Reading Roundup: May 2024
This month we read:
The Price of Greatness: Alexander Hamilton, James Madison, and the Creation of American Oligarchy by Jay Cost
Stillness is the Key by Ryan Holiday
Useful Not True by Derek Sivers
Going Infinite: The Rise and Fall of a New Tycoon by Michael Lewis
The Price of Greatness: Alexander Hamilton, James Madison, and the Creation of American Oligarchy by Jay Cost
Last month I read Radical Hamilton which explored how Alexander Hamilton debated America’s economic and industrial policies with James Madison and Thomas Jefferson. Hamilton, a Federalist, prioritized national security and defense, and wanted a strong federal government, central bank, and tariffs to finance and incentivize American industry. Industry would make America less dependent on foreign trading partners and give it the means of defending itself. Sound familiar? Madison and Jefferson, Republicans, wanted a small Federal government, strong states, and the country to remain decentralized and agrarian.
Radical Hamilton referenced The Price of Greatness, which explains Hamilton and Madison’s contrasting views on the division of wealth in America. Hamilton preferred strong economic growth, even if that meant giving preferential financial deals to a subset of the population which could finance the government on favorable terms. Madison preferred not to compromise his republican (“small government”) ideals, feeling that no growth was worth the cost of an oligarchy and corruption.
Both men had valid points, which is why wealth inequality continues to be a contentious topic in America today. There is a paradox at the heart of the American system, which is the tension between the fact that economic growth remains the best way to raise the standard of living for everyone. However, the fastest ways of growing will cause a small subset of the population to become significantly richer, and perhaps more influential, than the common man.
Cost chronicles many times the American government did not govern “by the people, for the people.” Hamilton and Madison saw this as corruption, and wanted to avoid it. Both eventually came to understand that some corruption (e.g. special interest groups) were inevitable.
Hamilton’s view was influenced by the British system, which was the most successful to that point. The British used the House Of Lords (the aristocracy) to check the power of the House Of Commons (the people). Hamilton similarly wanted an American oligarchy which could check the power of the legislative branch. Hamilton believed that wealthy Americans would finance the investment necessary to industrialize the nascent American economy. He was naive to think that wealthy Americans would behave like noble aristocrats looking out for the country’s long-term good rather than their current net worth.
“Over the course of his tenure at the Treasury Department, [Hamilton] would exhibit a shocking naïveté regarding the greed and small-mindedness of the speculative class...They were not the natural aristocrats he assumed them to be. Many were just crooks who abused his misplaced trust.”
Madison believed in a small Federal government. He interpreted the Constitution to push most power to state and local governments. Madison believed, not incorrectly, that anytime the Federal government got involved, it necessarily picked favorites and created inequalities. While Hamilton was quick to accept these inequalities as the cost of doing business, Madison was not.
A modern example might be the CHIPS Act. Should the Federal government pick sides and enrich certain companies/shareholders, like Intel, with sweetheart deals in order to rapidly build semiconductor fabs in the US? Hamilton would say yes, Madison no.
Another example might be the “Fed put” — the idea that speculators can make money because the government will bail them out, directly or indirectly, if their best go awry. This enriches people with financial assets. Do the Fed’s policies help the country enough to justify the wealth inequality they create?
Things came to a head during the War of 1812, when Madison was president. Hamilton died in a duel in 1804 and the central bank he championed lost its charter in 1811. Under Jefferson and Madison, the country’s army and navy were significantly scaled back.
Madison felt that Britain's economic war on America deserved retaliation, and he intended to capture Canada to use as a bargaining chip. Madison thought Britain was weak, having been fighting Napoleon for years. This proved not to be the case, as the British eventually burned Washington DC to ground.
Madison suddenly saw Hamilton’s point about how useful a strong federal government, industrial base, and central bank capable of financing large government expenditures could be. Without a strong central bank, there was no way to quickly raise financing to strengthen the army and navy. Britain’s industrial might allowed them to fight Napoleon and the US at the same time.
Madison eventually chartered a second central bank and enacted protective tariffs to nurture domestic industry. He did it in a more egalitarian manner than Hamilton to spread the burdens and benefits out. Still, the damage was done. Shifting coalitions of special interests groups came to dominate and steer America for years to come.
American policies remain somewhere in between both men today, though likely closer to Hamilton than Madison. There will always be tension between them, and the country will swing back and forth as well try to zero in on the elusive golden mean.
Matt
Stillness is the Key by Ryan Holiday
Ryan Holiday is a leading proponent of implementing the Stoic philosophy into our modern life. It’s hard to argue with him, and that goes doubly for any serious investor.
The Stoic mindset is nothing more than developing an inner peace and calmness, traits that are helpful in virtually every aspect of life. In Stillness is the Key Holiday focuses on the benefits of slowing down and developing this inner calm.
It may sound simple, but part of developing an inner peace is developing the (shockingly rare) ability to physically be still. Holiday opens the book by introducing this concept with one of my favorite quotes (from Blaise Pascal in 1654): “All of humanity’s problems stem from a man’s inability to sit quietly in a room alone.”
I’d argue many of the problems investors experience result from the same dilemma; an inability to metaphorically sit quietly in a room. Hyperactivity in the form of over-trading, always feeling like they need to be “doing” something (buying new stocks) and an unending nervousness about what the next day, month, or quarter will bring in the stock market seriously hampers investors ability to harness the long-term power of the stock market.
Another great story from the book is Napoleon’s attitude towards opening mail. Knowing that most news and correspondence sent his way was driven by a false sense of urgency, he would wait three weeks before opening letters. Napoleon mused at how many seemingly urgent letters just resolved themselves with no involvement from him, long before he ever opened the letter and gave the “pressing” issue so much as a thought.
Once again, investors can directly learn from this. Sometimes I’ll go back just a month or two and read Barron’s or the WSJ and chuckle at how irrelevant articles are even weeks later. And they all seem like a big deal during real time!
These are just two of countless helpful insights offered up in this book. I’d recommend everyone give Holiday’s books a read.
Dan
The Autobiography of Benjamin Franklin
Munger was not shy about declaring Benjamin Franklin one of his main heroes, and it’s not hard to see why. Much like Charlie Munger, Benjamin Franklin was the definition of a lifelong learning machine.
His autobiography is a piecemeal collection of his journals and letters written to friends and family members throughout the latter part of his life. They offer a fascinating insight into his life and habits.
Ben Franklin certainly grasped the power of compounding. Instead of aiming for quantum leaps in improvement in any area of his life, he aimed to make small improvements, consistently, over a very extended period of time. This is essentially our approach to investing. He explains in the book:
“human felicity is produc’d not so much by great pieces of good fortune that seldom happen, as by little advantages that occur every day.”
The rest of the book is really expanding on that one sentence and how he applied certain principles to achieve consistent improvement in his life. His official checklist of qualities he aspired to master, or his “system of self improvement”, as he refers to it was as follows:
Temperance
Silence
Order
Resolution
Frugality
Industry
Sincerity
Justice
Moderation
Cleanliness
Tranquility
Chastity
Humility
He spends time expanding on each of these areas, and where he succeeded and failed to live up to his own asperations, throughout the book. There is no rule that role models and mentors need to be alive, and most of us would do well to mimic many aspects of Benjamin Franklin’s approach to life.
Dan
Useful Not True by Derek Sivers
Derek Sivers is one of my favorite authors. I not only love his content, but also his style. He uses simple, everyday words to write short, impactful chapters. You can read most of his books in one sitting. Sivers offered his email list an early look at his latest, yet-to-be-released book Useful Not True, and I jumped at the opportunity.
The core idea in this book is that there are very few facts, and possibly none. Sivers defines a fact as an absolute, unchanging truth. Most of what we think of as facts are actually beliefs. These beliefs may not be true, but they’re still useful. While we can’t choose the facts, we can actively choose our perspective and shape our beliefs.
The ancient Greeks wondered how the sun rose and set. They couldn’t figure it out, so they invented the belief (which they believed as fact) that the god Apollo pulled the sun up every morning with his chariot. It was a useful, but not true, belief.
In the 1500s Galileo discovered that the Earth orbited around the sun. This heretical idea earned him a lifetime of house arrest, because it contradicted the Pope’s beliefs.
In the 1700s Sir Isaac Newton refined Galileo’s theory by discovering gravity and inventing calculus. Newtonian physics was considered an ironclad truth, but really it was just a belief. Einstein came along in the 1900s and discovered quantum mechanics. Einstein showed that Newtonian mechanics only work in specific circumstances. Undoubtedly many of the scientific “facts” we know today will be refined by future scientists towards, but never reaching, the truth.
Yuval Noah Harri calls Homo Sapiens “the storytelling animal” in Sapiens: A Brief History of Humankind. Humans are the only animals that can make up and believe stories. Money, for instance, is a story we’re all taught and believe in. Money is inherently worthless, but we all share the common belief that it is valuable. This is a useful belief, even if it is not literally true, because it allows us to transact and trade efficiently.
Another example – many people believe that “everything happens for a reason.” It's a useful but (probably) false belief. Or consider the adage that “there are no atheists in foxholes.” We all adopt beliefs to suit our situation, whether we admit it or not. As Charlie Munger said, humans are rationalizing, not rational.
Viktor Frankl wrote in Man’s Search For Meaning, “In that space is our power to choose our response. In our response lies our growth and our freedom.” Frankl was a holocaust survivor, and wrote about how he reframed his perspective on the holocaust while inside a camp to maintain his will to live. If he can do it, surely we in much less dire circumstances can too. As Shakespeare wrote in Hamlet: "There is nothing either good or bad, but thinking makes it so.”
Sivers writes “Beliefs are tools. Use them for the desired effect… Beliefs cause emotions and emotions cause action. Choose a belief for the action it will cause.” We can reframe a situation or shift our perspective. Feeling down about the grind at work? You can chose to dwell on the bloated bureaucracy your spreadsheet is feeding, or you can think of how this job allows you to put a roof over your head and feed your kids.
Investors need to search for truth and facts in a sea of opinions and beliefs. Buffett was never dogmatic about his definition of value. He started buying net-nets but eventually bought “quality” stocks like Coca-Cola. His beliefs changed to suit his circumstances when net-nets dried up.
When Buffett bought Apple, the company was considered a consumer electronics company. Those have notoriously short shelf lives. This turned out to be a belief, not a fact. Buffett didn’t let the market’s belief influence him. He saw that Apple had a powerful brand and sticky customers and was therefore very cheap.
The lesson? Do the work for yourself and come to your own conclusions. Don’t get influenced by the dominant narrative, because it may be a belief, not a fact. Don’t become dogmatic about your beliefs. Allow them to change to suit your present circumstances. Active shape your beliefs and perspective to enrich your life.
Matt
Going Infinite: The Rise and Fall of a New Tycoon by Michael Lewis
A lot of ink has been spilled about the FTX bankruptcy and fraud perpetrated by founder Sam Bankman-Fried, so I’ll be brief here. Still, I couldn’t help read Michael Lewis’ first hand account of the downfall of such a rapidly built empire.
Two of the most amusing things to me about FTX (and crypto as a whole) are a) how little anyone, including many of those working in crypto, seem to truly understand about the industry, and b) the irony that the pioneers of crypto simply created a worse parallel system to what they were trying to solve.
Lewis explains the perspective of one of FTX’s early employees, Natalie Tien, on the crypto industry in its nescient days:
“Once on the inside, she was struck by how few of the people who worked in crypto could explain what a bitcoin was. The businesses themselves didn’t always know what they were doing, or why. They were hiring lots of people because they could afford to, and big headcounts signaled their importance. What kept Natalie going, and ignoring the feeling that whatever talent she might possess was being wasted, was her feeling that crypto might be the next big thing.”
The crypto markets, and crypto exchanges in particular, had all the makings of a speculative boom and the above quote highlights what draws people into a speculative mess that they don’t understand and that might imminently implode: the fear of missing out. Of course, this isn’t the first nor will it be the last time we see this unfold.
Here is Lewis explaining how crypto pioneers made a problem that they were trying to solve much worse:
“The whole thing was odd: these people joined together by their fear of trust erected a parallel financial system that required more trust from its users than did the traditional financial system. Outside the law, and often hostile to it, they discovered many was to run afoul of it. Crypto exchanges routinely misplaced or lost their customers’ money. Crypto exchanges routinely faked trading data to make it seem as though far more trading had occurred on them than actually had. Crypto exchanges fell prey to hackers, or to random rogue traders who gamed the exchanges’ risk management.”
The Venture Capital industry has funded some of the worlds greatest breakthroughs, and is undoubtedly a critical engine of innovation in the world. Nonetheless, it’s amusing to watch the industry pour billions into projects that endeavor to offer solutions to problems that don’t exist.
Dan
Best of the Rest
Elliott Management’s Letter to Texas Instruments: “ Our diagnosis is simple: Investors are concerned that TI appears to have deviated from its longstanding commitment to drive growth of free cash flow per share.”
WSJ: The AI Revolution is Already Losing Steam: “The rate of improvement for AIs is slowing, and there appear to be fewer applications than originally imagined for even the most capable of them. It is wildly expensive to build and run AI. New, competing AI models are popping up constantly, but it takes a long time for them to have a meaningful impact on how most people actually work.”
Stocks for Growing Energy Demand: “if you’re investing in companies that are cranking out a 15% free-cash-flow yield through dividends, special dividends, share repurchases, and merger-and-acquisition activity, somehow you will receive that return. It doesn’t disappear into thin air.”
Memo from Howard Marks: The Impact of Debt: “As with so many aspects of investing, determining the proper amount of leverage has to be a function of optimizing, not maximizing. Given that leverage magnifies gains when there are gains and that investors only invest when they expect there to be gains, it can be tempting to think the right amount of leverage is “all you can get.” But if you bear in mind (a) leverage’s potential to magnify losses when there are losses and (b) the risk of ruin under extreme negative circumstances”
Stock Spin-Off Investing: Is There an Opportunity in LSXMK? ($)
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Thanks for a great read !