Peak US Dollar, Google's Degrading Culture, Levelling Up, & Keeping Things Simple
Market Talk, Edition 69, February 19th 2023
Once every second Sunday I will curate the most interesting things I have consumed during the previous two weeks. These will be bucketed into 5x must-reads and honourable mentions.
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Comments from Me
For whatever reason, I struggled to populate this section when I sat down this Sunday morning before sending this issue out.
“If you have nothing to say, say nothing” - Mark Twain
Recent Publications: Memos I have shared since the last Market Talk.
• The Good People of Britain will Always Stuff Their Faces with Pastry
5x Must Reads
In every edition of Market Talk, I share a number of readings that I have consumed over the past two weeks. Here are 5 that I found particularly enjoyable or insightful. Note, that these articles are not listed in order of perceived value.
To access the suggested article, click the purple link after the source subheading.
1) The Playing Field
Source: (Graham Duncan)
Opening with a tale of a near-road accident, the author makes the distinction between viewing the world as something which acts upon you vs something you act upon yourself. Under the latter mindset, you may come to appreciate aspects of life as a ‘game’; “this allows you to experience luck as luck, to separate the hand you drew from the playing of that hand”. Duncan transgresses into the discussion of five levels of that game, as they are shown below.
1. Apprentice: learning the game
2. Expert: mastering the game you were taught
3. Professional: making the game you were taught fit your own strengths and weaknesses
4. Master: changing the game you play as part of your own self-expression and operating at scale
5. Steward: becoming part of the playing field itself and mentoring the next generation
What follows is a distinction between each level, and how investors tend to move up, stagnate or exit the game over time. I believe my primary takeaway from this memo is most investors will stagnate at level 2 and dwell there for eternity. After learning the basics of valuation and market philosophy (level 1) they move from processing other people’s ideas to generating their own (level 2). However, as the author implies, because of their borrowed sense of investing identity (“I am a value investor, I am a dividend investor, I invest like Peter Lynch”, and so on), they rarely develop idiosyncratically; a prerequisite to level 3. Instead of figuring out how they want to play the game in a way that is unique to their strengths, they play the game they were taught. I believe that many will asses their own style and self-identity as level 3 when they are level 2.
For instance, if an investor believes their strength is their ability to drown out the noise, maintain low turnover, and attempt to buy high-quality stocks at reasonable prices; is that really unique? I am certain that this places anyone a considerable step above those who struggle to manage their emotions; those who meander along the oscillating sentiments of the market, becoming fearful and optimistic when everyone else does. I am also sure that this can result in a handsome return over a lifetime if executed consistently (with a little bit of luck in one’s favour). However, I don’t think it fully represents level 3. The author best illustrates the transition from levels 2 to 3 by analogising this to when Buffett migrated from being primarily a Ben Graham investor to when he adopted more of a qualitative approach under the influence of Charlie Munger. Thereby breaking away from playing the game his mentor (Graham) taught him and developing his own style. The rest of the memo explores levels 4 and 5, as well as how the greatest investors deal with time, risk, and maintain an open mind.
“The analyst moves from processing other people’s research agendas to generating the ideas. Many investors plateau at this level. They often have a somewhat static sense of identity, such as “I am a value investor like Warren Buffett.” This puts them in competition with the index, playing a game that is defined entirely by their peers. By constructing their identity as an “expert” at investing in certain sectors or companies, they limit their ability to observe change in those areas”.
2) 10 Years of A Wealth of Common Sense
Source: (A Wealth of Common Sense)
Ben Carlson’s reflection on ten years of writing A Wealth of Common Sense struck several cords with me. I’ve been a long-time reader and as someone who is three years into their own newsletter journey, I can relate to a lot of the things he said like; “my goal when starting this website was to put the complexities of finance into plain English. I thought I was writing for other people but the more I wrote the more I realized how little I actually knew”. His first reflection is that “writing forces you to figure out what it is you actually think” and I couldn’t agree more. I suppose this piece spoke to me because that same day I had finished a 2-hour call with Akshay Ramachandran where we touched on similar themes. It was the first time we had met and was supposed to be ~30 minutes; these things often happen. Introductions aside, we spoke about a number of things but one topic we spent some time on was complexity.
Akshay went down the traditional route, learning under mentors in the banking sector before migrating to a fund and so on. I initially wanted to do that. My goal was to complete the CFA and land a job as a junior analyst somewhere, but life pulled me elsewhere. Instead, I remained a self-taught retail investor; and I believe that is what I always will be. I am always striving to develop stronger analytical rigour, but the idea of managing other people’s money doesn’t excite me. The very best professionals; Buffett, Munger, Lynch, et al, do a great job of simplifying the investment process. Investing is not simple by nature, but I find that many investors get bogged down in the bullshit. There is this divide between wanting to simply own great businesses and go to the beachversus being entirely plugged into the obsession of generating near-term alpha. Worrying about where the share price will be in 12-18 months based on near-term variables. The constant search for an edge over your competitors; burning the wick at both ends. This is not an environment that is conducive to owning businesses for a long time. Perhaps that is the point. But in doing so, they sacrifice any long-term mindset in place of the quest for alpha in the near term.
Almost as though these people are making life hard for themselves to justify whatever is it they charge. But that’s what professionals are paid for. Sadly, most of them can’t even beat the market over the long-run. Rather their clients don’t; I am sure the PMs collect some nice fees along the way. My point is that pursuing a career that would ultimatley lead to being thrown into that constant struggle conflicted with my laid-back personality. I am not cut out for that, and that’s fine.
But back to the point I was trying to make. The further up you go, the further you tend to stray from keeping it simple. The more obsessed people come with trying to predict where the market is heading in the short-term; despite one of the first things that all investors learn is that this is a fool's errand.
Some of the other learnings that Ben shared are as follows;
Do your best but keep your expectations low.
Take your work seriously but not yourself.
You have to write about the things you care about, not what you think other people want to read.
You have to find your own voice.
These four, in particular, resonated with me because they are beliefs that I hold both in writing and in life generally. Especially the last one, as it relates to writing. Some days I think I have found mine; I will see flickers of it throughout my work. Other days I find that I have lost it. It’s a process, and one I am intent on pursuing for the foreseeable future.
“I’m not good at predicting the future on a consistent basis but neither is anyone else. I find it more helpful to seek out context and perspective rather than forecasts and predictions. “I don’t know” is my favorite starting point when thinking about what comes next.”
3) Why We Still Believe in Concentrated Investing
Source: (Oakmark Funds)
After 30 years, Bill Nygren’s Oakmark Funds has done a great job outperforming the market; chalking up a 12.6% CAGR vs the S&P’s 10% since inception. These results were accomplished by what Bill describes as “concentrated investing using bottom-up stock selection - making long-term investments in companies we believe are significantly undervalued, that have the sum of expected value growth plus dividends that is as high or higher than the average business, and are run by managements that we believe are trying to maximize long-term per share value”.
But when observing the more recent track record, the last 10 years, the fund is trailing both of the indices they strive to beat. Interestingly, the Oakmark Select fund, which is supposed to facilitate the fund’s best ideas, has trailed the Oakmark Fund by an annualised 3.3% over the last decade.
A decade is long enough (usually) for several cycles to run their course; making for a suitable period from which to evaluate a fund manager’s proficiency. Oakmark has clearly fallen short on this occasion, but they used this memo to express that they still feel their strategy (with some minor tweaks) is one that will serve them and their clients well for the next decade. The piece also includes some ponderings on why they underperformed.
“Why did we have trouble identifying big winners in the past decade? Because there weren’t as many of them. We compared 10-year performance of each of the 1500 largest companies in 1996 and 2013 to the S&P 500. In Oakmark Select’s first decade, there were nearly five times as many stocks (83) that more than quadrupled the S&P 500 return as there were in the most recent decade (17). Our analysis of other time periods suggests that the decline in big winners is not structural, but rather a direct result of the recent dominance of the largest stocks, which we believe is unsustainable”.
4) The Maze is in the Mouse: Google
Source: (Praveen Seshadri)
Written from the perspective of a founder who joined Google before the pandemic after his start-up was acquired, and left following his three-year mandatory retention period, this piece touches on why he feels Google is a “once-great company [that] has slowly ceased to function”. The opening paragraph is a zinger and sets up the theme that is present throughout well.
“Google has 175,000+ capable and well-compensated employees who get very little done quarter over quarter, year over year. Like mice, they are trapped in a maze of approvals, launch processes, legal reviews, performance reviews, exec reviews, documents, meetings, bug reports, triage, OKRs, H1 plans followed by H2 plans, all-hands summits, and inevitable reorgs. The mice are regularly fed their “cheese” (promotions, bonuses, fancy food, fancier perks) and despite many wanting to experience personal satisfaction and impact from their work, the system trains them to quell these inappropriate desires and learn what it actually means to be “Googley” — just don’t rock the boat.”
This has resulted in, what the author feels, are four distinct cultural problems; lack of mission, no urgency, delusions of exceptionalism, and mismanagement. Part of this might be down to the fact that Google has exploded in headcount; from the beginning of 2020 to the end of 2022 the company has grown from 123k to over 190k employees.
“Google has more than doubled in size in a matter of just a few years, despite ongoing attrition. I joined at the start of 2020, and by sometime in 2022, I had been at Google longer than half of all Googlers. Hiring at this pace is always a problem because it leads to bad hires and those bad hires create more bad hires.”
When addressing this article Pythia Capital suggested “it highlights how f*cking important it is to hire right and think about these things as a founder in the first place. Your business is path dependent: As hire As, Bs hire Cs. You hire a B and suddenly parts of your org are filled with Cs”. Can Google turn things around like Microsoft did when they lost their way? Or will they inevitably suffer the fate of IBM and AT&T; once behemoths of the technology industry?
“Within Google, there is a collective delusion that the company is exceptional. And as is the case in all such delusions, the deluded ones are just mortals standing on the shoulders of the truly exceptional people who went before them and created an environment of wild success. Eventually, the exceptional environment starts to fade, but the lingering delusion has abolished humility among the mere mortals who remain. You don’t wake up everyday thinking about how you should be doing better and how your customers deserve better and how you could be working better. Instead, you believe that things you are doing already are so perfect that they are the only way to do it”.
5) The Buck Stops Here: US Dollar Cycles
Source: (Research Affiliates)
The last couple of years has played witness to a US Dollar that has dominated its international peers. But this is a trend that has been in motion since the aftermath of the financial crisis of 2008. Since the beginning of 2023, the Dollar has pulled back from its September 2022 high, leaving many to ask “is this temporal rest bite for the world’s reserve currency, or is it time for a new cycle?”.
Over the course of the above chart’s time frame (1967 to 2023), the authors notice two things. One, the US Dollar’s strength relative to other developed market currencies is cyclical. Two, the typical cycle last ~8 years. If the current cycle began in 2010, its duration is becoming grey-haired at ~13 years. What follows is an exploratory discussion about currency drivers, potential trend reversals, the byproducts of potential Dollar weakness and how this relates to acquiring foreignassets. This an interesting article if you are exclusively a US investor or, like myself, you reside internationally and have exposure to both the US and foreign assets.
“Today, US inflation appears to be moderating. If that continues, the Fed’s rate-hiking cycle will likely slow. But other developed nations’ economies are still in the throes of high inflation, requiring their central banks to keep hiking rates. We expect the result will be a tightening of the interest rate differential and accelerate the dollar’s pullback. The result should be a tailwind for unhedged foreign assets”.
• Lindsell Train: Bags of Luxury
• Thirdpoint: Q4 2022 Letter
• More to That: The Antidote to Envy
• Pershing Square: Annual Investor Presentation
• Babbl: Earnings Season in 10 Words
• Neckar: The 'Berkshire System', Life Advice From a Shareholder Letter
• Consilient Observer: Cost of Capital, A Practical Guide to Measuring Opportunity Cost
Company Related Write-Ups
• Invariant (MO): Altria, The Ultimate Balancing Act
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Please be sure to visit the publications of the mentioned writers!
These are opinions only of the individual author. The contents of this piece do not contain investment advice and the information provided is for educational purposes only and no discussions constitute an offer to sell or the solicitation of an offer to buy any securities of any company. All content is purely subjective and you should do your own due diligence.
Occasio Capital Ltd makes no representation, warranty or undertaking, express or implied, as to the accuracy, reliability, completeness or reasonableness of the information contained in the piece. Any assumptions, opinions and estimates expressed in the piece constitute judgments of the author as of the date thereof and are subject to change without notice. Any projections contained in the Information are based on a number of assumptions as to market conditions and there can be no guarantee that any projected outcomes will be achieved. Occasio Capital Ltd does not accept any liability for any direct, consequential or other loss arising from reliance on the contents of this presentation. Occasio Capital Ltd is not acting as your financial, legal, accounting, tax or other adviser or in any fiduciary capacity.
Metaphorically; one should always keep close tabs on the businesses they own. My point is that if you don’t get around to reading an earnings call for a few weeks, the world won’t end.
I am aware that people like Druckenmiller do this very well, most of the time.
FYI, I fully acknowledge that some investors don’t believe in the idea of buying quality companies and owning them long-term. There are many ways to skin the cat, and for all intents and purposes, I may simply be demonstrating my naivety here. You will note that there some at the top who do so well because they keep it simple also. There will always be outliers.
Oakmark Select takes the best 20 ideas from the Oakmark Fund which has ~50 stocks.
That is, if you are based in the United States.
Thanks for mentioning us again :)