Weekend Reading #64
Photo by Clem Onojeghuo on Unsplash
This is the sixty-forth weekly edition of our newsletter, Weekend Reading, sent out on Saturday 18th April 2020. To receive a copy each week directly into your inbox, sign up here.
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What we're thinking.
For anyone that still believes that the stock market is a reflection of economic reality, this week must have severely challenged that assumption.
There has certainly been no shortage of bad news, at least in real life: another 5.2m unemployment claims in the US (taking the total to almost 22m new unemployed individuals over the past month), armed protests in Michigan calling for an end to lockdown, a second wave of infections in Asia, poor results from banks that have just started reporting season... think up some bad news and you’ll probably find it in one paper or another.
Yet take a quick look at any major market index and its charts tell a different story across the board: a V-shaped recovery, with some remarkable rebounds at the stock level and the S&P clocking in its best 15 day winning streak (+27.2%) since May 1933.
Incidentally, that rally 90 years ago, in the heart of the Great Depression, continued for another four years and only peaked in Feb 1937, with the index return from the lows in June 1932 (S&P at 84.08) to the top (S&P at 331.16) clocking in at a whopping +294.9% over 4.5 years, a stonking +30.4% annualised return. Even more amazing that it happened right in the middle of the Great Depression.
Then again, a quick examination of US monetary policy at the time highlights some major changes to policy:
1. The passing of the Glass-Steagall Act in 1932 permitted the Federal Reserve to use government securities to back its monetary issuance.
2. 1933 saw the US suspend convertibility of the US Dollar to gold.
3. 1933 also saw the Federal Reserve given authority to adjust commercial bank reserve requirements.
4. The Gold Reserve Act of 1934 allowed the US President to fix the dollar price of gold.
5. The Banking Act of 1935 expanded the Fed’s authority to adjust banking reserve requirements.
Massive monetary expansion and fundamental changes to market structure. Sound familiar? As we suggested last week, we think the game has changed.
What we're doing.
We’ve been swamped with work on the fund, trading platform and private deals platform. All from the comfort of our own home offices / kitchen tables, whilst juggling childcare, pregnant wives and stubborn parents who refuse to lockdown and to stop visiting the shops for a pint of milk every day! This is being achieved without the presence of live sport (i.e. football) to entertain and distract us!
Seriously though, running a business (or three of them under one roof) is easy compared with what healthcare professionals and carers are facing right now, and of course, those who are actually sick with CODID-19. At times like this it’s easy to get swept up in your own responsibilities and needs, and it’s hard to put yourselves in the shoes (and sub-standard PPE) of others. So today we take a minute to think of the people who are making it possible for us to carry on spending precious time with our families, growing our business and living our lives with minimal disruption. You probably don’t subscribe to this newsletter, but if you do, once again, thank you.
When this crisis began, we instigated a daily team call to ensure the Three Body Capital team kept talking, sharing ideas and solving problems together. But our 3:30pm team huddle has become more than just a meeting – it’s a chance to hang out with friends. So much so that we now find old school voice calls a bit weird and alienating. Whatever happens with this pandemic and however long it takes for life to go back to “normal” (although apparently only 9% of Britons want life to go back to “normal” post lockdown!), we will continue to seek face-to-face contact with colleagues and partners of the business, and failing that, we will persevere with video calls. We pride ourselves on keeping costs to a minimum (anyone who has tried our abysmal coffee knows that), but it’s seriously tempting to invest in some proper teleconferencing gear for the office. Recommendations welcome!
In other news, our wives (and in some cases, kids) have started cutting our hair… and doing a fantastic job of it! Needs must, and Coronavirus is teaching everybody valuable new skills… how to make a 500ml tub of peppermint choc chip ice cream last for a full 7 days (a feat previously assumed to be impossible), how to stay positive and productive in social isolation (easy when you have TOO MUCH stuff to do), how to keep children educated and entertained whilst juggling work and life admin (as hard as it sounds), and how to keep calm whilst loved ones hack at our hair with kitchen scissors!
What we're reading.
With the crisis comes the inevitable wave of layoffs. Tsunami would be a better way of describing it.
We found it interesting and refreshing to read how Henry Ward (CEO of equity management platform Carta) is approaching this – with refreshing honesty and transparency:
“Once the lists were created, they were sent to me for approval. It is important that all of you know I personally reviewed every list and every person. If you are one of those affected it is because I decided it. Your manager did not. For the majority of you it was quite the contrary. Your manager fought to keep you and I overrode them. They are blameless. If today is your last day, there is only one person to blame and it is me.”
This is what true leadership looks like. While it’s sad that people are losing their jobs, from our perspective as investors there is a lot to learn about companies from the way they respond to challenging situations. COVID-19 exposes the weaknesses of companies who have over-hired in the good times, but it’s also revealing the strengths of leaders who are able to communicate with their staff and the market at large in new and surprising ways.
Speaking of incredible leaders, we enjoyed this simple but powerful thought piece by Jim Lovell of Apollo 13 fame. In it, he argues that:
“As the coronavirus pandemic unfolds, Americans can take comfort in our history of facing difficult times with courage and emerging stronger on the other side of struggle [...] America must continue to do hard things. That’s how we soar into the heavens and progress as a civilization.”
We got a lot out of this piece by Tim Harford in the FT Magazine on why we fail to prepare for disasters, referencing the fate (in no way preordained) that befell New Orleans following Hurricane Katrina.
It’s surprising that so many people have referred to the Coronavirus as a “black swan”, as pandemics are frequent historical happenings and such an event has always seemed a “when” rather than an “if”. Catastrophes are often quite predictable, but as with everything, mitigating their effects is all about timing. That’s easier said than done, so we will resist the almost overwhelming urge to judge and condemn the political class. If we could be granted one superpower in life and investing, it would be great timing.
In some ways, timing is just another word for luck. Michael Maboussin is out with a note on dispersion and the opportunity to express skill. It offers some structure for thinking about process via batting average, slugging ratio, and where opportunities exist. For those of you who enjoyed our note on the role of luck in stock picking (and life in general), this one is a must.
What we're watching.
One thing we’ve found over the past few years is the dearth of true side-splittingly funny on TV. Our all time favourite is Curb Your Enthusiasm and we were elated at Larry David’s return for Season 10 this year. It does not disappoint, with its classic awkward humour leaving us with our hands over eyes in actual discomfort. It is simply world class and in these weird times it is an absolute joy to watch.
If you’re not familiar with the Khan Academy, then you should be. It’s a non-profit with the mission to provide a free, world-class education for anyone, anywhere.
At Three Body Capital we spend a fair bit of time thinking about cognitive biases. But thinking about them doesn’t make them go away. In this video, Laurie Santos of Yale University discusses why knowing about our cognitive biases is not enough to overcome them. She introduces a new cognitive error known as the “G.I. Joe Fallacy” – the tendency for our biases to stick around, even when we should know better.
When we’re not dissecting our physiological frailties, we’re hanging out with our families, Whatsapping friends to hear how they’re getting through lockdown, and watching far too much Friends. Call us nostalgic, lazy, unimaginative, but it’s just so uplifting! This old Quartz article on why the show is still so popular is a fun read.
What we're listening to.
Most of you will know that we are big fans of Patrick O'Shaughnessy's podcast “Invest Like The Best”. Now his old man, Jim O'Shaughnessy, is getting in on the act with a new podcast called Infinite Loops.
This interview with Logica Capital Advisers’ Michael Green on "Evolving Market Structures and COVID-19" is superb. The pair cover the passive narrative (another topic close to our heart here at Three Body Capital), and its impact on market structure. This is a wide-ranging and intense dialogue that touches on Vanguard and Blackrock’s lobbying efforts, target Date Funds and their increasing dominance, the governmental response to COVID-19, and the power of language. Green’s impressive paper, “Policy in a World of Pandemics, Social Media, and Passive Investing” is also worth a read.
And if you’re interested in the long term impacts of our short (hopefully, if everyone behaves) lockdown, it’s worth checking out this episode of the Recode podcast. In it, psychologist Adam Grant (author of “Originals”) talks about the benefits of working from home, and how work will change after the COVID-19 quarantine. Grant also discusses burnout, loneliness, collaboration, procrastination, and why employees don’t need to be micromanaged. A vital listen.