"A good company, which has a high ROIC, and a good stock, which has a high total shareholder return (TSR),
are two different things. The reason is that a stock price reflects the market’s expectations about a company’s future financial results. Excess returns are the result of revisions in expectations. Of course, actual financial results shape and reshape expectations. But the stock of a company with a high ROIC will not deliver attractive returns if it fails to exceed expectations over time."

"Just as FICO’s dominant algorithm is combined with credit data owned by an oligopoly of consumer credit bureaus to create a FICO credit score that is then sold to banks and lenders, so is MSCI and SPGI’s index IP translated into ETFs and other products by BlackRock and State Street, and then sold to the asset managers, insurance companies, pension funds, and wealth managers. The same dynamic exists between IP owners and exchanges where, for instance, ICE and CBOE provide the venues on which MSCI’s and S&P’s index derivatives are traded. One oligopoly owns the IP; another provides distribution. It’s a comfortable and lucrative setup."

"The fact is that newspaper, television, and magazine properties have begun to resemble businesses more than franchises in their economic behavior. Let's take a quick look at the characteristics separating these two classes of enterprise, keeping in mind, however, that many operations fall in some middle ground and can best be described as weak franchises or strong businesses.

An economic franchise arises from a product or service that: (1) is needed or desired; (2) is thought by its customers to have no close substitute and; (3) is not subject to price regulation. The existence of all three conditions will be demonstrated by a company's ability to regularly price its product or service aggressively and thereby to earn high rates of return on capital. Moreover, franchises can tolerate mis-management. Inept managers may diminish a franchise's profitability, but they cannot inflict mortal damage.

In contrast, "a business" earns exceptional profits only if it is the low-cost operator or if supply of its product or service is tight. Tightness in supply usually does not last long. With superior management, a company may maintain its status as a low-cost operator for a much longer time, but even then unceasingly faces the possibility of competitive attack. And a business, unlike a franchise, can be killed by poor management.

Until recently, media properties possessed the three characteristics of a franchise and consequently could both price aggressively and be managed loosely. Now, however, consumers looking for information and entertainment (their primary interest being the latter) enjoy greatly broadened choices as to where to find them. Unfortunately, demand can't expand in response to this new supply: 500 million American eyeballs and a 24-hour day are all that's available. The result is that competition has intensified, markets have fragmented, and the media industry has lost some - though far from all - of its franchise strength."

"Let’s assume there are one hundred 8% bonds outstanding. Let’s further assume that ninety will pay interest and principal as promised and ten will default. Since they’re all 8% bonds, all the ones that pay will deliver the same 8% return – it doesn’t matter which ones you bought. The only thing that matters is whether you bought any of the ten that defaulted. In other words, bond investors improve their performance not through what they buy, but through what they exclude – not by finding winners, but by avoiding losers. There it is: a negative art."

"My memos got their start in October 1990, inspired by an interesting juxtaposition between two events. One was a dinner in Minneapolis with David VanBenschoten, who was the head of the General Mills pension fund. Dave told me that, in his 14 years in the job, the fund’s equity return had never ranked above the 27th percentile of the pension fund universe or below the 47th percentile. And where did those solidly second-quartile annual returns place the fund for the 14 years overall? Fourth percentile! I was wowed. It turns out that most investors aiming for top-decile performance eventually shoot themselves in the foot, but Dave never did.

Around the same time, a prominent value investing firm reported terrible results, causing its president to issue an easy rationalization: 'If you want to be in the top 5% of money managers, you have to be willing to be in the bottom 5%, too.' My reaction was immediate: 'My clients don’t care whether I’m in the top 5% in any single year, and they (and I) have absolutely no interest in me ever being in the bottom 5%.'

These two events had a strong influence on me and helped define my – and what five years later became Oaktree’s – investment philosophy, which emphasizes risk control and consistency above all."

"Unlike a family, a country can change the amount of currency that exists, and hence, its value. That creates an important lever for countries to manage balance of payments pressures, and it's why the world doesn't have one global currency. Changing the value of the currency changes the price of a country's goods and services for foreigners at a different rate than it does for its citizens.

Think about it this way: if a family's breadwinner lost his/her job and would have to take a 30 percent pay cut to get a new one, that would have a devastating economic effect on the family. But when a country devalues its currency by 30 percent, that pay cut becomes a 30 percent pay cut only relative to the rest of the world; the wages in the currency the family cares about stay the same. In other words, currency declines allow countries to offer price cuts to the rest of the world (helping to bring in more business) without producing domestic inflation."

"Since 1971, we have been in what is called a fiat monetary system in which there are no constraints on governments’ abilities to create money and credit... Throughout history hard-money-linked monetary systems created too much debt, eventually leading to debt and economic crises and soft money—and quite often the creation of fiat monetary systems, which also created too much debt that led to money and debt devaluations which led to very tight money and often the return of hard-money systems, until these broke down, and so on repeatedly."

"As had happened repeatedly over thousands of years, the much larger financial claims on the money than the actual money in the bank led to a run on the central bank to get the money (i.e., the gold), which led the US in 1971 to default on its promises to allow holders of debt assets to turn them in for the money (gold).

In other words, during the whole 1945-71 period the Federal Reserve guided this credit cycle in a way that created many more debt asset claims on the gold-money than there was in the government’s bank so the government had to default on its promises to provide gold-money.

That led to the debt restructuring that took the form of a US government debt default and the creation of a lot of money, credit, and debt which led to the devaluations of money and large inflation around the world.

All that should not have been a surprise to students of economic history because history has shown that when governments are faced with this choice of how to deal with the excessive debts and the need to bring them down relative to incomes, this process is the least painful one, though it is still painful. That is why, in the end of all big debt cycles, all currencies have either been devalued or destroyed."

"The best way for policy makers to reduce debt burdens without causing a big economic crisis is to engineer what I call a “beautiful deleveraging,” which is when policy makers both 1) restructure the debts so debt service payments are spread out over more time or disposed of (which is deflationary and depressing) and 2) have central banks print money and buy debt (which is inflationary and stimulating). Doing these two things in balanced amounts spreads out and reduces debt burdens and produces nominal economic growth (inflation plus real growth) that is greater than nominal interest rates, so debt burdens fall relative to incomes."

"Why don’t central bankers do a better job than they have been doing in smoothing out these debt cycles by better containing debt so it doesn’t reach dangerous levels? There are four reasons:

1. Most everyone, including central bankers, wants the markets and economy to go up because that’s rewarding and they don’t worry much about the pain of paying back debts, so they push the limits, including becoming leveraged to long assets until that can’t continue because they have reached the point that debts are too burdensome so they have to be restructured to be reduced relative to incomes.

2. It is not clear exactly what risky debt levels are because it’s not clear what will happen that will determine future incomes.

3. There are opportunity costs and risks to not providing credit that creates debt.

4. Debt crises, even big ones, can usually be managed to reduce the pain of them to acceptable levels."

"When debt growth and economic growth are unsustainably fast and inflation is unacceptably high, central bankers will raise interest rates and limit money and credit which will incentivize more saving and less spending on goods, services, and investment assets. This will drive the markets and economy down because it’s then better to be a lender-creditor-saver than a borrower-debtor-spender. This dynamic creates short-term debt cycles (also known as business cycles) that have typically taken about seven years, give or take three years. In almost all cases throughout history, over time these short-term debt cycles have added up to create long-term debt cycles that have lasted about 75 years, give or take about 25 years. The stimulation phases of these cycles create bull markets and economic expansions and the tightening phases create bear markets and economic contractions."

"In a sense, the technological accomplishment of Bitcoin is that it invented a decentralized way to create scarcity on computers. Bitcoin demonstrated a way for me to send you a computer message so that you'd have it and I wouldn't, to move items of computer information between us in a way that limited their supply and transferred possession."

"The many systemic economic changes in recent decades that seriously aided net profit margins [are]

- wages, due in part to the global labor arbitrage enabled by the dismantling of national capital
controls in the 1970s and ‘80s;

− income taxes, due to repeatedly lower tax rates, plus the ability of multi-national U.S.
corporations to make use of jurisdiction-based tax-reduction strategies; and

− lower interest expense, via the Fed interest rate policies we’ve been discussing."

"Professor Smil, he identifies four materials that he calls the four pillars of modern civilization: cement,
steel, plastics, and ammonia... Professor Smil ranks ammonia (synthesized from natural gas) at the top of the list, because without its use to produce nitrogenous fertilizers, he has calculated that 40% to 50% of the global population of 8 billion people could not be fed. He further calculates that manufacturing these four essential materials consumes 17% of the world’s primary energy supply and accounts for 25% of all the CO2 emissions from the combustion of fossil fuels. Cement, which is very carbon intensive to manufacture, is made in larger quantity than any other material. There are practical limits to certain attempts to decarbonize the economy, although many avenues to reduce greenhouse gases certainly exist."

"Oil is the keystone commodity of the industrialized world. Natural gas is primarily a co-product of oil production; the latter comes with the former. Liquid fuel is like a magic substance or advanced alien technology that enables modern civilization. You wouldn’t think about it that way, unless you think about it.

Without oil and gas, even other key commodities can’t be produced. There would be no metals mining (no diesel fuel to power the equipment, or the metals and tires that comprise the equipment), no plastics, no nitrogen-based fertilizer to grow crops (synthesized from the natural gas), no combine harvesters to reap the crops, no semi-conductors (natural gas is required for the intense heat to produce purified silicon, more energy intensive than making aluminum or steel), and on and on."

"The annual deficit – bills do have to be paid – requires that much more money to be created every year. That is simply inflation by a different name, because when the money supply increases by more than economic output, any person’s money or savings becomes a smaller proportion of the total supply; it’s worth less and less. Approximately 31% of the total U.S. dollars in existence have been “created” within the past 2 years. That’s a far more transparent calculation than what goes into producing the CPI."

"Raising interest rates to slow demand in an effort to stamp out inflation is an incredibly blunt tool. Much like chemotherapy treats cancer patients by poisoning them, causing pain and suffering to healthy tissue even as it works to eradicate the cancer, aggressive interest rate hikes inflict pain and suffering on healthy aspects of the economy, driving companies to layoff workers, even as it works to eradicate inflation.

Because of this associated harm, in the mid-1970s, even before inflation had peaked at 12%, the Federal Reserve quickly backed off on interest rates as a recession took hold. Inflation did then begin to fade, but it remained at very high levels. By failing to complete the critical task at hand, the Fed allowed inflation to bottom out at a still high 5% and then roar back to rates approaching 15% as the 1970s came to a close.

It was this failure to finish the war against inflation that allowed inflation to return and led a new Fed chair,
Paul Volker, to famously raise interest rates to an astounding 20%, triggering two back to back recessions as
he committed to beat inflation for good.

As painful as these steps were, Volker’s actions laid the groundwork for a quarter century of robust economic growth, rising real wages, moderated inflation, and a booming stock market. The medicine was harsh but required. The patient recovered and went on to thrive."

"The mechanisms that people generally employ when responding to evidence that throws their beliefs into doubt include these (paraphrasing the authors’ words):

- an unwillingness to heed dissonant information;

- selectively remembering parts of their lives, focusing on those parts that support their own points of view; and

- operating under cognitive biases that ensure people see what they want to see and seek confirmation of what they already believe."

"To illustrate, people often ask me which of the past cycles I’ve experienced was most like this one. My answer is that current developments bear a passing resemblance to some past cycles, but there is no absolute parallel. The differences are profound in every case and outweigh the similarities. And even if we could find an identical prior period, how much reliance should we put on a sample size of one? I’d say not much. Investors rely on historical references (and the forecasts they foster) because they fear that without them they’d be flying blind. But that doesn’t make them reliable."

"Let’s think back to the fall of 2016. There were two things that almost everyone was sure of: (A) Hillary Clinton would be elected president and (B) if for some reason Donald Trump were elected instead, the markets would tank. Nonetheless, Trump won, and the markets soared. The impact on the economy and markets over the last six years was profound, and I’m confident no forecast that took a conventional view of the coming 2016 election got the period since then correct. Again, shouldn’t that be enough to convince people that (A) we don’t know what’s going to happen and (B) we don’t know how the markets will react to what happens?"

"Personally, if I think back, my career has been defined by recessions, I think a lot of people’s are. Recessions have always been hard, but they're also formative moments to focus and ultimately improve.

In 2000, as the first dotcom bubble first, the law firm I was supposed to go workforce that they didn't need any more securities lawyers, but they could probably find a spot for me in their bankruptcy practice. At just that time, you reflect on whether watching companies and flows was what I wanted to do with the rest of my life and pivoted to become an entrepreneur.

14 years ago, in 2008, at the onset of the last global recession, Google pulled their full-time offers for all their summer interns, which included my co-founder at Cloudflare, Michelle Zatlyn. If that hadn't happened, Cloudflare would have never been born. At the same time, I learned what a margin call was and, simply embarrassingly, literally had to borrow money from my mom to pay my rent.

That's when I got an extremely personal lesson on the importance of free cash flow, and it's why I'm ensuring right now in this uncertain time that Cloudflare is prioritizing being free cash flow positive. Tough times force you to reevaluate everything you've done and become better. It's why the best companies come out of tough times even stronger than they went in.

So, maybe it's a bit masochistic but I'm looking forward to have Cloudflare get even better during some of the tough times for the global economy that seem likely ahead. Hands on the wheel, eyes on the road, letting up a bit on the accelerator."

"The problem comes when prices get out of line with rents, jumping so high that families can lease similar properties at monthly payments much lower than what they'd shoulder as owners. 'There's an interplay between rents and prices,' says Pinto. 'When houses get too expensive versus rental properties, people rent more, lifting rents and pushing down home prices until the right balance is restored.' Rents exercise a kind of gravitational pull on prices. As Yale economist Robert Shiller puts it, prices to rents 'behave much like the price/earnings ratio for stocks.' He added that both are 'mean reverting.' Prices may from time to time jump way ahead of rents, but then the reverse happens: Prices slow or drop and rents catch up, restoring the usual relationship between the two."

"When asked whether we're heading toward a recession, my usual answer is that whenever we're not in a recession, we're heading toward one. The question is when. I believe we'll always have cycles, which means recessions and recoveries will always lie ahead. Does the fact that there's a recession ahead mean we should reduce our investments or alter our portfolio allocation? I don't think so. Since 1920, there have been 17 recessions as well as one Great Depression, a World War and several smaller wars, multiple periods of worry about global cataclysm, and now a pandemic. And yet, as I mentioned in my January memo, Selling Out, the S&P 500 has returned about 10.5% a year on average over that century-plus. Would investors have improved their performance by getting in and out of the market to avoid those problem spots... or would doing so have diminished it? Ever since I quoted Bill Miller in that memo I've been impressed by his formulation that 'it's time, not timing' that leads to real wealth accumulation. Thus, most investors would be better off ignoring short-term considerations if they want to enjoy the benefits of long-term compounding."

"[Howard] Marks returns repeatedly to a handful of themes that have obsessed him for decades. As I see it, five critical ideas come up again and again:

The importance of admitting that we can't predict or control the future.

The benefits of studying the patterns of the past and using them as a rough guide to what could happen next.

The inevitability that cycles will reverse and reckless excess will be punished.

The possibility of turning cyclicality to our advantage by behaving countercyclicality.

The need for humility, skepticism, and prudence in order to achieve long-term financial success in an uncertain world."

"One way that Marks gauges the current investment environment is by gathering "vignettes" about "stupid deals" that are getting done. For example, in 2017, Argentina issued a hundred-year bond with an annual yield of 9 percent. It was vastly oversubscribed, even though Argentina has defaulted on its debt eight times in two hundred years, most recently in 2014. It seemed a fine example of what Samuel Johnson called "the triumph of hope over experience." Sure enough, when I interviewed Marks in 2020, he noted that Argentina had just defaulted for the ninth time."

"In the 1977 to 1981 case, in order to stop inflation, the central bank found it necessary to increase the
federal funds rate from 4.69% in May 1977 to 17.19% in July 1981. At our current debt levels, such an
interest rate increase is unimaginable. In fact, even a 300-basis point rate increase is difficult to
contemplate. Yet, a 300-basis-point fed funds rate increase did not halt inflation at the end of the 1970s.

The magnitude of today’s debt levels appears to greatly reduce the central bank’s monetary policy
options. This is the central difference between the prior inflationary period and the current one. If the
inflation cannot be controlled by interest rate increases, perhaps it cannot be controlled. The alternative
is to control inflation via the money supply, meaning actually reducing the money supply."

"... it is not adverse macro events that derail compounding; it is investors’ reactions to them. In short, investor behavior derails compounding.

Examples of such counterproductive behavior are well known to all of us: trying to sell before the next recession, trying to buy just before the next bull market, 'repositioning' portfolios based on what is supposed to do better in the new paradigm, dumping stocks during a downturn, which deprives oneself of the means to eventually recover. People do these things because they are intuitive, because these actions appear rational in the face of heightened concern and uncertainty. This is precisely why compounding over the long term is so challenging and rare: it demands counter-intuitive and seemingly irrational behavior."

"The main reason the Federal Reserve System was created was to prevent banking panics. To do this, it was given the authority to provide credit, Federal Reserve Credit, to individual banks and, thereby, to the banking system as a whole whenever credit conditions began to tighten too abruptly.

The Federal Reserve System can provide credit in one of two ways. First, it can lend money to a member bank in exchange for sound collateral. Alternatively, it can buy a government bond (or other type of debt instruments authorized by Congress) from a bank. The Fed can also buy government bonds and other authorized debt instruments from a non-bank, such as an individual or a corporation, for example. The effect on the banking system is the same as if the Fed bought the bond from a bank because the non-bank entity deposits the cash it receives from the Fed into its commercial bank, thereby increasing the funds available to the banking system. By making a loan to a bank or buying a debt instrument from a bank, the Fed injects additional money into that bank, and, by extension, into the banking system and the economy as a whole."

"Throughout its long history, the balance sheet of the Federal Reserve has been dominated by five major components, of which three have been assets and two have been liabilities. The significant assets have been gold, loans (originally classified as bills discounted), and US government securities. The significant liabilities have been Federal Reserve Notes and Bank Reserves (originally classified as member banks' deposits).

Between November 1914 and June 2021, on the asset side of the balance sheet, the Federal Reserve System's gold holding increased from $205 million to $11 billion; loans (originally bills discounted) grew from $6 million to $163 billion; and government securities holdings (including GSE securities) soared from $0 to $7.5 trillion.

On the liabilities side, Federal Reserve Notes grew from $1 million to $2.1 trillion while Bank Reserves (originally member bank deposits) surged from $228 million to $3.5 trillion."

"Banking panics generally follow a particular pattern. In the lead up to the crisis, credit growth accelerates and generates an economic boom. Asset prices rise. Investor confidence becomes ebullient. Businesses misjudge future prospects and make poor investment decisions. Production outstrips effective demand. Prices begin to fall. Profits turn to losses. A respected company defaults on its debt obligations. Fears spread that more defaults will follow. Creditors not only cease to make new loans, but also call in their existing lines of credit. Unable to obtain financing for even essential working capital, otherwise sound businesses begin to fail. Panic spreads. Unemployment rises, investment plunges and losses mount. Debt defaults become widespread. A number of banks go under. The downward spiral intensifies, wiping out all those with insufficient capital to withstand the slump."

"Three months later, after Al Bean walked on the moon during Apollo 12, he turned to astronaut Pete Conrad and said, 'It's kind of like the song: Is that all there is?' Conrad was relieved, because he secretly felt the same, describing his moonwalk as spectacular but not momentous.

Most mental upside comes from the thrill of anticipation - actual experience tend to fall flat, and your mind quickly moves on to anticipating the next event. That's how dopamine works."

"Of the roughly 750 currencies that have existed since 1700, only about 20 percent remain, and all of them have been devalued. If you went back to 1850, as an example, the world's major currencies wouldn't look anything like the ones today. While the dollar, pound and Swiss franc existed in 1850, the most important currencies of that era have died. In what is now Germany, you would have used the gulden or the thaler. There was no yen, so in Japan you might have used the koban or they ryo instead. In Italy you would have used one or more of six currencies. You would have used different currencies in Spain, China, and most other countries as well. Some were completely wiped out (in most cases they were in countries that had hyperinflation and/or lost wars and had large war debts) and replaced by entirely new currencies. Some were merged into currencies that replaced them (e.g., the individual European currencies were merged into the euro). And some remain in existence but were devalued, like the British pound and the US dollar."

"While people tend to believe that a currency is pretty much a permanent thing and that 'cash' is the safest asset to hold, that's not true. All currencies devalue or die, and when they do, cash and bonds (which are promises to receive currency) are devalued or wiped out. That is because printing a lot of currency and devaluing debt is the most expedient way of reducing or wiping out debt burdens.

Most people worry about whether their assets are going up or down; they rarely pay much attention to the value of their currency. Think about it. How worried are you about your currency declining? And how worried are you about how your stocks or your other assets are doing? If you are like most people, you are not nearly as aware of your currency risk as you need to be."

"Typically debt crises occur because debt and debt service costs rise faster than the incomes that are needed to service them, causing a deleveraging. While the central bank can alleviate typical debt crises by lowering real and nominal interest rates, severe debt crises (i.e., depressions) occur when this is no longer possible. Classically, a lot of short-term debt cycles (i.e., business cycles) add up to a long-term debt cycle, because each short-term cyclical high and each short-term cyclical low is higher in its debt-to-income ratio than the one before it, until the interest rate reductions that helped fuel the expansion in debt can no longer continue."

"A genome is an organism’s complete set of DNA.

If the DNA code is a set of instructions that’s carefully organised into paragraphs (genes) and chapters (chromosomes), then the entire manual from start to finish would be the genome.

Almost every human’s genome, chromosomes and genes are organised in the same way. It’s the DNA code, the words on the page, that are slightly different. That’s what makes us unique."

"Two questions concerned [Sante Fe Institute member Geoff] West: why do small animals live for less time than bigger animals, and why do humans live for around one hundred years rather than say, one thousand years, or one year?

The simplest of scaling laws concerns body-mass and skeletal strength. As an organism increases in size its body-mass grows with volume (to the cubed) whilst the shear strength of the skeleton only increases with the width of the bones (to the squared, or a power law of 3/2).

Without a bigger bone structure, mass soon overwhelms strength, and the organism collapses under its own weight! (A few companies we know have followed a similar pattern). Metabolic rates (as measured by oxygen used) also rise with body mass, but at a declining rate (a power law of 3/4). This implies there is an economy of scale to mass in animals, further evidence of which might be that heartbeats per minute also decline with mass.

This is Kleiber’s Law and it states that literally a kilo of mouse costs more energy to live than a kilo of say, whale. West put the two power laws together and realized that if longevity increases with mass, and the heart rate decreases with mass, then it follows that all life shares a common number of heartbeats (indeed, around one billion). A mouse uses up its billion heartbeats in about four years (at a rate of five hundred beats per minute) whilst an elephant uses up its billion heartbeats in seventy years (at a rate of twenty-five beats per minute).

It seems that evolution has not changed this basic constraint: a billion heartbeats it is, careful how you use them!

But even so, why does the mouse heart beat so quickly? In all animals the aggregate cross sectional area of the blood vessels increases with distance from the heart. The purpose of this is to overcome the viscous drag created by blood coming into contact with vessel walls. Smaller animals do not have the space in their body to allow for much cross sectional widening, and so the mouse heart works harder to overcome the blood's resistance to flow. In larger animals the distance between the heart and the body's cells is much greater and so the cross sectional area can be increased much more.

In other words there is a very basic function to longevity with skeletal strength allowing for size, size allowing for circulatory efficiency, and efficiency allowing for longevity. The answer to West's question is that man lives for around a hundred years as this is all his heart can cope with, given body-mass and skeletal strength."

"Psychologists (McClure, Laibson, Loewenstein and Cohen 2004) have found that the brain perceives immediate rewards differently to deferred rewards because two different parts of the brain are involved. Immediate gains are perceived positively compared to larger deferred gains as the limbic (survival) system has the ability to over-ride the fronto-parietal (analytical) system. Interestingly, stress induces this override, and of course, money induces stress. So, the more stressed we are, the more we value short-term outcomes! This is not without reason, for if starving is a real possibility, a meal today is more important than a feast in a week's time, and the brain's wiring reflects that survival bias. Such notions are embedded in popular phrases such as "a bird in the hand is worth two in the bush". But at Nomad we try to be more analytical: it is the two birds in the bush we are concerned with and how they compare to the bird in the hand."

"When you have ‘enjoyed’ the experience of a collapsing bubble a few times, you realize that there is a certain pattern to all bubbles. Obviously, they don’t all behave exactly the same way, but I have noticed certain common characteristics in the bubbles I have been through:

1. Retail investors account for a growing share of trading as the bubble grows.
2. Access to credit is almost always too easy.
3. Intrinsic value is being completely ignored by most investors.
4. Option activity skyrockets, particularly purchasing of small lots of call options.
5. Trading volumes are increasingly disproportionate to market caps.
6. Irrational behavior drives prices, i.e. equities rise for the weirdest reasons.
7. The bull market is fueled by misinterpreted information.
8. Well-meant warnings from officials are being ignored (take for example Greenspan’s warning about “irrational exuberance” in December 1996).
9. Insiders increasingly distance themselves, as they can is no longer see the logic behind the rise in prices."

"The long-term mean value of wealth-to-GDP varies modestly from country to country. Why is that? Think of wealth as the total amount of capital available and think of GDP as the total output in an economy. Wealth-to-GDP is thus a gauge of capital-to-output and measures how much capital that is required to produce one unit of output. In other words, it is a measure of capital efficiency, and all countries do not deploy their capital equally efficiently."

"One of the mantras which has been regularly trotted out by commentators is that the events of 2020 are unprecedented. Whilst that is literally true, as Mark Twain observed, history doesn’t repeat itself but it often rhymes. It is certainly true that most of us have never experienced anything like it, yet it may not be strictly true that the events of 2020 are without precedent.

There have been six identifiable pandemics over the past 130 years:

Recent Pandemics Estimated Deaths
Russian Flu (1889–90) 1m
Third Plague (1894–1922) 12m
Spanish Flu (1918–19) 50m
Asian Flu (1957–58) 2–5m
Hong Kong Flu (1968–69) 1–4m
Swine Flu (2009–10) 0.5m

We might be able to draw some parallels from these past pandemics as a guide for what may happen as a result of COVID.

One of the conclusions that you might draw from the economic effects of pandemics is that they do not so much cause new trends but rather they accelerate some existing trends.

The most obvious comparator — and one which people have most frequently alighted upon — is the Spanish Flu pandemic of 1918–19. The death toll of at least 50 million people caused a reduction in the workforce which may have been a factor in the subsequent widespread adoption of assembly line techniques for mass production. The assembly line was not invented as a result of the Spanish Flu pandemic — the Model T Ford was put on an assembly line in 1913 — but it accelerated its adoption.

The increase in productivity this delivered helped to fuel an economic boom as the cost of production of items such as cars and household electrical appliances were reduced as the volume of production rose so that they became affordable by the middle classes for the first time. This helped to fuel the economic and stock market boom of the Roaring Twenties.

Might something similar happen as a result of COVID? Obviously, I do not know, and fortunately my predictive capability is not the basis of our investment strategy. However, there are some clear signs that existing trends have been accelerated by COVID. For example:

• E-commerce
• Online working from remote locations using the cloud or distributed computing
• Home cooking and food delivery
• Online schooling and medicine
• Social media and communications
• Pets — which have become more important in isolation and when their owners are at home more
• Automation and AI"

"Everyone belongs to a tribe and underestimates how influential that tribe is on their thinking. There is little correlation between climate change denial and scientific literacy. But there is a strong correlation between climate change denial and political affiliation. That’s an extreme example, but everyone has views persuaded by identity over pure analysis. There’s four parts to this:

- Tribes are everywhere: Countries, states, parties, companies, industries, departments, investment styles, economic philosophies, religions, families, schools, majors, credentials, Twitter communities.

- People are drawn to tribes because there’s comfort in knowing others understand your background and goals.

- Tribes reduce the ability to challenge ideas or diversify your views because no one wants to lose support of the tribe.

- Tribes are as self-interested as people, encouraging ideas and narratives that promote their survival. But they’re exponentially more influential than any single person. So tribes are very effective at promoting views that aren’t analytical or rational, and people loyal to their tribes are very poor at realizing it.

Psychologist Geoffrey Cohen once showed Democratic voters supported Republican proposals when they were attributed to fellow Democrats more than they supported Democratic proposals attributed to Republicans (and the opposite for Republican voters). This kind of stuff happens everywhere, in every field, if you look for it.

"We all understand the world is watching, watching all of us today.

So here's my message to those beyond our borders: America has been tested and we've come out stronger for it.

We will repair our alliances and engage with the world once again.

Not to meet yesterday's challenges, but today's and tomorrow's challenges.

And we'll lead, not merely by the example of our power, but by the power of our example."

"Just 10-15 short years ago, a lot of delivering software meant literally delivering software - Microsoft Office used to ship to you on a CD that you'd install directly to your computer. And it wasn't web-based, so you didn't need internet access to use Excel or PowerPoint. The public cloud (AWS and co.) didn't exist, so if you needed to run software on a server or two, you'd need to literally build that infrastructure yourself, which used to cost millions of dollars up front. So naturally, software delivery was bespoke and on the slower side.

But then people started consuming software via the internet, and public clouds like AWS made it cheap and easy to use a server without having to build a data center. That fundamentally changed 3 things:

1. The scale of software increased - software is generally used by a lot more people than in the past. You could realistically need to support millions of users for your application.

2. Infrastructure got more complicated - we're moving towards increasingly specialized managed infrastructure for different parts of the stack. Generally, you don't just throw your code onto a box and forget about it anymore.

3. Teams started releasing a lot more often - changes in philosophy mean teams are now shipping code changes to users as often as multiple times a day, which means many, many more opportunities to break things."

"Back in the old days Warren Buffett could find businesses that clearly were likely to remain dominant for long periods of time and perform relatively straightforward analysis to assess their valuation. For instance, he could look at something like the Washington Post, which essentially became the monopoly newspaper in a major city, and invest on the basis of reasonable, consistent assumptions regarding a few variables like circulation, subscription prices and ad rates. It was a foregone conclusion that the paper would remain dominant because of its strong moat, and thus that the past would look very much like the future. In contrast today:

- Because markets are global in nature, and the Internet and software have vastly increased their ultimate profit potential, technology firms or technologically aided businesses can grow to be much more valuable than we previously could have imagined.
- Innovation and technical adoption are happening at a much more rapid pace than ever before.
- It has never been easier to start a company, and there has never been more capital available to fund entrepreneurship.
- There have also never been as many highly capable people focused on starting and building companies.
- Since many of these companies are selling products primarily with code, their costs and capital requirements are extremely low and their profitability - especially on incremental sales - is unusually high. Thus, the economics of winners have never been more attractive, with very high profit margins and minimal capital requirements."

"When you find an investment with the potential to compound over a long period of time, one of the hardest things is to be patient and maintain your position as long as doing so is warranted on the basis of prospective return and risk. Investors can easily be moved to sell by news, emotion, the fact that they've made a lot of money to date, or the excitement of a new, seemingly more promising idea. When you look at the chart for something that's one gone up and to the right for 20 years, think about all the times a holder would have had to convince himself not to sell."

"Thus, to me the essential underlying principles of value investing are these:

- the understanding of securities as stakes in actual businesses,
- the focus on true worth as opposed to price,
- the use of fundamentals to calculate intrinsic value,
- the recognition that attractive investments come when there is wide divergence between the price at which something is offered in the market and the actual fundamental worth you've determined, and
- the emotional discipline to act when such an opportunity is presented and not otherwise."

"Two Types of Investing:

The type of investment you hold should also weigh into your decision on whether to sell or not.

Close the Discount Investing:
- Pay $0.70 for $1 of value, then sell at $1
- This strategy pays off once

Compounder Investing:
- Pay >$1.30 for $1 value that can grow into $10
- This strategy pays off multiple times
- A gift that keeps on giving"

"[John] Gottman has been able to narrow down four characteristics of a couple that tend to lead to divorces (or breakups). He has gone on and called these 'the four horseman' of the relationship apocalypse in his books.

1. Criticizing your partner’s character (“you’re so stupid” vs “that thing you did was stupid.”)
2. Defensiveness (or basically, blame shifting, “I wouldn’t have done that if you weren’t late all the time.”)
3. Contempt (putting down your partner and making them feel inferior.)
4. Stonewalling (withdrawing from an argument and ignoring your partner.)"

"Trust is like a china plate - if you drop it and it breaks, you can only put it back together with a lot of work and care. If you drop it and break it a second time, it will split into more pieces and it will require more time and care to put back together again. But drop and break it enough times, and it will shatter into so many pieces that you will never be able to put it back together again, no matter what you do."

"Don't ever be with someone because someone else pressure you to. I got married the first time because I was raised catholic and that's what you were supposed to do. Wrong. I got married the second time because I was miserable and lonely and thought having a loving wife would fix everything for me. Also wrong. Took me three tries to figure out what should have been obvious from the beginning, the only reason you should ever be with the person you're with is because you simply love being around them. It really is that simple.

- Greg"

"1. Be Together for the right reasons
2. Have realistic expectations about relationships and romance
3. The most important factor in a relationship is not communication, but respect
4. Talk openly about everything, especially the stuff that hurts
5. A healthy relationship means two healthy individuals
6. Give each other space
7. You and your partner will grow and change in unexpected ways - embrace it
8. Get good at fighting
9. Get good at forgiveness
10. The little things add up to big things
11. Be Practical, and create relationship rules
12. Learn to ride the waves"

"Newton's Laws of Motion are three fundamental, general laws which help describe how objects in the world move and react to forces.

1. First Law - The Inertia Law (an object at rest, stays at rest)
2. Second Law - Force=Mass * Acceleration (F=ma)
3. Third Law - The Law of Reciprocity (for every action there is an equal and opposite reaction)"

"One basic principle found throughout nature is this: tension seeks resolution. From the spider web to the human body, from the formation of galaxies to the shifts of continents, from the swing of pendulums to the movement of wind-up toys, tension resolution systems are in play. We can observe in nature and in our lives both simple and complex tension-resolution systems that influence not only the changes that occur but how those changes will occur. The simplest tension resolution system is a structure that contains a single tension. The tendency of the structure is to resolve the tension. If you stretch a rubber band, the tendency of the rubber band is to pull back to resolve the tension in the structure. A compressed coiled spring has a tendency to release the tension by springing back toward its original state."

"Most people, most of the time, will take whatever choice requires least work - death before inconvenience. When you understand this, you can take advantage of it - whether you're a programmer or the operator of a business. Often competitors will not be willing to put in the work required and although it is by definition difficult, it will be successful. Successful design sees through the customer's eyes and makes whatever choice they are being asked to make as simple as possible. Little nudges go a long way."

"Moderator: What are the traits to be a great investor?

Charlie Munger: Obviously you have to know a lot but partly it's temperament, partly it's deferred gratification. You got to be willing to wait. Good investing requires a weird combination of patience and aggression and not many people have it. It also... requires a big amount of self awareness and how much you know, and how much you don't know. You have to know the edge of your own competency. And a lot of brilliant people are no good at knowing the edge of their own competency. They think that they're way smarter than they are. And of course, that's dangerous and it causes trouble."

"One of the most common refrains that API-first businesses hear is, "Oh Company X will just build that in-house," and yet, they almost never do. It's not for lack of resources. Facebook generated more profit in 2019 ($57 billion) than Twilio's entire market cap ($51 billion). It's that once they're integrated into a customer's product, API-first companies have incredibly deep moats. Specifically, they benefit from network effects, economies of scale, and high switching costs."

"Coherent actions are the set of interconnected things that a company does to carry out the guiding policy, each reinforcing the other to build a chain-link system that is nearly impossible to replicate. Walmart isn't the leading retailer because it has lower prices, or because it puts its stores in a certain type of town, or because it's built up the right distribution network, or because of any single thing that it does. It's the leading retailer because all of those pieces work together in such a way that no one could copy Walmart without copying the whole system."

"The "Buffett indicator," total stock market capitalization to GDP, broke through its all-time-high 2000 record. In 2020, there were 480 IPOs (including an incredible 248 SPACs) – more new listings than the 406 IPOs in 2000. There are 150 non-micro-cap companies (that is, with market capitalization of over $250 million) that have more than tripled in the year, which is over 3 times as many as any year in the previous decade. The volume of small retail purchases, of less than 10 contracts, of call options on U.S. equities has increased 8-fold compared to 2019, and 2019 was already well above long-run average. Perhaps most troubling of all: Nobel laureate and long-time bear Robert Shiller – who correctly and bravely called the 2000 and 2007 bubbles and who is one of the very few economists I respect – is hedging his bets this time, recently making the point that his legendary CAPE asset-pricing indicator (which suggests stocks are nearly as overpriced as at the 2000 bubble peak) shows less impressive overvaluation when compared to bonds. Bonds, however, are even more spectacularly expensive by historical comparison than stocks."

"Therein lies the problem with government debt. It is readily observable whether in the multi-decade case of Japan or the most indebted nations of the Eurozone that high total debt balances and lower economic growth show correlation. Several notable studies from economists point out similar relationships across the centuries. The basic summary is that the average growth rate in GDP for countries with a debt to GDP between 90%-120% is 2.4%, but when debt to GDP crosses 120% growth slips to 1.6%, on average."

"In the 30 years from 1914 and 1944, there were two world wars and the global depression, which led to the creation of a lot of debt that had the interest rates on it legally capped while all major currencies were delinked from gold, gold ownership was outlawed, the abilities to take money out of most countries were eliminated, and price controls on rent and other items were created. Then central banks printed a lot of money, which produced a lot of inflation, sharply reducing the real value of fixed-income and equity assets. Additionally, in most countries (especially in Europe) businesses were expropriated or nationalized, and the war damage destroyed a lot of property. Capitalists and capitalism were widely blamed and hated especially as a result of the stock market crashes and depressions, so many of them were killed."

"Examples of revolutionary changes within the existing orders include Roosevelt’s revolutionary shifts to the left in the early 1930s and Reagan’s and Thatcher’s revolutionary shifts to the right in the early 1980s. They were reflected in radically different wealth distribution policies that were exemplified by the radically different top income tax rates. For example, the top marginal tax rate in the US and UK since 1900, the changes in which are shown in the following charts, went from 0% to over 90% in 30 years and almost all wealth was redistributed in the 30 years between 1914 and 1944."

"The extraordinarily good performance of both bonds, equities and property since the mid-1980s has resulted in significant wealth creation amongst the already very wealthy, causing the gap to widen again. The wealthiest 1% began to grab a bigger slice of the pie when Reaganomics in the 1980s changed the economic landscape, and they have managed to do so ever since. Even if the poorest 99% are wealthier than ever before when measured in absolute terms, many of them feel poorer as they can see the wealthiest 1% building their wealth much faster."

"The rising gap between rich and poor has many implications. The spending powers of ordinary people are under pressure, which affects GDP growth negatively. As those spending powers continue to decline, the overall level of anxiety in society rises which affects social stability. Even worse, populists in the political elite take advantage by making many (mostly empty) promises. About 25% of all Europeans vote for a populist these days. I probably don’t need to remind you that, last time populism was in vogue, we ended up with a problem called Adolf Hitler."

"But the Metaverse is going to be some sort of real time 3D social medium where instead of sending messages and pictures to each other asynchronously, you’re together with them and in a virtual world and interacting and having fun experiences which might span anything from purely games to purely social experiences.

The other critical element of the Metaverse is it’s not just built by one mega corporation, right? It’s gonna be the work, the creative work of millions of people who can each add their own elements to it through content creation and programing and design...

So it will be a massively participatory medium of a type that we really haven’t seen yet. And even though you have Fortnite and Minecraft and Roblox each manifest some aspects of it, I think we’re still pretty far from having the thing. But yet the talk about this thing is it’s not just the work of one company. It’s not just one company’s product or revenue stream. Right. We’re talking about a mass participatory media, which needs to be an economy if there’s not an economy underlying this thing."

"ClickBaitShop:

Hi Ray, Big fan of your series “The Changing World Order” on LinkedIn and how it explores the current “big cycle” trends related to the decline of the US and the rise of China. As I read through the series, I can’t help but wonder, 'What should I do with this information?' What actions can the average person in the US take to mitigate the potential negative impact of the changing world order on the country and on their own life?

Ray Dalio:

Save and put your savings in to a well-diversified mix of currencies, countries, and asset classes so that your savings will not depreciate in value and will be enough to help cushion the bumps. Think broadly rather than narrowly about the environments that you might be in so that they are safe, satisfying, and economical. Pay attention to the patterns in history and how they compare with what is going on as a way of thinking about the possibilities. Do these things without being stressed. I recommend that you meditate."

"As Aristotle said a long time ago: 'The poor and the rich quarrel with one another, and whichever side gets the better, instead of establishing a just or popular government, regards political supremacy as the prize of victory.'"

"I also saw that going from one extreme to another in a long cycle has been the norm, not the exception - that it is a very rare county in a very rare century that doesn't have at least one boom/harmonious/prosperous period and one depression/civil war/revolution, so we should expect both. Yet, I saw how most people thought, and still think, that it is implausible that they will experience a period that is more opposite than similar to that which they have experienced. That is because the really big boom periods and really big depression/revolution periods come along about once in a lifetime, and one-in-a-lifetime experiences are naturally surprising... and because the swings between great and terrible times tend to be far apart, the futures we encounter are more likely to be more opposite than similar to those that we had and expect.

For example, my dad and most of his peers who went through the Great Depression and World War II (which came about because of the Roaring 20's debt boom) never imagined the post World War II economic boom because it was more opposite than similar to what they had experienced."

"In the sports world, University of Alabama coach Nick Saban taught his players to ignore the big picture - important games, winning championships, the opponent's enormous lead - and focus instead on doing the absolutely small things well. He would tell them, 'Think about what you need to do in this drill, on this play, in this moment. That's the process: Let's think about what we can do today, the task at hand."

"Why are incumbents adaptive in one way but not the other?

The answer is that to adapt they have to feel comfortable with how uncertain the new technology or new market is. Incumbents strongly dislike uncertainty so they wait for it to be mitigated. But startups can build moats in new markets while they are still uncertain where they usually can't with new technologies."