Good Reading -- August 2016
Good Reading -- August 2016 -- Philip C. Ordway
Books
Sol Price: Retail Revolutionary and Social Innovator -- This book was written by Sol's son, Robert. I've read better writing and I wish certain aspects were explained in more detail, but the subject and the business lessons more than make up for it. This book is not quite in the same league as "Made America," but it's close, and even Sam Walton says he "stole as many ideas from Sol Price as from anybody else." As if the reshaping of the industry via FedMart/Price Club/Costco wasn't enough, I think the links to Wal-mart and Sam's Club -- and even Amazon and Home Depot -- are pretty clear. I highly recommend this book. Some snippets (emphasis added):
"Sol's business philosophy was simple: 1. Provide the best possible value to the customers, excellent quality products at the lowest possible prices. 2. Pay good wages and provide good benefits, including health insurance to employees. 3.Maintain honest business practices. 4. Make money for investors."
"Sol believed in building a long-term relationship with customers. He described his business philosophy as the professional fiduciary relationship between the retailer and the customer. In his words: 'If you recognize you're really a fiduciary for the customer, you shouldn't make too much money.' He described FedMart as a 'low margin retailer.'"
"Our first duty is to our customers. Our second duty is to our employees, Our third duty is to our stockholders."
"We owe Costco's legacy to the retail concept that Sol pioneered with FedMart and Price Club, as do our competitors in the industry and big-box retailng in in general." -- Jim Sinegal
Costco junkies like me will appreciate this: "Price Club [began] selling a quarter-pound kosher hot dog and a can of soda for $1.50. The price of a Costco hot dog and soda has remained the same -- $1.50 -- thirty-six years later."
The Habit of Labor: Lessons from a life of Struggle and Success -- This is the autobiography of Stef Wertheimer, founder of ISCAR. The company is now a Berkshire Hathaway subsidiary, and as you'd expect it was an exceptional person and business that lured Buffett into his first major non-U.S. acquisition. Wertheimer's story is fascinating and the book includes not just his personal and business philosophy but his thoughts on world affairs. There might be better crafted autobiographies but the story itself is incredible.
How Not to Be Wrong: The Power of Mathematical Thinking -- I think this is a great topic and a good book. It isn't perfect and it will get some criticism in circle circles, I'm sure, but it should appeal to a fairly broad range of people. (Apologies for forgetting who recommended this to me last year and for taking a year to get around to reading it, but please keep the good recommendations coming!)
Facts and Figures
Total U.S. mutual fund assets, at $15.7 trillion on 12/31/15, dipped 1.4% in 2015 after growing at a 13% CAGR since 1965. (Source: Investment Company Institute)
Quoted
"Half of electric-utility executives surveyed recently expect their industry to go into a 'death spiral' within 10 years" according to a trade journal. (Source; related here)
Links
2016 Thought Leader Forum -- Credit Suisse -- "What Being Wrong Can Teach You About Being Right" -- Courtesy of Michael Mauboussin. See the bottom for the full introduction. An excerpt: "Information and circumstances change constantly in the worlds of investing and business. As a consequence, we have to constantly think about what we believe, how well those beliefs reflect the world, and what tools we can use to sharpen our decisions. Because we operate in a world where we can succeed only with a certain probability, we have to learn from our mistakes...This year’s forum featured a venture capitalist, a computer scientist, an economist who focuses on decisions, and a leading sports executive."
The Financialist -- A new site and newsletter from the same. Definitely worth reaidng.
Berkshire's Blemishes: Lessons for Buffett's Successors, peers and Policy -- Larry Cunningham's latest paper. Always worth reading.
Corporate Governance Principles -- Many of the best and brightest executives in this country think public-company corporate governance is broken. Here are their suggestions.
Smart Investment: Hiring untested Ajit Jain paid off for Berkshire Hathaway -- "It was a Saturday in 1985 when Jain first walked into the Omaha office of Berkshire Hathaway...Jain knew nothing about insurance, and he was exactly the man Buffett wanted to build Berkshire Hathaway's reinsurance division. 'After talking to him for a couple of hours, I new that we'd struck gold...He has made Berkshire Hathaway tens of billions of dollars,' Buffett said."
America's Best Days Are Not Behind Us -- Bill Gates tackles an important and timely topic. His comments are made in the context of Bob Gordon's book, "The Rise and Fall of American Growth," mentioned here previously.
The Human Factor -- I've always been interested in airplanes and airlines (personally, not as an investor!). If you're not, or if you're afraid of flying, I wouldn't recommend this. "Airline pilots were once the heroes of the skies. Today, in the quest for safety, airplanes are meant to largely fly themselves. Which is why the 2009 crash of Air France Flight 447, which killed 228 people, remains so perplexing and significant. William Langewiesche explores how a series of small errors turned a state-of-the-art cockpit into a death trap."
Good News at the Washington Post and The Bezos Effect: How Amazon's Founder is Reinventing the Washington Post -- Two interesting looks at the media property and its new owner.
2016 Thought Leader Forum—“What Being Wrong Can Teach You About Being Right”
Introduction
Information and circumstances change constantly in the worlds of investing and business. As a consequence, we have to constantly think about what we believe, how well those beliefs reflect the world, and what tools we can use to sharpen our decisions. Because we operate in a world where we can succeed only with a certain probability, we have to learn from our mistakes. Hence, the theme for the Thought Leader Forum in 2016 was “What Being Wrong Can Teach You About Being Right.” This year’s forum featured a venture capitalist, a computer scientist, an economist who focuses on decisions, and a leading sports executive. Each explored an area of how our thinking and decisions can come up short of the ideal. We heard about how assumptions deeply shape how you assess a company’s potential and how well-intentioned incentive systems can go awry. There was an exploration of how computers, through machine learning, can serve as a new source of knowledge, complementing evolution, experience, and culture. Notwithstanding the potential benefits of augmenting our intelligence through computers, we discussed why we humans have an aversion to algorithms and how to overcome it. And then there is the issue of the old and new guard: how can we convince some who have been successful in an old regime to accept new and better ways of doing things?
The theme of “what being wrong can teach you about being right” has lessons to teach us about naïve realism, man versus machine, and the role of change. Naïve realism is the sense that our view of the world is the correct one. But when confronted with reality, we need to revisit our beliefs. For example, when we face someone who has beliefs different than ours, we tend to adopt one of three attitudes so that we can perpetuate our position. First, we might assume the other person is merely unequipped with the facts, so simple sharing will swing them to our side. Next, we believe that even with the facts, the other person lacks the mental capacity to see the consequences as we do. We can write off those people. Finally, there may be people who understand the facts as we do but turn their backs on what we perceive to be the truth. We categorize those people as evil.
Machine learning and artificial intelligence are again hot terms. Google DeepMind’s AlphaGo program, which beat a human champion in the board game of Go much sooner than most experts had predicted, is emblematic. The question is how we divide the cognitive work between machines and human judgment. If you are in the information business—and the chances are good this is true if you are reading this—then you must consider carefully how you might integrate computers and humans. All of this implies change, something we are loathe to do. Changing your mind takes time, effort, and humility. This is especially pertinent when you have been successful in your domain. Strategy in sports is a good analogy. There are traditional ways to do things, and often those ways are effective. But more careful analysis has revealed strategies that fly in the face of conventional wisdom that are clearly better. Defensive shifts in baseball are but one example. Convincing the old guard to change—and eventually, we are all part of the old guard—is a difficult hurdle.
The following transcripts not only document the proceedings, they also provide insights into how you can improve your own ability to learn from mistakes and improve your odds of being right in the future. Bill Gurley suggested that the high valuations for some technology startups (so-called “unicorns’) and the low level of liquidity is a balance that is not tenable. Pedro Domingos explained how computers might be able to complete tasks that are out of the grasp of humans. Cade Massey showed that we don’t readily embrace algorithms but that there is a way to overcome this aversion and improve decisions. And Paul DePodesta suggested that the bias against change has less to do with the game you are playing and more to do with how we humans think.