Saturday, June 30, 2018

Books Read - Q2 2018

Read 24 books in Q1. Read 26 this quarter, total of 50 year to date. Almost half of them are rated four or higher which is a good hit rate.

  • H. L. Mencken: Prejudices Vol. 2: Fourth, Fifth, and Sixth Series (4/5) This compilation of Mencken essays is full of gems, like "Who remembers that, during the Spanish War, the whole Atlantic Coast trembled in fear of the Spaniards' feeble fleet, that all New England had hysterics every time a strange coal-barge was sighted on the sky-line, that the safe-deposit boxes of Boston were emptied and their contents transferred to Worcester, and that the Navy had to organize a patrol to save the coast towns from depopulation?" (p 19). Other great essays are the anti-farmer one (p25), or his observations about the hopelessness of teaching the dull to write well (p295). Many of the cultural references and political concerns fall flat, though. (McPhee has an essay about how this happens). For example, it seems like every Mencken essay from the 20s has a reference to the Sinclair Lewis novel "Babbitt", which no one now has ever heard of. These essays are mostly from the 1920s, and at that time Mencken was irate about prohibition - for which he blamed Methodists. He was amusingly elitist and you realize that elitism has sadly gone totally out of fashion. Everyone now pretends to have common tastes - look at how our centimillionaires and billionaires like to claim that they are "middle class" and watch prole circuses like "professional" sports.
  • The 4 Hour Body: An Uncommon Guide to Rapid Fat Loss, Incredible Sex and Becoming Superhuman (3/5) We liked Tim Ferriss' Tools for Titans so we thought we might like this earlier book of his but... were not that impressed. Perhaps because this one is seven years old and a lot of the worthwhile ideas (low carb, lifting weights) have been picked up and carried further by guys like Mangan. One idea I did like from the end was that "your body is almost always within your control". He says you are a "Dow Joneser" if your self-worth is dependent on things largely outside your control (like watching the markets). But if you put your mind to it you can really improve your fitness and body composition and have satisfaction in that accomplishment. Hence deadlifting and impressive hiking feats.
  • The Great Chile Book (4/5) By Mark Miller who created the Coyote Cafe in Santa Fe. Two kinds of chiles: fresh and dried. A "chipotle" is a smoke-dried jalapeƱo, by the way. The eponymous restaurant uses them to flavor the meats and beans. If you are using store bought chili powder instead of making your own, you are missing out on a lot! I have never seen most of these chiles at a grocery store, but on the other hand most recipes call for ones that easier to find.
  • Everything but the Squeal: Eating the Whole Hog in Northern Spain (3/5) Emigration from Spain picked up beginning in 1853, to places like Cuba (a Spanish colony from 1492-1898), Mexico, Argentina, Uruguay, and Chile. Around two million Galicians emigrated over a period of a century - it was a poor province with surplus population. He says "Spanish breakfast, in case you didn't know, is coffee and cigarettes." Points out that Galicia has been conquered at least a dozen times over the past few thousand years. This book did not instill any desire to eat uncommon pig parts - he did it for the sake of checking them all off, which the Galicians found amusingly peculiar.
  • The Outlaw Sea: A World of Freedom, Chaos, and Crime (3.5/5) We mentioned William Langewiesche (and his article about the El Faro) in a recent links post. He says that ocean shipping "is not exactly a criminal industry, but it is an amoral and stubbornly anarchic one." One of the stories is about a tanker carrying molasses called the Kristal, which coincidentally sank in a storm right off the coast of Galicia with a very unlucky Galician sailor on board. The rescue helicopter which saves much of the crew came from La Coruna - the same town as lives the author of Everything but the Squeal. Another story is about a terrible loss of a ferry, the MS Estonia in 1994, with the loss of many passengers. It was a giant Baltic Sea motor ferry that took on water through the bow doors and began to capsize. Only those high-agency people that fled immediately, before the heel became too extreme to escape, survived.
  • The Analyst (4/5) Written by a Credit Bubble Stocks reader! This is potentially a new genre: investing science fiction. I won't give the plot away... You have never read anything like it.
  • The Forgotten Man: A New History of the Great Depression (3.5/5) "The Forgotten Man" is a concept from a brilliant William Graham Sumner essay which Roosevelt and his communist "brain trust" stole and turned on its head! (His words twisted by knaves to make a trap for fools.) See, the Forgotten Man is you and me, the Credit Bubble Stocks community of thrifty workers and investors. Sumner's point was that do-gooders steal money from the likes of us to give to other people. But FDR inverted it with the absurd notion that the millions of people on his dole were the forgotten. I would say that the Federal Reserve probably deliberately caused the initial crash, but FDR turned it into a decade-long economic train wreck by trying to impose socialism and settling for absurd micromanagement of the economy. Unemployment just would not get better while he was wrecking businesses big and small, and the desperate unemployed working classes (who should not be voting; they will only fall for charlatans like this) kept reelecting him in their ignorance. If only the polio had taken him in 1921. The type of person who becomes U.S. president is always a total misfit. Only someone deeply depraved psychologically would put up with the demands of the campaign itself, for example. You can't read two books a week as a politician. This goes to show you that the good guys always lose - that is the story of European civilization.
  • The Complete Guide to Fasting: Heal Your Body Through Intermittent, Alternate-Day, and Extended Fasting (4/5) I would estimate that Americans need to lose about ten billion (10^9) pounds in order to look and feel healthy. It would mean destroying Buffett's Big Carb investments and it would be very bad for Big Diabetes. The country would be vastly richer overall. It is fun to imagine, but it will never happen. However, a small subset of high-agency individuals will discover fasting as a way to shed excess weight. Fat reserves are an energy battery - you are meant to be able to use them to last extended periods without food. Fasting may also be beneficial for people at a healthy weight, for example by promoting autophagy and increasing growth hormone. The author is a physician who says his patients don't realize that pita bread is "bread" (sad!- also remember "bread is poverty food" from DeVany). There is data from WWI and WWII showing that food rationing decreased mortality from Type II diabetes. If there is ever a major food supply interruption in the U.S. from EMP or something, the fattest people are not going to starve for over a year!
  • The 100 Best Stocks to Buy in 2017 (2.5/5) Bought this to get inside the minds of boomer investors like Mr. UWS. Quite a hodgepodge of ideas and it was very Boomerist - lots of talk of what Millenials are going to be buying. I thought they would be writing about stalwart companies that will be around forever, but they put in Amazon and Macy's, of all things. Another goofy example was that they like CVS, but they also like Target, and they like that Target turned over its in-store pharmacy business to CVS. Sure, there are some companies that have moats and will be around for a long time. But how do you know which is which? Unless they are offered at very low P/Es where you can earn your money back very quickly, you can't afford to be wrong. Even the best wireless companies (VZ and T) went from looking wonderful to not so great. I was left thinking that this could be a list of great shorts. They had a lot of consumer packaged goods stocks, which sell pretty middlebrow products that are vulnerable to competition from the bottom (generics) and top ends. Their picks Nike and Columbia Sportswear have a ton of competition, and again are vulnerable from bottom and top. Starbucks - same thing. They had a lot of healthcare stocks - these are overearning because Uncle Sam will be forced by rising bond yields to crack down on the waste. Also their picks in major integrated oils are extremely overpriced. In general, I think boomers will wish they had been in T-bills rather than these stocks.
  • Warren Buffett's Ground Rules: Words of Wisdom from the Partnership Letters of the World's Greatest Investor (3/5) This was a quick read. Not as interesting as the Deals of Warren Buffet book by Glen Arnold from last year. Remember that the partnership was from 1957 until 1969, when valuations were high and he "quit" - wound it down and focused on Berkshire. The S&P PE in 1969 was 17.7; by 1980 it was only 7.4. (The PE10 peaked in 1966 at 24 and troughed, as we know, in 1982 at 7.4.) He believed in concentrated bets: 40% in AmEx, 35% in Sanborn Map, upwards of 20% in Dempster Mill. The concentration was because screamingly cheap investments were and are hard to find. Note that in the control situations, Buffett was valuing the companies himself, not using market prices (!!). So by taking control of a profitable net-net, higher and higher marks on the position with no downside volatility were assured. Speaking of Dempster, whatever happened to Harry Bottle who turned the operations around? It mentions that he invested in the Buffett Partnership after they sold the company.
  • Surviving "Terminal" Cancer: Clinical Trials, Drug Cocktails, and Other Treatments Your Oncologist Won't Tell You About (4.5/5) Ben Williams was a professor at UCSD diagnosed with glioblastoma in 1995 at age 50. When he realized that his neuro-oncologist had no plans to see him survive, he researched options on his own. He had surgery, radiation, and chemotherapy. To make the chemotherapy more effective, he went to Tijuana and bought tamoxifen and Accutane. He was also prescribed verapamil (off label) which is a calcium channel blocker used for blood pressure treatment. It is (still) thought to prevent tumor cells from using pumps to remove chemotherapeutic agents. He also took supplements like melatonin and gamma-linolenic acid. He's still alive and doing research on treatments. His big idea was using synergistic agents in parallel rather than in series (which ultimately results in a tumor cell population that is highly resistant to treatment), and choosing agents that were state of the art rather than just what his local MDs knew. We like "high agency" stories of survival, a similar example will be Craig Venter in his autobiography. 
  • How to Measure Anything: Finding the Value of Intangibles in Business (4/5) Motto: anything can be measured. Another "high agency" approach to life, in this case gathering information to inform better decisions. Mentions a paper, "On the Theory of Scales of Measurement" (1946); scales of measurement can be nominal, ordinal, interval, or ratio. Also mentions a paper "The robust beauty of improper linear models in decision making" (1979); "improper linear models are superior to clinical intuition when predicting a numerical criterion from numerical predictors. In fact, unit (i.e., equal) weighting is quite robust for making such predictions." We have experimented with linear models in both net net investing and shortselling, so this is an interesting thought. This book suggests normalizing (z-score) the predictors. Overall, this approach to gathering data about the "immeasurable" in order to dramatically decrease the width of 90% CIs around important decision-making variables goes along with the Guesstimation book, ahead.
  • The Deals of Warren Buffett: Volume 1, The First $100m (4.5/5) Mentioned this last year, but rereading a book still counts as one of the two books per week. One of the hardest things to get right in investing is position sizing. I have seen many people blow up by going too big (i.e. close to all-in) into an idea where they were wrong - although never in a Grahamian type investment. And Geoff Gannon takes big stakes in those types of investments. Buffett's famous investment Sanborn Maps had $7 million of securities and a business worth maybe $500k. He put 35% of his money in it at a $4.7 million market cap - that was a 1/3 discount to the sum of the parts value. Management was against him so he had to fight for his return. Later he put 20% of assets in Dempster Mill at half of net current asset value. Again, he had to get Harry Bottle in there to turn it around, but it was close to failure so it was not a matter of fighting management but of fixing the business. He put ~40% of assets in "quality" company American Express. When he put 25% of the partnership in Berkshire Hathaway it was a bad business and was trading at a discount to working capital but had debt. His rationale for these huge positions was that they are good investments but they are rare. In general I think that a company trading at a big discount to liquidation value always has some sort of glaring problem - like incompetent or misaligned management.
  • Mutually Beneficial: The Guardian and Life Insurance in America (3/5) Life insurer founded by German-Americans in New York. Originally as "Germania" but had to change name during WWI. Inflation is bad for life insurers, so in 1896 and 1900 employees lined up for McKinley "Sound Money Parades" in New York. They are still a mutual while most others demutualized so their managers could make a mint. The insurance and banking businesses are both full of shaky, leveraged bets on the term structure of interest rates (asset liability mismatch). I wonder how many businesses run by Boomers with zero interest in epistemology are going to fail in the next decade?
  • Bad: Or, the Dumbing of America (3/5) Not as good as his Class, but some funny moments. "Washington, D.C. feels obliged to present itself as a locus of taste and sophistication... It likes to assert that the presence of all those embassies gives it an exciting international flavor, but it hopes we don't know that the occupants of embassies and consulates all over the world are very dull people, the sort you might find at, say, field-grade rank in the world's armed forces..." And this observation: "'Something of a psychiatrical clinic' is the way Thorstein Veblen described this country, and he regarded the whole place as 'a case'."
  • Guesstimation: Solving the World's Problems on the Back of a Cocktail Napkin (5/5) This book goes along with How to Measure Anything (above). A high agency approach to thinking about quantities. (See previously 1,2,3,4) Suppose you wondered how much rubber your tires leave on the road as you drive around. Would you need a test track and precise measuring equipment? No - you can come up with an order of magnitude guess based on the thickness of tire tread and the number of miles a tire lasts. (Leave your answer in the comments.) You see people all the time who invest without doing dimensional analysis and/or reality checks of business model plausibility: i.e. the people who invested in uBeam, Theranos, the Valeant rollup, and so forth. Perhaps Tesla as well?
  • Run the Storm: A Savage Hurricane, a Brave Crew, and the Wreck of the SS El Faro (4/5) In Japan, CEOs have often done the jobs of all of the people who work from them. But here they are MBAs and people who are bad at math, dimensional analysis, and reality checks. So, they are unable to tell if people are lying when they say they cannot do something. The way they deal with this is to just demand something and then see what happens. The type of person who is an employee (not entrepreneur) does not understand this tactic and desperately tries to do the impossible. The master of this rusting Jones Act ship, carrying goods for Wal-Mart to sell in Puerto Rico (including fructose in tanks to give them diabetes), faced that type of pressure from his employers who were lawyers and suits. He sailed a forty year old rustbucket right into a hurricane! When the suits had scrapped the El Faro's sister ship, it did not occur to them that it would be smart to cannibalize the decommissioned ship for parts.
  • Bad Blood: Secrets and Lies in a Silicon Valley Startup (4.5/5) Theranos is an incredible story of business fraud but also the credulity of venture capitalists and elites. Elizabeth Holmes somehow figured out that this ecosystem operates based on social proof, not scientific thinking, and played these billionaires and former cabinet secretaries like a fiddle. She did not get money from investors with medical and scientific experience but from the type of people who cannot do guesstimation, sleuthing, or dimensional analysis. Some lessons from this quarter's books: no one is looking out for you, and in fact most people are not even looking out for themselves very competently. An economic cycle consists of ~80% ebullience and 20% comeuppance. During the ebullience stage, people and firms with strategies that will not last long term look like geniuses. All an investor needed to do to vet Theranos was to conduct a simple experiment comparing Theranos results to a real blood lab. Even a sample size of one would have revealed the inaccuracy and prevented them from losing money on this!
  • The Shipping Man (5/5) Reread this, still great five years later. "Liquidity is nothing more than a function of finding a market clearing price. At the right price there is endless liquidity. And at an unattractive price there is no liquidity at all."
  • Mr. Market Miscalculates: The Bubble Years and Beyond (3.5/5) We like James Grant. An excellent writer, he was way too early being bearish on bonds but he did not buy into the tech bubble or the housing bubble. He helps remind everyone that the central bank running our mixed economy is solely responsible for these ridiculous bubbles. "In the press release it issued to explain its last half-point easing, the FOMC sounded like a composite of the economic planning agencies of unredeemed socialist Britain and communist Poland." One good essay is from November 2006 about the ridiculous Freescale Semiconductor LBO (p336) which by April 2009 was in a "debt war with its noteholders". Another good one looks at Benjamin Graham's seven rule test for investing in companies (from Intelligent Investor) and finds that at the 1974 low 85 of the 500 S&P companies met the test; only 62 in August 1982; 6 in January 1991; and only 3 in March 2003. Market history is characterized by extremes that people psychologically don't really believe will ever reverse. But the lesson is the same as with Fooled by Randomness - things can change more than you think.
  • Fooled by Randomness (4/5) Reread this, see review.
  • Compendium Compilation 2015 - Murray Stahl (3.5/5) Don't think this can be found online, I got it directly from Horizon Kinetics. But the new stuff they are publishing is available here. Murray points out: "Indexation in its current from has no future. The huge stimuli of the last 40 years - big national deficits, 30 years of falling interest rates, tax breaks, expansion possibilities in the formerly communist world have already occurred, and did so concurrently with the index revolution. The indexes are now composed of mature companies." Another thought, the consumer packaged goods industries used to have low profit margins, but now they are high. As we know, these earnings are being capitalized at high multiples because they are viewed as being steady, bond substitutes. As noted above in my review of 100 best stocks to buy, they sell middlebrow products that are vulnerable to competition from the bottom (generics) and top ends.
  • Am I Being Too Subtle (3/5) Sam Zell got in trouble recently, but this is the autobiography of his real estate and distressed investing career. He started investing in apartment buildings while in law school. Law firms were not that interested in hiring him because he talked about doing deals on his resume, and they figured he wouldn't be able to stick to legal work. He acknowledges that the real money he made early on in real estate came from having nonrecourse, fixed rate debt during a big inflation. He actually did not see the Great Recession coming, he is just value oriented enough that when he got an offer he couldn't refuse for Equity Office, he sold. Since he did not see the crash coming, right before the crash he bought the troubled Tribune Company newspaper business. (He sold EOP in February 2007 and bought Tribune later that year.) The problem with buying something crappy and "cheap" at the top of the market is that the problems with it become a huge distraction as the cycle turns.
  • The Great Train Robbery (4/5) Michael Crichton was taller, smarter, and more successful than any of us. He was an ubermensch. This is one of his earlier novels, from 1975, a historical novel about the Great Gold Robbery of 1855. Thieves stole 200 pounds of gold off of a train from London to Folkestone, a payroll for the stupid Crimean War. It is not clear whether the real William Pierce (mastermind of the heist), got away with the money the way "Edward Pierce" does in the book. But stealing a military payroll is a time honored way to get rich.
  • The Perfectionists: How Precision Engineers Created the Modern World (4/5) Newly released, by Simon Winchester. It's about an orders-of-magnitude journey from a tolerance of 10^-1 to 10^-28 over the last three centuries. The end really reminds me of (and repeats) Measuring America (from Q1), but the beginning had some good stuff I have never heard of before. For example, gauge blocks, which you can buy cheap or expensive. Another precise toy would be high precision screws with lots of turns (250) per inch.
  • Genius Foods: Become Smarter, Happier, and More Productive While Protecting Your Brain for Life (3/5) This is true stuff but no longer cutting edge: avoid industrial oils, eat low carb, fast, and so forth. Mentions a study I hadn't seen before: "Lower HbA1c and glucose levels were significantly associated with better scores in delayed recall, learning ability, and memory consolidation." Keeping insulin down is important. Another thought from an Alzheimer's researcher: "The inhibition of lipid metabolism by high carbohydrate diets may be the most detrimental aspect of modern diets" because in addition to being a fuel the ketones can be a signaling molecule in some circumstances. A reminder that anticholinergic drugs are associated with dementia. Also, another idea is that "once you are fat-adapted, periodic high-carb meals can be a potent way of promoting healthy leptin dynamics."

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