Longreads + Open Thread
Japan, Altman, COBOL, China, Factors, Geoengineering, LTV, Mistakes
Patrick McKenzie on payments in Japan. The payments world is a fun one because 1) every economy has some form of payments, which works well enough that it's pretty invisible most of the time, and 2) many countries have wildly different setups, and different layers of the supply chain that are commoditized or monopolized.
Jon Steinberg in The Information profiles Sam Altman ($). Altman's investments are an interesting barbell, with AI as a bet on eliminating lots of problems in the world of bits and fusion eliminating many more in the world of atoms.
Clive Thompson in Wealthsimple on COBOL. Sample quote: "The second most valuable asset in the United States — after oil — is the 240 billion lines of COBOL." For previous thoughts on the economics of COBOL, see here.
Noah Smith on the possible end to China's catch-up growth. Many countries have managed an extended period of investment-driven growth, which slows down before they reach parity with the richest countries in the world. Often that slowdown is caused purely by a financial crisis—when growth is funded by credit, and the amount of GDP a given dollar of additional credit buys is in decline, it's an unstable system. For China, Noah highlights several problems they're running into all at once: declining real estate prices, rising electricity prices, tighter regulations, and the aftereffects of Zero Covid. (Depending on how bad the Omicron Variant really is, it might be what finally ends Zero Covid in China. It's already been detected in Hong Kong. The ideal scenario, plausible with our current data but by no means certain, is that Omicron is far more contagious but less deadly.)
Guido Baltussen, Bart P. Van Vliet, Pim Van Vliet: an analysis of factor-based investing's returns from 1866 to 1926. As it turns out, even in the 19th century strategies like momentum, carry, and the low-volatility anomaly made money.
Termination Shock: the latest from Neal Stephenson. It's a very timely novel: Covid! China/India border disputes! Deepfakes! Geoengineering! And also hits on some long-term topics of interest to Diff readers, including the new money vs old money dichotomy and the question of how to deal with property rights. The book takes a while to get going but has a worthwhile payoff by the end.
Ling: The Rise, Fall, and Return of a Texas Titan: Obscure, but probably should be considered a classic. This book recounts James Ling's career, from founding an electrical contractor in 1947 to being #14 on the Fortune 500 in 1970. Much of this growth was through financial engineering: buying diversified companies and partially spinning off their most interesting units. Part of the equation for this company was that as long as it was generating large underwriting fees—and the company engaged in constant restructurings and debt-equity swaps that kept the fees flowing—it got good M&A leads and optimistic ratings. Once the company simultaneously ran into an antitrust problem that slowed their pace of mergers and a recession that killed earnings, the entire business fell apart. Ling is an interesting figure; there's a character based on him in James Clavell's Noble House. Part of the interest is trying to figure out if his model was a shell game, an example of a CEO fooled by his own misleading accounting, or visionary.
Drop in any links or general comments likely to be of interest to Diff readers.
What was your first memorable investing mistake? The first stock I got truly excited about was a company called Actrade Financial Technologies, which in 2001 was reporting earnings growth of 50%+ annually but traded at 10x earnings. I imagined that it was an undiscovered small company, but as it turns out it had been discovered, by short sellers, who pointed out that the CEO had run into some problems with creditors in a different country and that they'd also hired, as a senior executive, the founder of a hedge fund that had suffered a messy collapse in 1994. Also, the numbers were much too good for a company that was basically providing trade financing. The short sellers were right, and the company collapsed soon after. Which offered two useful lessons about investing. First, make sure there's a credible reason for a company to produce incredible returns. Second, Google the executives, just in case.
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