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Thursday 27 January 2022

Weekend Reading: 28-Jan-22

Reading across disciplines is one of the best ways to improve our investment acumen. Here is a summary of some of the best articles I read this week. If you like this collection, consider forwarding it to someone who you think will appreciate it.

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1. Investing wisdom from Terry Smith's 2021 annual letter

These return characteristics persist because good businesses find ways to fend off the competition — what Warren Buffett calls ‘The Moat’ — strong brands; control of distribution; high spend on product development, innovation, marketing and promotion; patents and installed bases of equipment and/or software which are troublesome

to change for example.


Poor returns also persist because companies which have many competitors, no control over pricing and/or input costs, and an ability for consumers to prolong the life of the product in a downturn (like cars) cannot suddenly throw off these poor characteristics just because they are lowly rated and/or benefit from an economic recovery.


Contrary to the mantra that every fund has to recite, past returns of companies are a good guide to future returns.


Even if you manage to identify a truly cheap value or reopening stock and time the rotation into that stock correctly so as to make a profit, this will not transform it into a good long term investment. You need to sell it at a good moment — presumably when some of your fellow punters investors will also be doing so because its cheapness will not transform it into a good business and in the long run it is the quality of the business that you invest in which determines your returns.




2. China is progressing fast in AI

Not so long ago, China set a new record with ‘artificial sun,’ also known as experimental advanced superconducting tokamak (EAST) fusion energy reactor, which achieved temperature five times hotter than the real sun – i.e., about 15 million degrees Celsius at its core.


According to the global intellectual property firm WIPO’s ‘Global Innovation Index (GII) 2021,’ China has made continuous progress from ranking 14th last year to 12th this year, and is now ‘knocking at the door of the GII top 10,’ and is towards becoming a global innovation leader. The credit goes to its consistent innovation policy, increased spending on education and science, and the ability to translate these into sound results, shared WIPO.


Last year, the Chinese government developed an AI prosecutor to identify and suggest charges for alleged crimes, including social dissent, criticism, and ‘provoking’ trouble. The AI platform can file charges after hearing a verbal description of the case.


The desktop-enabled platform can press charges based on 1000 traits from the human-generated text description. It has been programmed with data from 17,000 real-life cases, ranging from 2015 to 2020, and can identify and press charges for the eight most common crimes in Shanghai.



3. Seizing The Middle: Chess Strategy in Business

Chess can serve as an apt metaphor for other areas of our lives, especially business. Chess helps us develop strategic thinking because we get immediate feedback on our strategic decisions. It also shows the benefits of thinking ahead.


Seizing the middle is a chess strategy embodying the value of forward thinking. It involves using pieces to commandeer the middle of the board. A player can then restrict their opponent’s movements by controlling the maximal number of pieces in the game.


John D. Rockefeller infamously used the strategy of seizing the middle to control the oil industry throughout the nineteenth century. Before he turned forty (according to a Fortune estimate) Rockefeller had personal control over an estimated 90% of the US oil refining industry via the Standard Oil company, and by the time of his death he was the richest person alive.


Seizing the middle didn’t just help create the energy industry as we know it today. The strategy also contributed to the creation of the modern film industry.


Between the 1920s and 1960s, Fox, Loew’s Inc., Paramount, RKO Radio, Warner Bros., United Artists, Universal, and Columbia Pictures formed the studio system. Much like Standard Oil needed control over the railroads to ensure their success, the film oligarchy also prioritised power over distribution systems. In this case, that meant owning the cinemas that showed their films. For the most part, they also owned the production facilities, and held Hollywood staff and stars under strict long-term contracts. 



4. Why nuclear energy is the possible answer to a green energy future

The transition to “green” energy will be rocky, expensive, and not-so-green – our CO2 emissions will likely go on rising. Solar and wind are not good sole sources of energy – they are intermittent, relying on the kindness of Mother Nature, who is temperamental and not always kind. To compensate for this weakness in our green sources, when Mother Nature takes a break, we need either cheap and ample batteries (we have neither), or to turn on peak demand power plants that run on natural gas (if we are lucky) or coal.


Being rich has allowed us to develop what some call “luxury beliefs” – ideas and beliefs that make us feel good about ourselves but that horribly fail upon contact with objective reality. We ignore inconvenient truths about our green energy weaknesses and keep marching on, trying to convert an even larger portion of our economy to wind and solar power.


After Japan’s Fukushima incident, Germany gave up nuclear and went “green.” Except that “green” was anything but. Germany’s CO2 emissions went up and so did its electricity prices. Yes, the coal-fired peak power plants that Germany uses to provide electricity on the days when the wind doesn’t blow or the sun doesn’t shine are more expensive and produce more greenhouse gasses than nuclear power plants.  Another example, just a few months ago, electricity prices in Europe skyrocketed because (I kid you not), the wind stopped blowing in the North Sea.


When it comes to power generation, luxury beliefs are dangerous. Electricity is anything but a luxury; it is a necessity.


China is not as rich as we are and struggles with horrendous air pollution which must be killing tens of thousands of people a year. China cannot afford luxury beliefs; it is pragmatic. It has announced that it will be building 150 (!) nuclear power plants over the next twenty years.




5. Culture is everything

Since businesses are nothing more than collections of messy people trying to achieve common aims, it stands to reason that an organization’s posture will be a mix of individual frames of mind, heart, and even sometimes body.


This is culture, the shared grooves of habit, conscience, and character. It’s why Peter Drucker pronounced, “Culture eats strategy for breakfast.” And, every other meal.


Said differently, culture is everything and everything about culture starts with posture.


We think a lot about who we want to be. It’s always aspirational; in this life no one arrives. But if we have free will and ability, the aim matters. How we spend our days is how we spend our lives. We’re always becoming something, for better or worse. We want to be an organization of kindness, self-forgetfulness, and service. We strive to serve our sellers, leaders, employees, vendors, customers, and communities well through win-win-win deal structures, long-term thinking, and humble help. Too often, we fall short.


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