Lots of reading this month! Some of that was cleaning out a bunch of older articles – that either needed to read or passed over. Generally, I have around 200 or so saved articles in my queue. See a bit more on my reading system here.
Also, got through a few books, which is nice. Again, my eyes here tend to be larger than my pace of reading. Check out my latest note: The Go-Go Years
This month was a bit more interesting as well event-wise. The Fed has done exactly what they said they would. Take that for listening to them! And, Congress has embarked on a course of stupidity and political suicide by holding the debt ceiling / default gun to their own heads. Again, no surprise.
Here are my most influential reads for the month – in no particular order:
Read Old Books – “Yet, as sobering as this all may be, there is a silver lining. If the majority of people (and therefore investors) continuously fail to learn from others’ mistakes, shouldn’t there be significant value in being in the minority that does? Of course, but how? One way to start is by reading old books.”
Mohamed El-Erian, Citing Hamilton, Says the Fed Should Talk Less – “I’m more worried about economic contagion than financial contagion—namely, that the banking tremors we’ve had will lead to a reduction in credit to the economy over the course of this year and early next year, increasing the risk not just of recession but stagflation.”
My Most Valuable Season – “Outside of the energy sector, it has been a long time since any part of the economy has truly lost. This means that most 20- and 30- year old’s have never truly felt job insecurity.”
The Phillips Curve is Still Working Just Fine – “The Phillips Curve is a very simple idea and a very powerful model. It simply says that when labor is in short supply, its price goes up”.
Walk with me… – “A short, 20-minute stroll around a friend’s neighborhood at sunset became the highlight of my day.” SMS: We had a very similar experience during the early part of the pandemic.
Why I am not investing in a buyout for a long time to come – “Inflated returns, denial of volatility, high prices and fees, excessive leverage, absence of covenants on buyout debt — all this together represents fantasy thinking. It is what happens when a successful investment model becomes too popular.” SMS: FT continues their critique of private equity.
Why cutting your personal carbon footprint matters – “The most impactful ways to reduce personal emissions are familiar by now: Fly and drive less, eat less meat, switch to electric cars, and install electricity-based home heating.”
The lies we tell ourselves – “It concerns me that it seems like markets, the Fed, and policymakers are operating under the assumption that eventually we’ll get our old economy back. Or after this rather unfortunate hiccup, inflation will fall to below 2% and we’ll go back to near-zero interest rates.”
Taxes – “But we can make a major step toward closing the gap between our spending and our revenue. By actually collecting the taxes we’re owed. The distraction is tax rates; the focus should be the tax code and enforcement.”.
Note: This is based on when I read the article, not necessarily when it was first published. Unfortunately, my backlog of things I would like to read always seems to dwarf the amount of time I can devote to reading.
“If you’re going to panic, panic first.” – Old adage
Well, March was exciting. Inflation and bank failures…a recipe for…the stock market to crush it?
In my first full month of semi (?) retirement, we had a bunch of house guests and made a short trek up to Ketchum, Idaho for some skiing at Sun Valley and skating at Galena Lodge .
Here are my most influential reads for the month – in no particular order:
Dissecting Goldman’s gory $2.25bn SVB equity issue – “Second, the stock offering has to be underwritten. Hard-underwritten. Or already subscribed-for. Investors must assess the equity offering on the basis of a repaired balance sheet. They must know you don’t actually need them.”
The Powell of Positive Thinking – “He clearly signaled (again) that once Fed overnight policy rates reach a peak, they would not be declining for a while. “
Risk Capital and Markets: A Temporary Retreat or Long Term Pull Back? – “It behooves both investors and traders to therefore track movements in risk capital, since it is will determine when long term bets on value will pay off for the former, and the timing of entry into and exit from markets for the latter.”
Free Money Turned Brains to Mush, Now Some Banks Fail – “And when I say “free money” with regards to banks, I mean it literally. Since 2008, banks have been borrowing from depositors at 0% interest or near 0% interest. Even today, even as some banks are trying to attract more deposits by offering higher interest rates, even today when the Fed’s short-term rates are near 5%, the average interest rate on savings accounts is still only 0.4%. Even today, 0.4%.” SMS: This is nuts.
Is Inflation Mean-Reverting? – “What that means – and it is super important – is that inflation has momentum. Keep in mind that during most of the period shown here, the Federal Reserve was actively trying to make inflation mean-revert. And they didn’t succeed, at least on a one-year basis.”
Banking Woes Hark Back to the S&L Crisis of the 1980s – “Former Fed Reserve Chairman Paul Volcker used high rates to squeeze inflation out of the economy four decades ago, and the savings & loan industry was among the unintended victims. “
The easiest way to spot a market bubble – “New Metrics get invented while timeless investing principles become a thing of the past.” See Cash EBITDA. SMS: During the sale of my business last year, the investment bankers wanted me to use “Cash EBITDA”, but they could not even provide a definition.
Note: This is based on when I read the article, not necessarily when it was first published. Unfortunately, my backlog of things I would like to read always seems to dwarf the amount of time I can devote to reading.
“Standards apply not just to the quality of work you produce but the opportunities you work on. If you accept substandard work from yourself, you’ll only get average work from others. If you say yes to average projects, you’ll have no time for exceptional ones.” – Brain Food, Farnam Street
Big news in my world: I resigned my CFO role at a private equity backed software maker after selling the business to a new private equity group. I will be taking some time off to “to evaluate, to collect, to dream, to wonder and to wander.”
Reading and writing more is definitely a goal.
Here are my most influential reads for the month – in no particular order:
Jim Chanos: The Golden Age of Fraud in Finance – ” One of the things that is as old as financial markets is that we don’t see oversight or new laws and regulations until after people lose money.”
“Disinflation” Hoopla Sunk by Spiking Prices – “Not only did all the relevant measures get a lot worse in January, but the prior three months, October through December, were revised higher – much like the CPI inflation readings a couple of weeks ago – showing substantially greater inflation momentum at the end of the year than originally shown.”
The Wisdom of Non-Effort – “Non-effort is letting yourself take a walk and notice what comes up for you as something to write about, and trusting that”
Just Twenty-Five Pages a Day – “The solution I devised for myself is a simple one: 25 pages a day. That’s it. Just commit to that, and then do it.”
Buffett Profile from 1979: “The investor’s investor” – “The essence of Warren Buffett’s thinking is that the business world is divided into a tiny number of wonderful businesses well worth investing in at a price and a huge number of bad or mediocre businesses that are not attractive as long-term investments.”
We Are All Bond Traders Now – “What this means is that if interest rates are low, you care a great deal about the interest rate. Any change to your numerator is easily wiped out by a small change in the interest rate you are discounting at.”
The Forgotten Lessons of 2008: Seth Klarman – “You must buy on the way down. There is far more volume on the way down than on the way back up, and far less competition among buyers. It is almost always better to be too early than too late, but you must be prepared for price markdowns on what you buy.”
Enough Part 2 – A Framework – Calibrating Capital – “Too many of us run too hard for too long, reaching a point of exhaustion (or worse) when we could have taken a breather (or several of them) long ago.”
Microsoft and the Metaverse – “I suspect that this is the path that virtual reality will take. Like PCs, the first major use case will be knowledge workers using devices bought for them by their employer, eager to increase collaboration in a remote work world, and as quality increases, offer a superior working environment.”
Note: This is based on when I read the article, not necessarily when it was first published. Unfortunately, my backlog of things I would like to read always seems to dwarf the amount of time I can devote to reading.
On Reading More “The solution I devised for myself is a simple one: 25 pages a day. That’s it. Just commit to that, and then do it.” – Farnam Street
Well, that is one way to start the new year. Set a few goals. Miss them all.
Certainly behind on the book reading front. Also, want to maintain an average of writing one article a week. And behind on that one.
So there is no where to go but up!
Big news is in the works on the career front. That one is actually going according to plan here in February. More to come once the fat lady sings.
Here are my most influential reads for the month – in no particular order:
After a Timeout, Back to the Meat Grinder! – “Now things get more complicated. While the most extreme froth has been wiped off the market, valuations are still nowhere near their long-term averages.”
Why Competitive Advantages Die – “The only thing harder than gaining a competitive edge is not losing that advantage when you have one.”
How to Get New Ideas – “The way to get new ideas is to notice anomalies: what seems strange, or missing, or broken?”
On Email and Horses – “The right question is not, is this useful? But instead, how do we want to use it?”
The Federal Reserve Is Trimming Its Assets. It’s Not Working – ” The Fed’s QT has had relatively little effect on financial conditions since it got under way last year. And in a surprising twist, the new battle over the nation’s debt limit will largely negate any impact QT might produce”
Inflation, Rising Interest Rates Brought End to Cheap Money – “Cheap money—an incredibly popular and influential feature of finance that led to a surge of wealth, speculative trading and booms in ridiculous investments such as meme stocks and digital images of cartoon monkeys—died suddenly in 2022. It was 14 years old. Cheap money is survived by its estranged relative, expensive money.”
Rental Housing Is Suddenly Headed Toward a Hard Landing – “Why has the rental market turned so weak? As rental housing economist Jay Parsons points out, new lease demand cratered in the second half of the year, and was negative for the full year for the first time since 2009.”
2023 is the Year of _________ – “2023 is a pivotal year for many startups. Churchill once said, “Never let a good crisis go to waste.”” SMS here: SFTE could turn out to be a pivotal year for the family; need a moto.
The Critical Question – “They assume you’re price sensitive, and expect you to ask why something doesn’t cost less…but they are not expecting you to ask why something doesn’t costmore.”
Note: This is based on when I read the article, not necessarily when it was first published. Unfortunately, my backlog of things I would like to read always seems to dwarf the amount of time I can devote to reading.
“We tend to assume that the worst that has happened is the worst that can happen, and then prepare for that. We forget that “the worst” smashed a previous understanding of what was the worst..” – Brain Food: Figuring it Out (https://fs.blog/brain-food/december-11-2022/)
Happy New Year!
First post of 2023. I’ve set a goal for posting more. Competing priorities last year, especially the fourth quarter, hampered my ability to read, write, and post.
However, we successfully sold the business to a new set of investors, delivering a great outcome for our prior shareholders. So with that behind me, I hope to be spending more time here.
Note on the book reading front – I did knock out the entire Travis McGee series.
Here are my most influential reads for the month – in no particular order:
Take Calculated Risks – “Making an unconventional decision can be a very lonely action. Yet, when the person making it has intimate knowledge of a situation and has calculated the risks involved, it often proves to be precisely the right one.”
3Q 2022 GMO Quarterly Letter – ” Looked at in this way, it seems as if a value strategy in the U.S. should be avoiding the “shallow value” stocks that are mildly cheap relative to the market and focusing solely on the “deep value” quintile. “
Summary of My Post-CPI Tweets – “Overall Core ex-housing (which includes core goods) is down to 5.2% y/y. That’s the lowest since…well, September 2021. Going the right direction but unless core services start to decelerate, there’s a limit to how good this picture can be.”
The Fed is Dead – “In fact, rather than slowing corporate price increases, the Fed’s rate hikes seem to be having the opposite effect.”
Q&A with Scott Reardon: Great Investor Track Records – “Generally they were looking for companies where free cash flow yield + growth rate equaled 20% or more. In other words, they were looking for returns double the market average, which is exactly what all of them achieved over their long careers.”
How private markets became an escape from reality – “Private equity firms reported gains of about 3 per cent this year, when public markets were down 20 per cent or more and tighter money battered all markets similarly.”
TeamDynamix Secures Investment to Deliver Rapid Innovation for IT Automation – ” TeamDynamix, a leading IT automation provider, today announced that it has secured an investment from New York-based Level Equity Management while existing investor, K1 Investment Management, will roll a material portion of its proceeds from its exit into the business.”
Note: This is based on when I read the article, not necessarily when it was first published. Unfortunately, my backlog of things I would like to read always seems to dwarf the amount of time I can devote to reading.
Inflation Tends to Linger. Could It Last a Decade This Time? – “Given that U.S. inflation has run above 6% for the past year and over 8% for the seven months through September (before dipping to 7.8% in October), history indicates that the median time it will take before inflation eases below 3% is 10 years. “
Papa Doble. Hemingway Revisited. – “The toolbox for achieving great financial outcomes has changed quickly, as have the accompanying implications of these higher, risk-free, short-term rates.”
The Pandemic Housing Bubble is bursting—U.S. home prices falling 15% looks ‘conservative’ – “That Pandemic Housing Boom coincided with a staggering 42% jump in U.S. home prices between March 2020 and June 2022. At least 60% of that appreciation, researchers at the Federal Reserve Bank of San Francisco estimate, can be attributed to the elevated demand for “space” that occurred during the pandemic.”
Note: This is based on when I read the article, not necessarily when it was first published. Unfortunately, my backlog of things I would like to read always seems to dwarf the amount of time I can devote to reading.
This draft has been sitting in my folder for a couple months now. And is possibly some bandwagon jumping. Although at least I have been on the bandwagon a bit (Bears Watching: Observations In Real Estate). However, the transition to lower prices requires a psychological shift in the market, especially on the part of sellers, and that is going to happen reluctantly (and slowly).
I realize the residential real estate market is large and diverse. And, most homeowners are not transacting frequently making price moves somewhat less relevant for many.
However, I might be nervous if:
I bought a house in the last 18 months – to the right of the line on the price history chart below.
In an area with a price history chart that looks like this one.
I am not really a practitioner of technical chart analysis. But that is starting to look a lot like a head and shoulders pattern.
The question is – is how much of runups like the one above are due to inflation vs. speculation / an asset bubble driven by low interest rates. The inflation component is unlikely to subside. Or said differently, slowing inflation will not cause prices to retrace their prior ascent. Only deflation will cause that.
However, the component fueled by historically low rates stemming from monetary and fiscal policies that appear to be in the rear view mirror are at risk of reversing. In fact, they are reversing – you just have to squint a bit and adjust for the rapidly declining transaction volumes. Also realizing that asking prices on Zillow are not indicative of transaction prices.
But sellers will be slow to acknowledge that their houses have not doubled in price in the last two years and will be until forced to do so.
