Reading Roundup: May 2022
Limping On Water, Competition Demystified, Trillion Dollar Triage, The Revolution That Wasn't, Misbehaving, and The Lion Tracker's Guide To Life
Limping on Water: My 40-Year Adventure With One Of America's Outstanding Communications Companies by Phil Beuth
Capital Cities transformed from a fledgling broadcasting company that owned a few local stations in the 1950s to a media powerhouse that purchased ABC in 1986 (an acquisition that became known as “the minnow that swallowed the whale”). This stunning success all started when soon-to-be legendary CEO Tom Murphy joined the company as employee number one.
Under Murphy’s stewardship Cap Cities stock returned more than 1,000-for-1 from the 1950s to the 1990s. Murphy was also a longtime Berkshire Hathaway director and close friend of Warren Buffett. Tom Murphy passed a few days ago at the age of 96 after a distinguished career.
Buffett has publicly praised Murphy as one of the best corporate managers he’s ever encountered. He’s said:
Cap Cities will forever represent the gold standard for ethical corporate behavior accompanied by incredible financial performance. Tom Murphy and Dan Burke were the architects oft these two achievements.
Despite a top-notch career, surprisingly little is written about Murphy. Fortunately, Phil Beuth wrote a memoir in 2015 called Limping on Water that recounts his multi-decade career at Cap Cities. Beuth was the first employee that Murphy hired and he stayed with the company for his whole career, eventually managing Good Morning America, among many other prominent roles at Cap Cities/ABC.
Beuth’s book recounts the incredible culture Tom Murphy created and why it worked so well. Cap Cities was a decentralized meritocracy with aligned incentives and exceptional cost control. Murphy trusted his managers to run their operations the way that made the most sense for their local markets. He pushed every decision to the lowest appropriate level and gave business leaders substantial skin in the game through equity and options.
Tom Murphy was also an excellent capital allocator. While his righthand man and COO, Dan Burke, kept an unrelenting focus on minimizing costs Murphy was always hunting for the next acquisition.
Equally as important, Murphy was a man of unflappable integrity and was unwilling to sacrifice a shred of the companies reputation even if it meant better financial results.
The culture and discipline that Murphy and Burke cultivated created a powerhouse of a business that is worth studying for anyone interested in leadership, business, or investing. Beuth provides a rare ringside look at how it unfolded.
For more on Tom Murphy, see his 1995 interview with Charlie Rose.
— Dan
Competition Demystified: A Radically Simplified Approach to Business Strategy by Bruce Greenwald
Bruce Greenwald is a professor at Columbia business school and a renowned researcher and value investor. He’s written several books, all of which are worth a read.
In Competition Demystified Greenwald focuses less on the technical process of valuing businesses and more on how competition unfolds in different industries and how investors and managers can take advantage of the different competitive situations. The book is heavy on case studies, which I love, and debunks some common myths among investors and business people.
Greenwald provides a helpful framework for assessing whether or not a business has a competitive position and, if it does, how it might proceed to protect or grow that advantage. The graphic below is a basic framework on the options available to businesses with and without a competitive advantage.
Figure 18.1: Competition Demystified
A few helpful takeaways include:
A good sign of a competitive advantage is high and stable market share and high returns on capital over a 5-10 year or more period. Obviously this is not a perfect test but a good filter/starting point if you’re interested in studying great businesses.
Most businesses don’t have a durable competitive advantage because of industry structure. If your business does not possesses what Greenwald would consider a competitive advantage, which mostly center around barriers to entry, then the only way to deliver differentiated returns is to operate as efficiently as possible. You can argue whether or not a competitive advantage can arise from being the low cost producer (what Hamilton Helmer would call “process power”), but regardless the point holds that if barriers to entry don’t exist then a company must operate with ruthless efficiency.
Growth is often value destructive. Generally, when businesses expand into adjacent markets significant value for shareholders is only created if the company enjoyed a competitive advantage in its original market.
There are a plethora of useful case studies of good and bad outcomes at each stage of the “tree” pictured above. Like many books written by professors, Competition Demystified can be a bit academic and theoretical for my taste at times, but I still find the broad ideas very useful to my investment process. The book pairs well with 7 Powers, which we wrote about earlier this year.
— Dan
Trillion Dollar Triage: How Jay Powell and the Fed Battled a President and a Pandemic---and Prevented Economic Disaster by Nick Timiraos
After Warren Buffett recommended this book on Charlie Rose, I added it to my reading list. After Ted Weschler recommended it on a podcast, I moved it to the top.
Trillion Dollar Triage delivers a fast-paced, play-by-play narrative of how the Fed and Treasury poured trillions of dollars of stimulus into the American economy just in time to avert what could have easily become a second great depression.
The book offers a day-by-day look at the Zoom meetings, emails, and phone calls of the top Fed and Treasury officials. Though we all lived it just two years ago, this book reminded me of just how uncertain and precarious March 2020 felt. We knew shockingly little about the virus and it was uncertain when, if ever, we’d get a vaccine.
I was most interested to learn about the power dynamics between the Fed, Treasury, and White House. Trump put Powell under intense pressure to lower rates in 2019. While unusual, this wasn’t unprecedented. Powell held firm and protected the Fed’s independence, but past Fed chairs have relented. For instance, Chairman Burns succumbed to pressure from Nixon to keep rates low through the November 1972 election.
Today with inflation raging it is becoming fashionable to bash what the Fed and Treasury did in the 2020. But imagine the counterfactuals: what would the economy look like had the stimulus not arrived? Timiraos wrote:
It’s unreasonable to be mad at the fire department for getting the furniture wet when they saved your house from burning down, but it’s perfectly justified to blame authorities for failing to work on fire prevention during good times.
— Matt
The Revolution That Wasn't: GameStop, Reddit, and the Fleecing of Small Investors by Spenser Jakab
While Trillion Dollar Triage tells the story of how the Fed and Treasury saved the economy, The Revolution That Wasn’t details some of the unexpected consequences of their policies.
The book tells the story of the meme “stonk” mania that swept over markets in late 2020 and early 2021. I followed it closely at the time and wrote about it in a December 2020 post titled Financial Euphoria, noting that it had all the telltale signs of a speculative bubble.
GameStop rose from $11 in November 2020 to over $340 in January 2021. The stock subsequently crashed back to $40, but has stabilized since near $120.
This book reinforced a few lessons.
First, in the immortal words of John Maynard Keynes, “The market can remain irrational longer than you can remain solvent.” Short selling is difficult because a stock can only go to zero but can appreciate indefinitely. That risk/reward doesn’t excite me. The hedge funds shorting GameStop never imagined it could 30x in a few months because that would be irrational. However, as David Foster Wallace wrote in Infinite Jest, “Logical validity is not a guarantee of truth.” Illogical and irrational things happen all the time and investor’s should take care that their portfolios can withstand that.
Second, speculative excesses usual begin with a good idea, but take it too far. Keith Gill (aka u/DeepFuckingValue) had a real thesis behind his GameStop investment. But as the stock and his account value soared, investors began throwing money at the stock purely because everyone else was. FOMO is a terrible reason to invest.
Third, if you don’t know who the patsy at the poker table is, it’s you. Or, as Mark Twain wrote, “It’s not what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so.” The Redditors and RobinHooders were so confident that they were sticking it to “the man” they never considered that the man might be sticking it to them.
Their confidence blinded them to reality, and Citadel and Robinhood made billions off of them. The meme stock traders had no awareness of what they didn’t know, and therefore had more confidence than they should have. It was a clear example of the Dunning-Kruger effect at work.
— Matt
Misbehaving: The Making of Behavioral Economics by Richard Thaler
Behavioral economics has long been a fascination of mine. Word for word, it’s hard to beat Charlie Munger’s “Psychology Of Human Misjudgment” on the subject. And while I think Kahneman’s Thinking Fast And Slow is more practical, Misbehaving is still worth reading. Unlike Munger and Kahneman, Thaler explains how behavioral economics started and how it gained traction in the academic and real worlds.
Traditional economics assumes rational actors, but Thaler, and many others, have shown that this is inappropriate. We humans suffer from cognitive biases, meaning we are prone to making illogical choices.
For example, we suffer more from a $100 loss than we feel pleasure from a $100 gain. Or the Endowment Effect — we value things we already possess more highly than we’d pay for them if we didn’t already own them.
Kahneman once said that knowing you are biased does not absolve you of the biases. The best that we can do is to build systems to circumvent our biases. I think we can take it a step further and use our inherent and inevitable biases to our advantage.
For example, the endowment bias means we are likely to hold stocks a little too long. We’ll continue holding stocks at prices where we wouldn’t buy them. If that’s the case, then it’s best to own businesses that have time on their side — ones that are generating lots of cash and with ample opportunities to reinvest at high rates of return. The longer you hold these types of stocks, the better. Their returns are less dependent on changes in their P/E multiple (which they can’t control) and more dependent on their business fundamentals (which they can control).
— Matt
The Lion Tracker’s Guide To Life by Boyd Varty
I first discovered Boyd Varty on Patrick O’Shaughnessy’s Invest Like The Best podcast in 2017. Varty told gripping stories laced with worldly wisdom about growing up in the South African bush tracking lions. Varty went back on the Invest Like The Best in 2018 and more recently did an interview with Tim Ferris. All are worth a listen. Varty is a great storyteller, so I recommend the audiobook, which Varty reads in a concise 3 hours.
In The Lion Tracker’s Guide To Life Varty uses tracking, one of the most ancient human arts, as a metaphor for getting what you want out of life. Varty’s motto is “I don’t know where I’m going but I know exactly how to get there.” He follows the track one clue at a time. He doesn’t need to know where the track is going, only his overarching goal (find a lion) and where the next track is.
Investors likewise must focus on process over outcome. Investors don’t need to predict exactly what a company will look like in ten years. Not even Warren Buffett could have have predicted Berkshire’s current makeup. Instead, investors need to focus on their businesses’ fundamentals. Are they generating cash? Is their competitive position improving? Are they allocating capital rationally? Keeping these “tracks” in sight will ultimately lead to a desirable outcome.
— Matt
The Best Of The Rest
David Foster Wallace — This Is Water. Perhaps the best commencement speech of all time, it is worth reviewing each spring during graduation season.
Charlie Munger — How To Guarantee A Life Of Misery. Avoiding misery is a more reliable path to happiness that the direct route. Munger inverts “how do I live a happy life?” by asking “how do I live a miserable life?”
John Huber - Mental Tension and the Value of Falling Stock Prices. “Rising prices are counterproductive if we are planning to be net buyers of stocks.”
Ted Weschler — Lunch With Warren Buffett, Working For Berkshire Hathaway, and The Future Of Investments. “I always want to be able to look at myself in the mirror and say that I’m reading enough weird stuff that nobody else is reading the same stuff that I am. If you’re just reading the New York Times and the Wall Street Journal, there’s no way you’re going to beat other people. You’re just reading the same thing.”
Ben Thompson — Cable’s Last Laugh. “For cable companies, power comes from a wire; it would certainly be ironic if the cord-cutting trumpeted by tech resulted in cable having even more leverage over customers and their wallets than the pre-Internet era.”
Matt Levine — Money Stuff, May 13, 2022. “Safe assets are much riskier than risky ones. This is I think the deep lesson of the 2008 financial crisis, and crypto loves re-learning the lessons of traditional finance. Systemic risks live in safe assets.”
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