless news cycle. Put distance between you and the attention merchants. Read philosophy. Read history. Read biographies. Study psychology. Study the patterns of humanity.
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If only dollar general implemented Sam Walton's equity idea by driving intense ownership and aligning incentives between store managers and the company, they would be in a much greater position.