Competition is for Losers, Tsundoku, Munger's Speech & Losing Your Fastball
Market Talk, Edition 71, March 19th 2023
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Capital Employed: Interviews with Smart Investors
But first, a word from this week’s sponsor, Capital Employed! I would love it if the Investment Talk community could give some support to a fellow independent writer and curator. They share some great stuff.
Capital Employed is a free newsletter where the authors interview investors about their process and stocks they find interesting. From boutique active fund managers to private micro-cap investing superstars, they interview them all. I particularly enjoyed their interviews with Sean Westropp of Deep Sail Capital and Carter Johnson from MCJ Capital Partners. The discussion with Sean Westropp was particularly engaging; they spent a fair bit of time breaking down the fundamentals of shorting stocks.
The topics range from how they generate ideas, research processes, and thoughts on the current market environment, and much more. Guests also discuss companies they’re bullish on. If you're seeking new investment ideas then this is the newsletter for you.
Comments from Me
In less than 48 hours, I will be flying to India where I will spend the next two months. As a relative newbie to long-haul travelling, I have to say I can’t wait to sit on a plane for 13 hours again. It’s one of the rare occasions I get time to myself to read for hours at a time. I have loaded my iPad with transcripts and the litany of earnings reports I need to catch up on. Plus, the movies are fun too.
I recently found a renewed sense of enjoyment in writing when I can nail down one theme, structure a short memo around that, and send it out. I am used to spending days writing an article, whereas now there are some I can type up in the early hours of the morning before sunrise when I am most productive. Not every article will be like that, but I find this provides me flexibility with respect to latching on to ideas. Similar to what I said a few weeks ago:
This is important when it comes to writing and creating an environment conducive to creative thought. You can’t force inspiration. You can only invite it.
If you have noticed these, what do you think? I love hearing from you all. Sometimes people do that in the comments, and quite often they will shoot me an email back directly. This is an invitation for you to give me feedback on anything that crosses your mind, no matter how small. All ears.
Recent Publications: Memos I have shared since the last Market Talk.
The (p) indicates a partially or fully paywalled post.
5x Must Reads
Here are 5 pieces that I found particularly enjoyable or insightful. Note, that these articles are not listed in order of perceived value.
1) The Hard Truth About Ageing: Losing Your Fastball
Source: (Jazzi Young)
Before introducing this article; a little story time. I first encountered the author(s) in 2022; noticing they always left value-add comments under my tweets. I reached out to them, we chatted, and I discovered that the Jazzi Young account was run by a couple who retired at the age of 50 and have been active members of the stock market for over three decades. They now live comfortably from their investments and are exceedingly kind individuals. To my surprise, when they created a Commonstock account they began to do something I hadn’t expected. This couple, who rarely used Twitter aside from the occasional comment, began to write memos; sharing the learnings from their decades in the market. To date, they are one of my favourite creators on the platform, and I highly recommend checking out their work. I feel they are an undercovered gem in the community.
Story time over. I wanted to highlight this particular memo because it hit me right in the feels. It covers the hard truths about ageing and the sobering reality that our cognitive dexterities degrade with time. As the authors say; “like taxes, there’s no avoiding it”.
Early in life, we have an abundance of fluid intelligence; our ability to solve problems in novel ways. This is what helps us learn new things, grasp complex concepts and engage in abstract thinking. As life progresses, we build an ever-expanding base of knowledge and form crystallised intelligence; our ability to solve familiar problems because of our accumulated knowledge and life experience. These two variables are countervailing trends, and this fact is one of the difficult realities of ageing.
The most important thing as an individual investor ages is to start to simplify things. Because as we age, we lose the flexibility in our brains to make complex decisions, especially if we need to make them quickly.
Dr Carolyn McClanahan
What follows is an exploration of this theme, flecked with real-life examples and heartfelt advice from a pair who have “been there, done that”. If you read any of the articles I share in today’s edition of Market Talk, I implore that it is this one.
“As a long-tenured investor stumbling closer to the age of 60, I feel duty-bound to inform the younger investor what might lies ahead in the far-off horizon. Think of this as a preview of things to come. I hope a lot of investors under the age of 35 read this essay, then there’ll be no surprises when you find this out for yourself. You can embrace and plan for it. It might even influence some of the longer term decisions you make today. It’s fortunate that our skills in the field of investing and trading can be sustained for multiple decades. We don’t suffer the short "peak life" that track and field athletes typically experience for example. They peak around the age of 25 to 28, and then face a pretty daunting drop off. Despite the long "shelf life" of an investor, there eventually comes a time when the fastball analogy comes into play”.
2) Competition is for Losers
Source: (Peter Thiel)
In 2014 Peter Thiel asked, “what valuable company is nobody building?” in his essay ‘Competition is for Losers’. But value creation isn’t enough, you must capture the value too. Airlines, for instance, provide one of the world’s most important services; shuttling millions of passengers across the skies every day. But they are terrible businesses. In contrast, a business like Google also provides a heavily used and valuable service; in search. One business competes with handfuls of others, in a race to the bottom. The other stands alone and soaks up gargantuan margins.
What separates the two businesses is market structure; one is situated in a perfect market and the other in a monopoly. Thiel remarks that Google “hasn't competed in search since the early 2000s”, which held true until recently. However, more evidence is needed before we can rule Bing a worthy adversary. Back then Google commanded ~68% of the search market. Today, it’s closer to closer to 93%.
Thiel suggests the idea of a monopoly is often confused.
The confusion comes from a universal bias for describing market conditions in self-serving ways: Both monopolists and competitors are incentivized to bend the truth. Monopolists lie to protect themselves. They know that bragging about their great monopoly invites being audited, scrutinized and attacked. Since they very much want their monopoly profits to continue unmolested, they tend to do whatever they can to conceal their monopoly usually by exaggerating the power of their (nonexistent) competition.
Non-monopolists tell the opposite lie: "We're in a league of our own." Entrepreneurs are always biased to understate the scale of competition, but that is the biggest mistake a startup can make. The fatal temptation is to describe your market extremely narrowly so that you dominate it by definition.
The essay is littered with examples that highlight the nuances of competition, and unsurprisingly concludes with the idea that competition is something you don’t want; it’s for losers. I took the liberty of converting the essay into a PDF and I also found a presentation that Thiel gave on the same topic, but in a more expansive fashion.
Essay: Competition is for Losers
Presentation: Competition is for losers
Transcript of Presentation: Competition is for losers
“In business, money is either an important thing or it is everything. Monopolists can afford to think about things other than making money; non-monopolists can't”.
3) Cranking The Learning Machine Up To 11
This was a great piece that addresses the idea of intelligence signalling and how platforms like Twitter and LinkedIn condition us to become “insight junkies”. They serve “quick bites that make us feel smarter but turn out to be empty calories” and they encourage public figures to engage in faux intelligence for clicks and reputation. A good example is how we tend to buy books at a greater velocity than we manage to read them. The Japanese have a word for this; tsundoku. People often take pride in their bookshelves in the hope their houseguests marvel at their fine collection. Little thought is ever given to whether or not these books have been consumed.
Booklists are another great example. One might even reason that this very segment of my newsletter is. In all cases, the individual is signalling their love of knowledge, but are they actually taking it all in? In my case, Frederik’s article gave me pause for thought. The reason why I select only five articles to highlight every other week is that I feel any more would provoke me to partake in intelligence signalling. Most of what I read in a two-week period never makes it into this newsletter. Whether it be SEC filings and transcripts, or articles I have only skimmed through. I make it a point to only share things I have actually read carefully and enjoyed. From a commercial standpoint, I suppose it means I am not being the best CuRaToOoOoOr I can be, but I'd rather offer a genuine thimble of perspective than a disingenuine bathful.
Life is not a quest to read the most books and investing is not a race to out-read your competitor. Value is created by applying what you’ve learned through better judgment. This requires reading, repeated engagement to process and integrate, and even periods of disengagement to filter and surface what is important.
It does make me ponder though. I often tell myself that most of the “must read” articles I share here could be discussed in their own separate memo. But at the same time, I do like the structure of Market Talk. A recurring curation of interesting things, with a splash of commentary from me. Sometimes I feel like just sharing the article, other times I may feel compelled to comment on it. What do you think? Would you miss Market Talk if it ceased to exist? Let me know in the comments.
Frederik concludes the piece with some practical advice for managing our inputs (mind feeding), outputs (creation, analysing), and downtime (disengagement).
“You need a time of disengagement during which your subconscious can sift through the pile. This could be sleep and naps during which a process of discernment and synthesis can run in the background. But it also applies to many other seemingly unimportant activities during which your mind is disengaged: walks and time spent in nature, family time, washing the dishes, playing games, listening to music. It’s the proverbial shower during which ideas suddenly bubble up.
Rubin writes that “distraction is one of the best tools available to the artist when used skillfully”.
4) The Psychology of Human Misjudgment, Charlie Munger
Length: Dense AF
Source: (Farnam Street)
In 1995, Charlie Munger wrote a speech called ‘the psychology of human misjudgment’ that would walk through 25 psychological tendencies which lead to poor decision-making. He would deliver this speech to students at Harvard Law School.
Ten years later, prior to the publication of ‘Charlie’s Almanac’, he would realise that he “could now create a more logical but much longer talk” with the additional knowledge and life experience he had gained. Supposedly, he did this from memory and without research, at the age of 81. A personal favourite of mine is number 23, the twaddle tendency.
Man, as a social animal who has the gift of language, is born to prattle and to pour out twaddle that does much damage when serious work is being attempted. Some people produce copious amounts of twaddle and others very little.
Well, all my life I’ve been dealing with the human equivalent of that honeybee. And it’s a very important part of wise administration to keep prattling people, pouring out twaddle, far away from the serious work.
I have only read the revised edition (which also comes with a Q&A section at the end) but have left a link to the original text for those interested.
“People disagree about how much blindness should accompany the association called love. In Poor Richard’s Almanack Franklin counseled: “Keep your eyes wide open before marriage and half shut thereafter.” Perhaps this “eyes-half-shut” solution is about right, but I favor a tougher prescription: “See it like it is and love anyway.”
Hating and disliking also cause miscalculation triggered by mere association. In business, I commonly see people underappraise both the competency and morals of competitors they dislike. This is a dangerous practice, usually disguised because it occurs on a subconscious basis”.
5) The Collapse of Silicon Valley Bank
Length: Light to Dense
Source: (Apricitas, Rational Walk, Net Interest, Fallacy Alarm)
There has been a lot of commentary on Silicon Valley and the health of the world’s banking system in the last week. Most of that commentary has come from banking tourists. I won’t be commenting on it because I am not informed enough to do so. Like you, I am trying to learn as much as I can. It’s significant news though; there have been 563 US bank failures since 2001 and we just witnessed two of the largest in one weekend.
Information diet is always important but particularly when there is an ocean of perspectives from folks with misaligned incentives flooding the news syphon. Whether it’s an attempt from VCs to protect their founders or fear-porn engagement bait, I would urge you to examine the biases and competencies of the news sources you are consuming. Here are the four best pieces I read which explained what went down before the intervention of the FDIC.
Net Interest: The Demise of Silicon Valley Bank
Apricitas: The Death of Silicon Valley Bank
Rational Walk: The Fall of Silicon Valley Bank
Fallacy Alarm: Enough With The Fear Porn Already
And here are a couple of pieces that outline the aftermath, the new Bank Term Funding Program (BTFP), and a great piece about the history of deposit insurance’s role in the financial system. The BTFP is a program that offers loans of up to one year to depository institutions that pledged any collateral eligible for open-market operations; market at par value instead of fair value.
As Joey from Apricitas puts it:
“Banks with large unrealized losses on high-quality held-to-maturity assets thanks to rising interest rates will be able to borrow from the BTFP as if those assets had not lost value”.
Apricitas: The Fed's Plan to Rescue the Banking System
Apricitas: The Fed's $300B Emergency Response
Edelweiss: The impact of the BTFP on US banks
Rational Walk: The Role of Deposit Insurance
Here is some other great stuff worthy of your time.
• Neckar: Statistically Speaking, You Are The Patsy
• Kingswell: Terry Smith at the Fundsmith Annual Meeting
• More to That: The Levers that money can’t pull
• Rational Walk: The Risks of Investing in Bonds
• Lewis Enterprises: The Invention (MBS)
Company Related Write-Ups
• Arda Capital (SPOT): Bet on Video and The Spotify Standard
• Overlooked Alpha (SCHW): Charles Schwab, Panic Buy
• Edelweiss (SCHW): Lessons and losses
• Tidefall (FFH): Fairfax Letter Highlights
• Fairway (ISV): Information Services Corp Research
• Invariant (MO): Altria’s Investment History
• Under Followed Stocks (B3ST): B3 Consulting Group
• Vest Rule (RELL): Richardson Electronics
• Rational Walk (BRK): Berkshire's Fixed Maturity Portfolio
• Apollo Global: Outlook for US Regional Banks Report
• The Transcript: Waiting for More Data
• Last Bear: Too Big To Fail
• Kyla Scanlon: The Takeconomy
Please be sure to visit the publications of the mentioned writers!
While I am affiliated with Commonstock, I assure you my sentiment would be the same regardless of what medium this duo used to share their work. It just so happens they use Commonstock, exclusively, to share their long-form thoughts.
Google’s share of Search across all mediums (desktop, mobile, and tablet) actually grew in February 2023, while Bing’s declined. Given that Google has everything to lose and Bing has everything to gain, this will be an interesting battle. My gut says that it won’t amount to much in the short term. If Google can slip a similar product into their search product within the next year, then consumers will be none the wiser.
The information from sources like these do occasionally make their way into the newsletter, but not typically in Market Talk.
I saw the other day a talk Peter gave at Stanford I believe in which he went through "Competition is for losers". I didn't know there was an essay as well. I'll for sure be reading that, thank you for sharing!
He's an extremely clear thinker.
Thanks for the mention Conor! Really appreciate it :)