Reading Roundup: June 2024
This month we read:
The General Theory of Employment, Interest, and Money by John Maynard Key
The Inner Citadel: The Meditations of Marcus Aurelius by Pierre Hadot
The General Theory of Employment, Interest, and Money by John Maynard Key
Buffett has often referenced the General Theory as one of the three major influences on his investing philosophy – with Ben Graham’s books being the faraway biggest two influences. John Maynard Keynes is the father of Keynesian economics, and this book, written in 1936, is his seminal work laying out what were radical thoughts at the time.
Throughout the book Keynes discusses a myriad of economic and investing-related concepts, much of which is rather academic but nonetheless instructive. Keynes argues that inadequate demand across the economy leads to prolonged periods of adverse economic outcomes such as stubbornly high unemployment and an economy left completely to its own devices will not automatically fix itself. This is unsurprising given the country was still coming out of the Great Depression at the time. He urges policymakers to ratchet up spending and support for the economy during recessions and subsequently pull back when things rebound; laying the groundwork for how the Fed has responded to crises in recent years (though they often seem to forget the part about backing off the gas when things get better).
My favorite parts of the book were, unsurprisingly, the sections where Keynes discusses his thoughts towards the investment world. He actually turned out to be an excellent long-term investor after he, ironically, abandoned trying to invest based on macroeconomic indicators. One of his ideas that still very much resonates is the fact that most investors, professional or otherwise, do not invest “for keeps” but rather rent stocks that they hope will go up in price in the near term based on market psychology. This is not a winning strategy over the long run.
“It happens, however, that the energies and skill of the professional investor and speculator are mainly occupied otherwise. For most of these persons are, in fact, largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public. They are concerned, not with what an investment is really worth to a man who buys it “for keeps”, but with what the market will value it at, under the influence of mass psychology, three months or a year hence.”
This idea relates to his thoughts that the investor often is working in several derivatives of reality. Rather than assessing what a business or stock is worth:
“We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees."
Finally, there are several relevant chapters regarding the interactive and counterintuitive effects of monetary policy that are particularly relevant today. Keynes explains that up until the point of full employment, employment will rise with the increase in money supply (or QE basically), then, once full employment is reached, prices start to rise and you get inflation. This is all very theoretical, which Keynes realizes, but it’s also not entirely wrong and some of the Fed members would be well served by revisiting his thoughts from almost a century ago as they recently played out in real time (we had full employment and were still printing money and – voila – we got inflation!).
Anyone looking to understand how fiscal and monetary policy has been shaped over the last century should look no further than The General Theory.
Dan
Socrates: A Man for Our Times by Paul Johnson
I previously read and enjoyed Paul Johnson’s short, readable biographies of Napoleon and his compendium titled Heroes: From Alexander the Great and Julius Caesar to Churchill and de Gaulle. This one was no different, coming in at a svelte 226 pages.
Socrates did not write anything down, so what we know about him is second hand. Most is from Plato and Xenophon. And both sources muddy our view of Socrates with their own views and opinions.
Socrates lived at the apogee of ancient Athens. His philosophy is notable because it is not academic, it is lived. He spent his days talking and questioning everyday Athenians.
To Socrates, knowledge was the basis of virtue. Virtue was the basis for a happy life. Knowledge was acquired through conversation and questioning. Every assumption and angle was to be examined. Some Athenians did not appreciate this.
Socrates believed that all virtues were interrelated and ultimately inseparable. He believed that “It better for the empire to allow ourselves to suffer wrong than to destroy, however justly, those whom we ought not to destroy.” This contradicted the prevailing culture of revenge — “An eye for an eye” — common in the ancient (and, let’s face it, modern) world. Socrate really believed it because he died practicing it.
After several decades of the Peloponnesian War, the open and tolerant Athenian culture began to erode. The economy crashed, many young men died, and plague ravaged the city. Socrates was accused of disrespecting the city's traditional gods and corrupting the young.
It wasn’t unusual for the leading men of Athens to find themselves in court at one time or another. Socrates wasn’t unique. What was unique is that he steadfastly refused to admit guilt in any way, compromise with his accusers, or agree to exile. He was given many outs, and took none of them. Socrates believed that admitting guilt in any way would compromise his virtue. He wanted to practice what he preached. He was condemned to death and could be considered the first martyr for freedom of speech.
Socrates used irony liberally. It’s what we’d call sarcasm today — to mean something different than what you literally say. This was a new concept in Greece and was not widely appreciated. His use of irony at his trial cemented his guilty verdict.
Socrate’s is considered the father of western thought. His life and death showed that philosophy could be lived, not merely discussed. Cicero said:
He was the first to call philosophy down from the sky and establish her in the towns, and bring her into homes, and force her to investigate the life of men and women, ethical conduct, good and evil.
At his trial Socrates said, “The unexamined life is not worth living.” Investors should heed Socrates advice to examine everything. Asking “why” five times usually gets you closer to truth than other market participations. All you need is tenacity to stick with it. At worst, asking '“why” will reveal your own ignorance and help define your circle of competence.
Matt
Becoming Trader joe by Joe Coulombe
I always enjoy reading about the founding story of successful businesses, particularly ones that are relevant to our investment style. Trader Joes has been an outstanding business for many decades and Becoming Trader Joe is the story of how it grew from a few convenience stores into the cult favorite powerhouse it is today.
Founder Joe Coulombe takes readers through the tactics he used to ward off competition from larger grocers and it’s an interesting read for anyone who studies specialty retailers. Trader Joes did a great job of building a niche that consumers loved – in Trader Joes’ case it revolved around its extensive offering of great wine at a great value – and leaning into that niche.
Throughout the book there are little insights into how Coulombe thought differently than his competitors, and one of my favorites was his attitude towards margins. He explained:
“This is the question other retailers most often ask. Usually they ask, “What percentage margin did you aim for?” Which always launches me into my tirade about how you pay your bills with dollars, not percents.”
Rather than targeting an arbitrary margin level, Trader Joes sought to maximize profit dollars, because that’s ultimately what they took home to the bank. They considered how many dollars they made on each sale, not a target margin that was uniform. For a $20 bottle of champagne they’d be fine making 13 percent, or $2.60 profit. For a $2.00 item, they wanted a much greater percentage and they got rid of anything that sold for less than a dollar. At the time, Trader Joes’ competitors were all operating under the same school of thought – you come up with a target margin on a top-down basis and then fit it to each individual product (regardless of if it made sense). TJs took a bottom-up approach rather than a top-down, and it worked much better. This isn’t much different to my views about top-down (macro) vs. bottom-up (micro) investing.
This is one small example of Coulombe being able to think a little differently and just do what made sense, rather than what everyone else was doing. There are interesting nuggets like this throughout the book.
Dan
The Inner Citadel: The Meditations of Marcus Aurelius by Pierre Hadot
Meditations by Marcus Aurelius is one of the books I re-read most often. The Inner Citadel provides context to Meditations. It is an extended commentary on it, and should only be read by hardcore fans of Meditations.
Hadot explorers how Marcus became a philosopher. In the ancient world to be a philosopher was to live by a philosophy, not necessarily to found a school or form abstract arguments. It was more practical than theoretical. In The Republic Plato pines for a Philosophy King. Marcus Aurelius is as close as the world has ever gotten.
One of the lines in Meditations that always intrigued me was when Marcus thanks Diognetus for encouraging him to choose the Greek lifestyle — "To choose the Greek lifestyle - the camp-bed and the cloak." Hadot explains:
It was Diognetus, said Marcus, who gave him his love for philosophy and inspired in him “the desire to sleep on a cot and a simple animal-skin, and for things of this sort which belong to the 'Hellenic' way of life.”
Simply foregoing luxuries does not make you a philosopher. “Philosophy does not consist in sleeping on the ground, nor in writing dialogues, but in rectifying one’s character. It resides neither in sophistry, bookish dissertations, nor pretentious declamations, nor in ostentatiousness, but rather in simplicity.”
Meditations is filled with notes Marcus made to himself in order to rectify his character. For example:
To study texts with precision, without being content just to skim over them in a general, approximate way; and not to give my assent too quickly to smooth talkers.
“It is not things that trouble us,” as Epictetus said, “but our judgment about things,”
“For us, nature’s final accomplishment is contemplation, becoming aware, and a way of living in harmony with nature.”
In these quotes we see a line of thought from the ancient stoics back to Socrates pronouncement that “the unexamined life is not worth living.”
Over the course of his life, Marcus comes to the conclusion that actions, not words, and the basis of ethics. That philosophy should be lived, not preached, and that behavior towards people is the most important of all.
These ideas were not unique to Marcus, but had lasting effects on Christianity and our modern world. I find the most practical of them to separate judgements from facts. Shakespeare put it elegantly in Hamlet when he wrote, “There is nothing either good or bad, but thinking makes it so.” This is an important lesson to investors who must see the world clearly, without getting distracted by narrative or dogma.
Matt
Devil Take the Hindmost by Edward Chancellor
Devil Take the Hindmost is one of Howard Marks’ favorite books and after reading it it’s not hard to see why. The book is basically a summary of every speculative bubble from the 1600s through the tech bubble of the early 2000s.
From the South Sea Bubble to the Tulip Mania hundreds of years ago to the Japanese “Bubble Economy” in the 1980s, the most striking takeaway to me is just how little human behavior changes over time. As Chancellor explains better than I can:
“It is often said that speculation never changes because human nature remains the same. “Avarice, or desire of gain, is a universal passion which operates at all times, in all places, and upon all persons,” wrote David Hume in the eighteenth century. To this we might add that the fear of loss, emulation of one’s neighbor, the credulity of the crowd, and the psychology of gambling are equally universal. The early stock markets were moved by homes and fears as much as their later counterparts. These emotions are unleashed during moments of speculative euphoria. They follow the path of least resistance, moulding each mania, regardless of its historical context, into a common form. This explains why all great speculative events seem to repeat themselves and why the experience of the 1690s seems so familiar.”
Despite countless chances for humans to learn vicariously from the folly of history, we can’t seem to help ourselves the next time a speculative frenzy begins to unfurl. Anyone that was investing during 2021 (and to some extent, certain parts of the financial markets today) will find a striking similarity between the pump and dump schemes of the South Sea Bubble and the SPAC mania or meme stock bubbles of recent.
If there has been one similarity between all of these periods, I think it is best summarized by mans inability, as a group, to exercise patience in getting rich. Rushing to cash in on the latest craze is, and always has been, a recipe for disaster. It’s a lesson that is re-learned by investors roughly every few decades and is why Buffett famously quipped “The stock market is a device for transferring money from the impatient to the patient.” This was true in the 1600s and it remains no less true today.
Dan
Brent Underwood used to be author Ryan Holiday’s research assistant in Austin, Texas. He loved his job and clearly learned a lot about history and writing, but aspired to more. He wanted to make a physical mark on the world. During the depths of the pandemic, Underwood bought an entire ghost town called Cerro Gordo. It is perched in the mountains above Death Valley and below Mount Whitney. It was once one of the most prolific silver mines in the US.
Underwood moves there to restore what he can and create a tourist attraction. The book tells the story of his struggles and the lessons learned along the way. I read this on Ryan Holiday’s recommendation and interest in the topic. While I found it interesting enough to finish, I wouldn’t necessarily recommend it. It lacks a definitive plot line, and the town’s last chapter is far from finished.
One of the book’s themes is the difference between talk and action. Talk is cheap and action is expensive. When Underwood arrived in town, he had to prove to the locals that he was really going to pour his own blood, sweat, and tears into the town. That he wasn’t some rich kid from the coasts looking for a sandbox to play in for a summer.
When a fire ravages the town and burns the original hotel to the ground, Underwood resolves to rebuild it. But it wasn’t obvious that he’d be able to get enough concrete up the steep, decaying dirt roads to do it. He had to team up with some locals and pull in favors from his network to pull off the impossible, and it worked.
He writes:
The more time you spend around people who get things done, the more it rubs off on you. High-agency is contagious. So is the belief that things are figure-out-able. Figuring out how to get 240,000 pounds of dry concrete, 100,000 pounds of water, and the machinery to mix it all up to Cerro Gordo and into the ground was impossible. Until it wasn’t. Heavy D and John Simpson assured me so.
There’s a lot of truth to this. Big dreams are common, but execution is rare. If you want to execute, you need to surround yourself with other people who are executing. The momentum is contagious. A good culture is the biggest asset a company can have, but getting a read on a culture can be hard because everyone claims that theirs is great.
The one thing fools all have in common, Seneca once said, was that they were always getting ready to start. In a sense, this is the question that life asks us all: When are you going to get serious? When are you going to get to work? Until the answer is “now,” you are a poser.
Sometimes, dreams don’t have to be rational. Charlie Munger says humans are rationalizing, not rational. And that’s certainly true. Underwood writes that “J. P. Morgan once said every man has two reasons for doing anything: a good reason and the real reason.” Irrational dreams often make the best stories. Going to the moon, the top of Mount Everest, or the South Pole are irrational. But those stories are often the most human and most captivating.
They remind us that, “Tempus fugit, memento vivere. Time flies, remember to live.”
Matt
The Best of the Rest
Blue Cross of Michigan to Drop Coverage of GLP-1 drugs: Blue Cross Blue Shield of Michigan will drop coverage GLP-1 obesity drugs in fully insured large group commercial plans starting in January citing consideration of their “efficacy, safety and access, and cost,”
WSJ: The Crazy Economics of the World’s Most Expensive Handbag: “You could double your money in five minutes by buying a Birkin handbag at your local Hermès boutique and then flipping it. But getting your hands on the world’s most sought after purse is a lot more complicated than it sounds.”
Barron’s: After 40 Years, a Tech Columnist Says Farewell. But First, One More Thing. “Most of the time, the next great thing just isn’t that great, although it always makes for fantastic copy…. Remember this, from the physicist Richard Feynman: ‘For a successful technology, reality must take precedence over public relations.’”
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Great piece!
I admire the volume of reading EPC constantly does every month.
On average how many hours do you try and read everyday? and what type of books have you noticed has the biggest carryover to investing? finance books or philosophy books?