Howard Marks

A good pundit on the economy and investing is Howard Marks, founder of Oaktree Capital. Occasionally, maybe once per quarter, he writes a memo that can be found here (which was also made into a podcast this week). Incidentally, I started writing memos to myself and then publishing them as a direct result of his influence.

Aside from reading his past memos, I have also read his two books as they summarize the methodology that informs his firm’s investing practices:

If a reader is looking for a formulaic approach to investing, unfortunately he will not be the source. Instead, he largely acknowledges that investing is hard, the future is largely unknown, and one simply needs to take action with the information they have at their disposal. Reading through these two books, below are a few highlights.

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Low Rates Pushing Up Asset Values

Head-scratching has resulted from asset valuation increases in the face of a rocky economy. On the surface, the increasing value of companies or properties does not make sense. Dubious prices are due to the uncertainty about our future; many say there must be some bubble. The purpose of this post is to explain such exuberance as lowering interest rates may be leading to exponentially higher asset values.

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Hofstadter’s Law

Douglas Hofstadter in his book Gödel, Escher, Bach: An Eternal Golden Braid (1979) named Hofstadter’s Law which states:

It always takes longer than you expect, even when you take into account Hofstadter’s Law.”

Hofstadter’s Law is easy to understand: complex and/or infrequent tasks take a longer time to complete than estimated. This law is particularly relevant if someone is considering how long it will take themselves to perform an operation, as opposed to someone else, as people are over-confident about their abilities. 

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Daily Rituals

The book this week is Daily Rituals by Mason Currey. It is a fairly quick read with short chapters about how successful creative people crafted their own working days. I found myself enjoying a glimpse into these people’s world, even if I often separated the person’s work and lifestyle that supports the work from their sometimes flawed character.  

While this book comprises of a collection of anecdotes about creators over time, similar themes continue to pop up that point to those habits most productive people share in common. These include routine, reflection, exercise, time-blocking, focus, and steady progress. 

A danger of works like this is that it possibly fetishizes habits where a reader can keep going on gathering stories about work habits as opposed to distilling the essence of the obstacle these routines are addressing. One can go on requesting “one more” story as opposed to simply enacting basic changes to their lives and, by doing so, making them more prolific. 

Below is more color on some of the themes that I pulled from this book.

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Coach K

Mike Krzyzewski, or Coach K, has been Duke men’s basketball coach since 1980. He is the winningest college basketball coach ever and has the most national championships by a current coach and won four national championships.

Seemingly it is easy for successful basketball coaches to get into business management speaking and writing. They are effectively managers; they are not in control of the outcome of games, as their players perform all of the action. Instead they prepare them, gameplan against their opponent, identify and address weaknesses and during the game, make substitutions and call time-outs to provide feedback. As a fan, you can see drama play out on television in the span of a few hours. The fact that basketball coaches are visible and often wear suits also helps bridge the transition into business. 

It’s not convincing that successful basketball coaches would be successful in other fields. Would they be adept at business or blue-collar work or as a car salesman? Probably not. They have a specialized interest and have developed a skill-set that is appropriate for basketball, not plumbing or computer software. With those caveats aside, the ups-and-downs within basketball are interesting to witness. Lessons learned from those trials are beneficial. While a basketball coach seems to provide a cheap form of advice on business, excellence in any field should be studied, particularly one where a supporting cast will dictate success.

As a lifelong Duke fan, it is natural to look to Coach K for guidance. As expected, most of his books are similar in content. Below are excerpts from my reading of the following:

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Talisman

Talismans are a part of everyday life, even though most people are not familiar with the term.

Merriam-Webster’s dictionary defines a talisman as:

  1. an object held to act as a charm to avert evil and bring good fortune
  2. something producing apparently magical or miraculous effects

A talisman is a symbol. Used strictly, it can have a voodoo connotation. As a mental model, the term talisman has grown to be a representation of an idea or ideal. It is an internal reminder of values that are important to the person, or an external signal of a stance to outsiders. 

Everyone projects images to themselves or others. Below are a few thoughts on the term and how they are used throughout our society. 

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Publication Bias

Scientific studies are not always published. Those studies that prove a theory and are significant make it into their intended publications, while insignificant or negative results are discarded. The number of studies that do get published is a fraction of those that are produced and submitted to journals. In short, there is a distorted representation of data on a given subject; a filtering process, to which the public is largely blind.

Publications only have so much space. Insignificant results or indeterminable conclusions are not of interest; they are saying, “We thought X was true, but it really isn’t.”.  Scientific journals also don’t publish studies that disprove previous studies that were already published. Why would a scientific journal be interested in publishing a study that negates a hypothesis? Also, didn’t someone already cover that hypothesis with a published result? Articles have already been written about those published studies so why revisit them?

There is a problem with this method of decision-making. Not only does the general public get only a small glimpse into the overall field of study, but those studies that do get published could be erroneous or misleading, and lead to that theory catching hold in the zeitgeist.

The famous paper that highlights this publication bias is: Why Most Published Research Findings Are False: by John Ioannidis in 2005. Since then, scientists, the media, and to a lesser extent the public, have been more careful about how much faith they put into published studies.

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How The Economic Machine Works

Have you ever watched a news segment or read an article about fancy economic stuff and then realized you didn’t understand a thing they were saying? It happens a lot, even to people that have fancy degrees that are supposed to know this stuff. In times like that, I watch this.

Today’s book is not a book but a video (though I’ll still call this a BookMarc). The video we will be discussing today is How the Economic Machine Works by Ray Dalio.

I have watched this video in its entirety about two dozen times. It’s a regular go-to for me and I revisit it a few times a year, mostly in situations that I described above. In any kind of complex yet everyday field, I find that it is important to have a methodology that you follow. This “economic machine” video is a simpleton way to look at the economy, which can be complex, but is still fairly comprehensive. It acts as my economic manual and I hope more of you will use it as a resource as well.

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Good Profit

Today we visit the book Good Profit by Charles Koch.

As you will probably quickly realize, the book is written by one of the leading libertarians and largest republican donors today. It would be easy to simply think that this book must have a political slant. On the other hand, Charles Koch is the CEO of Koch Industries, which is the second-largest private company in the US with revenues of $110BB (Cargill is the largest with revenues at about $115BB). He is also the 18th richest person in the world with a net worth of about $45BB (his deceased brother, David Koch, was number 11 on the list with a net worth of around $51BB and his other two brothers are wealthy as well). Regardless of political affiliation, there are lessons to be learned from successful executives who manage a conglomerate of businesses.

Good Profit is a distillation of the Market-Based Management (MBM) philosophy that Koch Industries has developed over time. Here are a few excerpts that stood out to me and are concepts that caused me to think about personal or project-related issues.

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Third Story

In a conflict/dispute, there are two sides to any argument. There is what one side experiences or thinks, and there is the competing side. These perspectives are two different versions of the same story. The “third story” is a concept where an objective, impartial perspective attempts to distill the argument down to its core elements and provides a reasonable counterpoint for either party to consider.

Thinking in terms of the third story can help in both the business and personal worlds. The main upside of utilizing this third story technique is to develop and utilize empathy. Seeing an argument from the other person’s perspective can help to understand why they are in disagreement. Additionally, speaking of conflicts in terms of a third story shows that one or both sides are willing to be reasonable and objective in the conversation, rather than stubbornly digging their heels in about their own interpretation or views. 

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