Reading Roundup: June 2022
This month we read:
How the World Really Works: The Science Behind How We Got Here and Where We're Going by Vaclav Smil
A Place Of My Own: The Architecture of Daydreams by Michael Polen
How Will You Measure Your Life by Clayton Christensen
Endure: How to Work Hard, Outlast, and Keep Hammering by Cameron Hanes
Men and Manners: Essays, Advice, and Considerations by David Coggins
Am I being Too Subtle? by Sam Zell
Trillion Dollar Triage: How Jay Powell and the Fed Battled a President and a Pandemic - and Prevented Economic Disaster by Nick Timiraos
The Psychology of Money by Morgan Housel
How the World Really Works: The Science Behind How We Got Here and Where We're Going by Vaclav Smil
Humanity has undergone three energy transitions and is amidst its fourth. The first was fire — burning biomass to release stored solar energy. Farming came second, converting solar energy into food. Farming had the knock-on effect of allowing for larger human and draft animal populations, which increased muscle power. The third transition was from biomass and muscle power to fossil fuels. Coal, oil, and natural gas fueled the industrial revolution and power the machines responsible for life as we know it. The third energy transition “has been the very essence of modernization.”
The fourth energy transition is ongoing and remains in its infancy. It is a transition from fossil fuels to renewable fuels. The premise is to rely on the sun’s current energy output rather than solar energy trapped millions of years ago in deposits of coal, oil, and natural gas.
Using history as a guide, “energy transitions are slow, painstaking, and hard to predict. Existing technologies have a lot of inertia.“ The first tractor appeared in the late 1800s but the number of horses on U.S. farms didn’t peak until 1915. Many GIs rode diesel tanks across Europe in WW2 only to return home and plow their field with horses. New energy sources usually take several decades to achieve widespread use. LNG, for example, took almost 100 years, and the shift from coal to crude oil required generations to accomplish.
The fourth energy transition now underway is unique in that it is shifting toward less dense sources of energy. All previous energy transitions were towards more dense energy sources.
Refined products like gasoline, aviation kerosene, diesel, and heavy oil have the highest energy density of all fuels. Their high energy to weight ratio make them ideal for transportation.
Turbofan engines powering jetliners burn fuel whose energy density is 46 megajoules per kilogram (that’s nearly 12,000 watt-hours per kilogram), converting chemical to thermal and kinetic energy—while today’s best Li-ion batteries supply less than 300 Wh/kg, more than a 40-fold difference.
Admittedly, electric motors are roughly twice as efficient energy converters as gas turbines, and hence the effective density gap is “only” about 20-fold.
But during the past 30 years the maximum energy density of batteries has roughly tripled, and even if we were to triple that again densities would still be well below 3,000 Wh/kg in 2050—falling far short of taking a wide-body plane from New York to Tokyo or from Paris to Singapore, something we have been doing daily for decades with kerosene-fueled Boeings and Airbuses
The lower energy density of renewable resources presents challenges prior energy transitions never faced. There’s a question of location and transmission — the places where the wind blows and the sun shines isn’t always where people live. There’s also a question of intermittency and storage — how do we keep the lights on when the wind doesn’t blow and the sun doesn’t shine? And there’s a question of energy density — what happens to food prices if we devote a significant portion of arable land to biofuels? These are (theoretically) solvable problems, but the solutions take time.
Smil, a self-proclaimed “European pessimist” concludes that “our civilization is so deeply reliant on fossil fuels that the next transition will take much longer than most people think.”
Techno-optimists continue to over promise and under deliver. Smil writes:
Forecasts for the worldwide electrification of road transport have almost uniformly overestimated the actual share: between 2014 and 2016 it was put as high as 8–11 percent by 2020, while the actual share was just 2.5 percent.
And by 2019, forecasts for electrics as a share of all vehicles on the road by the year 2030 differed by an order of magnitude, while the actual sales of internal combustion vehicles may outnumber those of the electrics for more than a decade.
I’d guess that Buffett agrees — he’s been buying oil companies (Occidental Petroleum and Chevron), investing in electric transmission lines, and buying pipelines.
- Matt
A Place Of My Own: The Architecture of Daydreams by Michael Polen
A Place Of My Own chronicles author Michael Polen’s journey of building a writing cabin in his backyard. He works with an architect and builder but reminds intimately involved in the projec’s details. Polen wanted a cabin in the woods, disconnected from the world, where he could, self-contained, think deeply, write, and day dream.
Daydreaming does not enjoy tremendous prestige in our culture, which tends to regard it as unproductive thought. Writers perhaps appreciate its importance better than most, since a fair amount of what they call work consists of little more than daydreaming edited. Yet anyone who reads for pleasure should prize it too, for what is reading a good book but a daydream at second hand? Unlike any other form of thought, daydreaming is its own reward.
Winston Churchill said, “We shape our buildings; thereafter they shape us.” Psychology has proven that our environment matters. It affects what we think about and how we think about it. This has come to the front and center of our culture as many continue to work from home. There is little separation anymore between work and play. We’re constantly trying to manage both at the same time, and failing to achieve any depth in either.
Polen took pleasure in physically building his cabin. A day of writing produces little tangible results; framing a wall provides immediate, tangible feedback. Charlie Munger once said that you have to find an outlet to occupy yourself to cope with the paint-drying nature of investing. He took up architecture and even built an 85 foot catamaran.
Like writing, investing is best done in quiet contemplation. At the end of a day of reading and thinking, there will be little tangible to show for it. And long-term investors might not find out of their thesis was correct for years. The worst thing an investor can do is resort to playing the markets for fun.
Investor’s don’t need grandiose hobbies like Polen or Munger. Anything physical and tangible whose output is immediately affected by effort will do. I enjoy running and think it checks all of these boxes. I know investors John Huber and Ted Weschler are also avid runners, so there may be something to it.
- Matt
How Will You Measure Your Life by Clayton Christensen
Clayton Christensen was a Harvard professor best known for his book The Innovator’s Dilemma where he uses business case studies to teach business management. In In How Will You Measure Your Life, Christensen uses business case studies to teach general life lessons.
Christensen argues that the millions of small, daily decisions about where we spend our time and attention ultimately shape who and what we become.
How you allocate your resources is where the rubber meets the road. Real strategy—in companies and in our lives—is created through hundreds of every day decisions about where we spend our resources. As you’re living your life from day to day, how do you make sure you’re heading in the right direction? Watch where your resources flow. If they’re not supporting the strategy you’ve decided upon, then you’re not implementing that strategy at all.
This reminds me of a quote attributed to Anton Chekov: “Any idiot can face a crisis – it’s day-to-day living that wears you out.”
What people state as their values and how they spend their time and attention aren’t always the same. We all know people who say they are “family focused” but spend all day and night at the office. Christensen cautions against this.
The relationships you have with family and close friends are going to be the most important sources of happiness in your life. But you have to be careful. When it seems like everything at home is going well, you will be lulled into believing that you can put your investments in these relationships on the back burner. That would be an enormous mistake. By the time serious problems arise in those relationships, it often is too late to repair them.
My favorite point Christensen makes is that it is easier to hold to your principals 100% of the time than it is to adhere 98%.
A voice in our head says, ‘Look, I know that as a general rule, most people shouldn’t do this. But in this particular extenuating circumstance, just this once, it’s okay.’ And the voice in our head seems to be right; the price of doing something wrong ‘just this once’ usually appears alluringly low. It suckers you in, and you don’t see where that path is ultimately headed or the full cost that the choice entails. Recent years have offered plenty of examples of people who were extremely well-respected by their colleagues and peers falling from grace because they made this mistake.
The managers at Enron never set out to perpetrate the largest fraud in U.S. history. Instead, the slid down a slippery slope one exception at a time (which I wrote about here). Making exceptions to your principals is a dangerous game that is best not played.
- Matt
Endure: How to Work Hard, Outlast, and Keep Hammering by Cameron Hanes
I’ve always admired the pursuit of mastery. My favorite biographies are always about someone who devotes their life to honing their craft. They inspire me to continue along my pursuit of mastery of investing - a journey with a direction, but no end.
Cameron Hanes pursues mastery of bow hunting. He’s goes so far as to run 240 mile ultramarathons merely as training for his bow hunts. The guy has guts.
Hanes is generally regarded as one of the world’s best bow hunters, if not the best. But that hasn’t slowed him down. He points out that he wasn’t born knowing how to shoot a bow. He learned everything he knows step by step, one at a time. His first run was just mile long. By slowly increasing (compounding!) his training, he was able to finish the Moab 240.
Of course, running ultra marathons and becoming a world leader in your field don’t happen by accident. Feats like these require focus. Hane’s thinks his success is as much about what he doesn’t do as what he does do. He doesn’t drink, doesn’t smoke, and, I’m guessing, doesn’t watch a lot of Netflix. Instead he’s out in his backyard, shooting his bow, getting his reps in.
Endure reminded me of Can't Hurt Me by David Goggins. They pair well and are sure to give you a little extra motivation to get after it.
- Matt
Men and Manners: Essays, Advice, and Considerations by David Coggins
Coggins is they type of writer I’ll read no matter the topic. His witty, effortless prose made this an easy airplane read.
We’re taught manners as children, but never told why they are what they are. Though some seem arbitrary, they’re an example of Chesterton’s Fence.
Chesterton’s Fence is the idea that “if you encounter a fence in the middle of nowhere, you should stop and first understand why it was put there before taking it down. There is probably a good reason the fence is there in the first place, and finding out the hard way might be really bad and irreversible” (h/t LessWrong).
Coggins traces the root of manners to respect. Manners are ”about showing fundamental decency to the people you come across every day: waiters, taxi drivers, flight attendants, strangers you meet only once… It’s easy to obsess over details, but it can be clarifying to pull back and ask one question above all: Do you try to make the lives of people around you easier?”
- Matt
Am I being Too Subtle? by Sam Zell
Sam Zell’s book Am I Being Too Subtle? tells the story of how the son of Jewish immigrants that came to America after fleeing the Holocaust grew up to earn the nickname “The Graver Dancer” by buying up office properties for pennies on the dollar during the real estate bust of the 1980s.
Although he had no formal investment training Zell is a classic deep value investor and has evolved over the decades to earn outstanding returns across asset classes - from various types of real estate to operating companies and into emerging markets. Zell’s flexibility is a testament to his ability of going to where he sees value; the opposite of those that suffer from “a man with a hammer” syndrome.
Although he has a very different personality, Zell also espouses many of the same traits as Buffett in the way he conducts his business. He hires great people to help run his businesses and gives them extreme autonomy to make important decisions. He has been given the opportunity to participate in attractive investments in large part because of his reputation of being fair and doing what he says he will do. Perhaps most importantly, like Buffett, business and investing is not work to him. In everything he does he has fun and never takes himself so seriously. It’s what has allowed him to persist for decades while so many others burn out.
- Dan
Trillion Dollar Triage by Nick Timiraos (part 2)
Matt wrote about Trillion Dollar Triage last month and I just finished the book, but it’s such an interesting book it’s worth multiple posts.
The most interesting aspect of the book to me is the under-the-hood view that readers get of the plumbing of the financial system. How the Federal Reserve impacts financial markets is a very abstract topic that most people don’t think about. That is the way the Fed would like it, as they only become front and center to the functioning of the economy and markets when things go haywire, which is exactly what happened in 2020.
There are broadly two kinds of bubbles that can cause stocks to go down sharply – equity bubbles and credit crises that lead to liquidity crises. The recent market decline has largely been led by stocks coming back to earth that were just absurdly valued in the first place. This is very normal and healthy and certainly is something that should happen. Crashes driven by credit and liquidity drying up are much more concerning. March of 2020 and the GFC of 2008/9 were examples of market crashes driven by credit markets.
Given the uncertainty about how the pandemic would impact countries and economies in early 2020, the only thing on everyone’s mind was to get as much cash as quickly as possible. That meant that foreign governments, who are huge holders of U.S. Treasuries, were attempting to sell those Treasuries as quickly as possible to exchange them for cash. Combine this dynamic with companies across the country all drawing down emergency lines of credit simultaneously and the credit markets nearly ceased to function.
Spreads on Treasuries and mortgage securities started to go haywire amidst the lack of liquidity in the system (everyone trying to sell with no one trying to buy). Because so many financial products are linked in some way to U.S. Treasuries, when that market ceases to function it has huge ripple effects across financial markets. Needless the say, the whole financial system was not functioning properly and was far closer to a major meltdown than most people realize for a few weeks in late March of 2020. The Fed had to step in to buy hundreds of billions of dollars’ worth of treasuries week after to week to stabilize the market, and they did.
The book is filled with many other examples of different levers that the Fed pulled to get the financial market back on track, and without those actions who knows how things would have unfolded. We are paying the price for much of it now in the form of higher inflation and interest rates, but it’s a tradeoff that was well worth it considering the potential alternatives. Read Trillion Dollar Triage in conjunction with Stress Test (firsthand account of how the Fed handled 2008) to really get an idea of how the Fed works during times of financial turmoil.
- Dan
The Psychology of Money by Morgan Housel
The Psychology of Money should be required reading for all investors. I actually think it should be required reading for all high school graduates for that matter. In the book Housel unpacks many of the psychological reasons as to why so many people are so bad at managing their money, fail to build wealth over the long-term, and struggle to successfully invest.
The book is very easy to read and broken into 20 short chapters, each containing a separate and succinct idea, much like Howard Marks’ original book, The Most Important Thing.
Read the book to get the details, but some of the main ideas Housel expands upon are:
In investing (and life) things are never as good as they seem or as bad as they seem. Give yourself (and others) some leeway when things aren’t going well and find some humility when they are going well.
Less ego, more wealth. Happiness is nothing more than the gap between expectations and reality. The less stuff you want to buy to impress others – buying more stuff won’t impress the people that you care about impressing anyways - the easier time you’ll have building real wealth. Also, Use money to gain control over your time, not accumulate more stuff.
Manage your money in a way that helps you sleep well at night. This shouldn’t need any further explaining, but it looks different to every individual.
You can be wrong half the time and still earn exceptional returns thanks to the power of compounding.
Think of holding investments through volatility as the fee for being rewarded with compounding. Most people are not willing to pay this fee when the bill comes due, and therefore do not get to enjoy the magic of compound interest.
Define the game you are playing and don’t be lured in by those playing a different game.
Housel uses the example of Cisco selling for $60/share 1999, a level that was so egregiously overvalued that the company has yet to return to that 22 years later. Housel says:
“Cisco stock rose 300% in 1999 to $60 per share…few actually thought it was worth that much; the day-traders were just having their fun. Economist Burton Malkiel once pointed out that Cisco’s implied growth rate at that valuation meant it would become larger than the entire U>S. economy within 20 years. But if you were a long-term investor in 1999, $60 was the only price available to buy. And many people were buying it at that price. So you may have looked around and said to yourself, “wow, maybe these other investors know something I don’t.” Maybe you went along with it. You even felt smart about it.
What you don’t realize is that the traders who were setting the marginal price of the stock were playing a different game than you were. Sixty dollars a share was a reasonable price for the traders, because they planned on selling the stock before the end of the day, when its price would probably be higher. But sixty dollars was a disaster in the making for you, because you planned on holding shares for the long run.
These two investors rarely even know that each other exist. But they’re on the same field, running toward each other. When their paths blindly collide, someone gets hurt”
The above example is eerily familiar to what was occurring in late 2021.
Respect the mess. There is no single right answer as to how to invest or handle money. Try to be sensible and come up with a strategy that works for you and that you can stick with.
Housel’s book is an excellent overview of psychological traps and some heuristics that help individual and professional investors alike cope with innate human flaws.
- Dan
Best of the Rest
Peter Lynch 1995 article on why everyone perpetually fears a market correction
Amazon on reversing pandemic era over expansion
Seth Klarman Interview with Harvard Business School
Sequoia Fund Investor Day 2022
Morgan Housel: Keep it Going
Panmure House interview with Howard Marks
Ben Thompson on Spotify, Netflix, and Aggregation
Mohnish Pabrai on the Richer Wiser Happier Podcast
If you would like to invest with Eagle Point Capital or connect with us, please email info@eaglepointcap.com. Thank you for reading!
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