Reading Roundup: October 2024
This month we read:
The Great Depression: A Diary by Daniel B. Roth
Team of Rivals: The Political Genius of Abraham Lincoln by Doris Kearns Goodwin
The Ten Commandments for Business Failure by Don Keough
American Prometheus: Carnegie's Captain, Bill Jones by Tom Gage
Stay Sane in an Insane World by Greg Harden
The Great Depression: A Diary by Daniel B. Roth
Reading about the causes, cures, and behaviors during the Great Depression is one of the most instructive things an investor can do, and Benjamin Roth’s first-hand diary of this period is as interesting as any book I’ve read on the Depression era.
Roth was a young lawyer in Youngstown and began recording his observations of the economic and social climate in 1929 and continued through World War II with near continuous journal entries throughout the heart of the Depression in 1930-1939. He provides insights into the impacts of the depression on different local industries from banking to the steel industry to professionals such as lawyers and doctors.
Though I don’t expect to invest through a period quite as dark as the Depression, I like to think about how our portfolio, and more importantly how our businesses, would fare during a period of extreme economic stress like the 1930s. A few (perhaps obvious, but still important) takeaways from Roth’s observations are:
Companies with resilient cash flows are always a good bet. This is very easy to forget during benign markets but intensely important during selloffs. Though the market dropped 80%+ during the Depression and many stocks never recovered, dividend paying stocks and other high-quality companies came through it fine.
From an entry on 8/29/36
“AT&T paid its usual dividend thru the depression. Other high grade stocks did not but practically all of them have come back again and the holder who did not sell will lose nothing except the unpaid dividends.”
Way too many people made themselves path dependent by using excessive margin to buy stocks. They subsequently got wiped out and could not take advantage of the crazy bargains available during the early 1930s. Even a small amount of liquidity would have afforded abundant opportunities to make 10-100x your money buying blue chip companies.
“Had lunch with Mr. M.S. who has been a manager of a branch clothing store for a growing company for about 30 years. During the 1st 20 years he accumulated stock of the company out of his savings…never speculated in his life. In 1929 the stock was sky-hi – he had 400 shares at $130 a share – worth $50,000. On 10/10/29 he learned from his boss that the company would declare a special Xmas dividend of $5. Since the news was not made public he decided it was a good chance to speculate. Took his $50,000 stock to a bank – borrowed on it – bought more. At the end of October 1929 the crash came. He could have gotten out at 25 but he held on. It went to 14 and he lost everything but about $1000. All because he had put his stock up as collateral and had speculated with someone else’s money.”
There are countless stories in the book just like this.
Roth also summarized a helpful overview of how reflexive markets are and why the initial crash in the U.S. caused a chain reaction in Europe which then perpetuated the crash in the U.S. causing the Depression to be far worse and longer than ordinary depressions of the time:
“In a speech delivered the other day Pres. Hoover summarized the present depression so far as follows:
1.In 1929 and 1930 it seemed to be an ordinary depression and in early 1931 the U.S. seemed on way to recovery.
2. In 1931 European countries became demoralized and suffered break-down and revolution. England went off gold standard and was rapidly followed by Sweden, Denmark, Norway, Finland, Australia, India and Egypt. All Europe withdrew her gold from U.S. – European investors were scared and dumped their American stocks and bonds on the market and withdrew more gold. Then the people of U.S. followed suit and withdrew their savings for the purpose of hoarding and this caused our banks to fail. This was followed by Japanese war and a breakdown in Germany. This went on for 18 months.
3. We have now survived this financial panic. We paid Europe every dollar we owed them and we are still strong and will remain on gold standard. With the help for Reconstruction Corp. And other government agencies we are now lending credit to railroads and other Private industry. The recovery will be slow because Europe also must recover but it is certain we will succeed.”
This speech was made in mid-1932 and proved to be eventually correct but premature in declaring the panic over.
I’d highly recommend anyone interested in stocks or business read this book.
- Dan
Team of Rivals: The Political Genius of Abraham Lincoln by Doris Kearns Goodwin
There are enough Lincoln biographies to fill a library on their own. Goodwin’s book distinguishes itself by telling Lincoln’s story through the lens of his cabinet.
The book begins with the 1860 Republican National Convention. Lincoln entered as an underdog and won despite his limited political background. He’d served a single term in Congress, had lost two campaigns for the Senate, and had no administrative experience whatsoever.
After winning a four-way election to become President, Lincoln nominated his Republican rivals to his cabinet. William Seward became Secretary of State, Salmon Chase Secretary of the Treasury, and Edward Bates Attorney General.
Lincoln’s “team of rivals” wasn’t exactly one big happy family. Seward became Secretary of State thinking Lincoln would be his puppet. Chase openly ran a campaign for president in the 1864 election against Lincoln out of the Department of the Treasury.
Two years into his first term, Lincoln replaced his Secretary of Defense with Edwin Stanton. Stanton was a Democrat and an ally to Chase. He had disrespected Lincoln years ago when they were lawyers on the same case. Stanton thought Lincoln, with his long lanky limbs and il-fitting clothes, was a country rube. By the time of Lincoln’s death, Stanton was Lincoln’s biggest fan.
The book shows how Lincoln used masterful leadership to deal with the internal strife in his cabinet and externally across the country. Lincoln was a great storyteller, a skill he developed while on the road as a young lawyer in Illinois. He always had a humorous story up his sleeve to illustrate his point and disarm his opponents. Warren Buffett’s grandfatherly demeanor and humorous anecdotes are a modern testament to the effectiveness of this style of leadership.
Lincoln’s dealings with Chase showed his extraordinary ability to balance personal grievances with the nation's needs. Chase was an excellent Treasury Secretary, implementing the first national currency and creating a system of national banks to fund the war effort. However, Chase was never satisfied, no matter how much he achieved, and always wanted more. He positioned himself as Lincoln’s rival in the election of 1864. At times, Chase’s actions were insubordinate, including unauthorized political maneuvers and self-promotion. Lincoln was frustrated, but never retaliated. Lincoln knew the country needed Chase more than his ego wanted him gone.
When Chase submitted his resignation for the fourth time, thinking Lincoln would never accept it, Lincoln did. But Lincoln shortly appointed Chase to the Supreme court. Chase was a strong candidate for the appointment, but it was also a magnanimous way for Lincoln to clear away a rival. Chase, Lincoln, and the country all won. Lincoln was pragmatic and could always see the bigger picture, even when it hurt him in the short term.
Lincoln also had a keen sense of timing. Between his election and inauguration, seven southern states seceded. Lincoln laid low and refrained from making inflammatory remarks. He tacitly refused to endorse the Crittenden Compromise, which sought to extend slavery, signaling his firm stance against slavery while avoiding escalation.
Lincoln gave the south every chance to reconcile with the North. His 1861 inaugural address reaffirmed his commitment not to interfere with slavery where it already existed while firmly rejecting the legality of secession. This left the door open to reconciliation without war.
Lincoln used a similar tactic when he unveiled the Emancipation Proclamation. While Lincoln relied on his cabinet’s advice for most major decisions, this one he made unilaterally. Lincoln waited patiently for a Union victory, which came at Antietam, so that the north did not look desperate or weak. Lincoln announced his plan on September 22 but signaled that it would not become law until Jan 1. The delay gave northerners and southerners time to come to terms with the bill. It also gave the Confederacy a chance to negotiate a peace that would keep slavery where it already existed before it was gone forever.
Other examples of Lincoln’s sense of timing, patience, and self restraint were the Gettysburg Address, which succinctly redefined the war’s purpose at the exact moment the Union began to gain momentum. Similarly, Lincoln called in all of the political favors he was owed to get the 13th Amendment passed when it was clear the Union would but before the war actually ended. Lincoln knew he needed to secure abolition while the Union held the moral high ground.
Investors and politicians alike could learn from Lincoln’s “masterly inactivity”, a phrase Buffett cites in his 1984 letter The phrase is attributed to English statesman Lord Salisbury, who served as Prime Minister of the United Kingdom during the late 19th century, and was known for his cautious and restrained foreign policy, which prioritized maintaining stability and avoiding unnecessary entanglements or interventions. In investing, this means waiting for the fat pitch and sitting on your hands until it arrives.
Lincoln’s ability to empathize gave him his sense of timing. He had an extraordinary ability to put himself in the place of other men, to experience what they were feeling, and to understand their motives and desires. These are superpowers that can help with anything, including investing. Investors who understand how frontline workers and consumers think can gain a huge advantage.
The politics described in Team Of Rivals are as savage as they are today. It’s easy to get nostalgic about the past. We assume it was a simpler, happier time because we know how everything turned out. That’s what Anie Duke would call “resulting.” Most people (politicians included), then and now, fight fire with fire. Lincoln stands out in history for his ability to de-escalate situations and avoid unnecessary provocation. It might have looked like weakness at the time, and certainly bruises his ego, but in retrospect it was true strength and the very reason that there are more biographies of Lincoln than almost any other man or woman.
Matt
The Ten Commandments for Business Failure by Don Keough
Don Keough was the longtime President of Coca-Cola and a manager that Buffett has often praised. In the ultimate sign of respect Keough served on the Berkshire board for many years. The Ten Commandments for Business Failure is Keough’s version of Munger’s advice to always invert. He details the ten things not to do if you want to be successful in business. The book is entertaining and sprinkled with first-hand examples of when Keough violated each of his rules (always with poor results) throughout his career at Coca-Cola.
Check out the book for his examples but I’ll just leave his list (with a newly added eleventh commandment) here as an overview:
Quit Taking Risks;
Be Inflexible;
Isolate Yourself;
Assume Infallibility;
Play the Game Close to the Foul Line;
Don’t Take Time to Think;
Put All Your Faith in Experts and Outside Consultants;
Love Your Bureaucracy;
Send Mixed Messages;
Be Afraid of the Future;
Lose your Passion for Work - for Life.
Anyone familiar with Berkshire will find all of these principles mentioned continuously during annual meetings and Buffett’s impact on Keough - and vice versa - is clear. Keough’s advice can largely be summed up as; think for yourself, always keep learning, don’t be dogmatic, and operate with integrity and collaboration with people you respect.
Keough
-Dan
American Prometheus: Carnegie's Captain, Bill Jones by Tom Gage
Bill Jones was a Captain in the Union Army during the Civil War and supervisor of Carnegie Steel’s Edgar Thomson Works. Under Jones’ supervision Edgar Thompson became the world’s most productive and profitable steel mill. Jones was one of the few people Carnegie would listen to, even when they butted heads.
Carnegie tried to make Jones a partner, which was Carnegie’s preferred way of retaining high-value employees, but Jones refused. Instead, Jones earned a salary of $25,000, as much as the President earned back then. Jones prioritized independence over wealth and thought his men would think of him differently if he had an ownership stake.
Jones was a valuable employee because he was an excellent leader who looked out for his men and earned their respect. Jones honed his leadership during the Civil War, which he volunteered for early on and, upon completion of his service, voluntarily re-enlisted. Jones was also a local hero, saving many lives during the Jonestown Flood.
Jones invested the eight hour workday. Back in the late 1800s twelve-hour workdays were standard. He pitched Carnegie that overworked employees were less efficient and more prone to accidents, which ultimately hurt productivity and profitability. The workers loved the eight hour day so it also raised morale, reduced strikes, and decreased turnover.
The eight-hour workday was a success, but Carnegie phased it out after Jones’ death. Carnegie was obsessed with reducing his costs and felt he needed to operate like his competitors to match them. The eight hour workday wasn’t seen again until Henry Ford reintroduced it in 1914.
Jones was also a tinkerer and investor, with more than 50 patents to his name. Jones’ inventions kept Carnegie Steel at the forefront of technology.
Jones died in 1889 at the steel mill while working with the men to fix a blockage. He always led from the front. 40 tons of molten iron suddenly and unexpectedly flooded the platform he was on, throwing him forty feet to the floor below. His head struck a car when he landed. Despite the trauma and burns, he was conscious, but died days later.
Soon after Jones’ death, Andrew Carnegie struck a deal with Jones’ widow to acquire his patents for $35,000. While this was a lot of money at the time, it undervalued the patents’ value. The book’s author is Bill Jones’ great-grandson and wrote it to preserve Jones’ legacy. Gage isn’t overly bitter, but points out that in the Gilded Age unbridled capitalism meant that virtually all of the rewards accrued to a few tycoons at the expense of the men like Bill Jones which actually got stuff done.
Matt
Stay Sane in an Insane World by Greg Harden
Greg Harden was a legendary sports psychologist that worked at the University of Michigan for decades until he died of cancer in September of this year. He had a massive impact on the mindset of hundreds of athletes throughout his time at U of M.
Tom Brady credits Harden for transforming his mindset from a self-pitying backup Quarterback to the most accomplished Quarterback in NFL history. Heisman winner and super bowl MVP Desmond Howard and Michael Phelps - the most accomplished Olympian of all time - are just two of countless others that credit Harden with massively impacting their success. Anyone who has impacted athletes as successful as these is worth listening to.
Harden’s principles are directly related to investing as he harps on focusing on what you can control, how to think about process before outcomes, and the importance of consistency and compounding small wins.
Here are Harden’s 7 most important principles and how they might relate to investors:
“Become the world’s greatest expert on yourself, so that you can become the very best version of yourself.”
He reminds me of Guy Spier in that you cannot maximize your own results if you try to emulate someone else; you have to find a style that works for you that you can stick with through thick and thin if you hope to achieve long-term success in any field.
“Control the Controllables. Never forget that you are the only person who has control over your own mind - over your thoughts and ultimately over your feelings.”
You cannot control the outcome of an investment, only how you react to it.
“Practice, train, and rehearse giving 100 percent, 100 percent of the time. Because if you make this your mindset, then on your absolute worst day, you’re still going to be better than the average person on their best day.”
He who uncovers the most rocks tends to win in investing.
“Commit, Improve, Maintain. Commit, right now, to improving your life. Make the changes, one at a time. Consistently maintain those changes, every single day.”
If you go to bed a little better at your craft every day you can’t help but have success over many years.
“Stop being afraid of being afraid. The demons of fear and self-doubt are predictable, therefore manageable. Fear is part of being human, and courage is not the absence of fear. Courage is facing fear.”
Don’t live in fear of your portfolio, or the stock market in general, experiencing periodic and sometimes substantial drawdowns. This is a guarantee so you might as well accept it. This is the price of admission and nothing to fear.
“Practice self-love and self-acceptance. They are the keys to replacing self-defeating attitudes and behaviors with self-supporting attitudes and behaviors.”
Don’t expect to bat 1,000 in investing, it isn’t possible. Accept that you’ll be wrong sometimes, learn from it and move on.
“Become the very best friend you ever had in your life, because your very best friend has to be you.”
-Dan
The Best Of The Rest
Yet Another Value Podcast: Chris Waller on Watches Of Switzerland.
Here’s Chris’s write-up. And here’s ours and our presentation on it.
Bloomberg: The Energy Transition Is Powered By — Wait for It — Coal.
“As demand for power goes up faster than renewables can supply, the world is turning to a time-tested source to produce it: coal. The result is twofold. First, the year when coal demand is expected to peak gets pushed further out. Second, what follows the peak now resembles more an elevated plateau that’s getting higher and higher by the year. And if history is any guide, we should expect further revisions.”
IEA: World Energy Outlook 2024
“The outlook for coal has been revised upwards particularly for the coming decade, principally as a result of updated electricity demand projections, notably from China and India.”
Memo from Howard Marks: Ruminating on Asset Allocation
“It’s one or the other. You can’t simultaneously emphasize both preservation of capital and maximization of growth, or defense and offense. This is the fundamental, inescapable truth in investing. The questions listed on page one are just details, the options available for reaching your targeted risk posture…looking for the right balance between offense and defense – it becomes clear that the goal should be optimization, not maximization. To my mind, it shouldn’t be “wealth,” but “wealth pursued in an appropriate way, taking into account the investor’s wants and needs.””
John Huber on Stock Market Valuations
“I think investors should be considering the risks of owning the index at these levels. It very well could continue to rise over the next few years as expensive markets can always get more expensive as they did from 1996-1999, but I do think there are risks to longer term results at these level”
“For the first time in a while, I feel like we may be coming closer to some inflection point of some kind. It feels like I am going to have to start rolling up my sleeves and do some work to find some other things”
Real-Estate Scions are Breaking a Cardinal Rule: Never Sell
“I have yet to sell a building where I didn’t regret selling,” Gural said.
Yet other families are choosing to walk away from properties—even if they reinvested in them
John Coleman's pitch for SiriusXM
Here’s a link to our write-up and slide deck.
Elon Musk Channels Warren Buffett.
“The stock market is wild, sort of rollercoaster. I think Warren Buffett has a lot of good sayings. One is, ‘Having a publicly traded company is like having someone stand outside your house and yell house prices all day,’ and it’s still the same house.”
Bloomberg: Even Some High-Income Americans Can’t Afford New Cars Anymore.
The Edmunds survey found that 73% of consumers are holding off on buying a new car because of the cost.
Bloomberg: Oil Was Written Off. Now It’s the Most Productive US Industry
“The nation’s crude output has risen to a record 13.3 million barrels a day, 48% more than Saudi Arabia. All with less than a third of the rigs and far fewer workers than were needed 10 years ago.”
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A great series of articles where I find new book suggestions!