Russian Markets

Competition’s effect is the “market mechanism”. This example is from 1996 Russia.

Bill Browder is looking at stock in a Russian oil and gas company. The country’s companies have just become public, and though MNPZ has slightly smaller reserves than British Petroleum, it’s trading for 100x less. Why?

I was convinced that there must be some other explanation for the deep discount and spent the next several days searching for it.

Did the preferred shares have different par values? No. Was the ownership restricted to workers? No. Could the higher dividends be arbitrarily changed or canceled by the company? No. Did they represent only some minuscule part of the share capital? No. There was no explanation. The only reason I could fathom for why they were so cheap was that no one had showed up to ask about them-until I had.

Amazingly, I found that this anomaly wasn’t restricted to MNPZ.

Nearly every company in Russia had preferred shares and most of them traded at a huge discount to the ordinary shares. These things were a potential gold mine.

If there’s a name, there’s a market mechanism. If the invisible is now visible, there’s a market mechanism. If something is weird, new, unknown, secret, there may not be.

Pricing power evaporates with the heat of the market mechanism. Sometimes though, in the far reaches, someone can, find a gold mine.

Can someone be, like MKBHD?

Can someone become like you now Guy Raz asked Marques Brownlee?

It’s different today. “I’ve noticed that in polls of younger people their dream jobs used to be firefighter or movie star, but they all say YouTuber now”, said Marques, “this is fascinating to me because when I started that did not exist.”

If something is legible it’s something to compete on. But illegible things – becoming a YouTuber before it was a thing – make the competition harder.

Legible means playing according to the rules of the game. Illegible means making up the rules as you go. “I just wanted to make the kind of videos I liked to watch,” Marques notes. Illegible also means there’s time to find your rules. Brownlee spent years making videos. He admits that the early ones are hard to watch because they’re so bad. That’s fine!

With value comes competition, and the market mechanism whirls to life. “Your margin,” Bezos believed, “is my opportunity”. Alpha erodes.

Except in some places like the new, the foreign, the unaccounted, the unfavorable, the silly, and so on. Not every new thing ‘works out’ but every new thing has less competition.

Cons & Contexts

Context matters. A person at a college football game is unlikely to rip off their clothes and go streaking across the field. It happens, sure, but not whimsically. Streaking is premeditated. How else do they write such witty comments on their bum? But that person might rage. They might tear down the goalposts. They might set a couch on fire. Mobs are infectious.

Music is too. Turn on some good music. The context has changed the person.  

In a Betwixt the Sheets episode, Maria Konnikova talks about her 2016 book, The Confidence Game (Konnikova is one of my favorite non-fiction authors). She notes that con observers typically don’t understand. Too often we say that would never happen to me

But a con artist changes the context. “What we don’t understand” (looking at cons from the outside), Maria says, “is that objectivity goes away when we are emotionally involved. The first thing a good con artist does is get you emotionally involved in the story so that your ‘red flag spotter’ turns off.”

My wife’s grandmother lived to ninety one. She was a collector – of junk. Marketed in small-ish magazines sent directly to her house, she bought statues with American flags and coins and bobbles. She bought “limited edition” coins. She musta had fifty porcelain elephants. Her purchases were emotional: sentimentality, patriotism, greed.

She was a shrewd woman. Sharp too. Her eighty-fifth birthday was an open house and we spent much of the day eating and laughing with her. I was amazed at her observations. She lived through the depression. She worked on a farm. She had nine kids. She outlived some. She was tough, not an easy mark. She was conned. 

Her chotskies were just the artifacts. Family used her too.  

In business there’s an expression: you set the price and I’ll set the terms. You can charge any price if I can pay it whenever, however, and with whatever. Cons are similar: you set the mindset and I’ll set the context

Eliud Kipchoge is the greatest marathoner ever – so far. In a New York Times piece, he is quoted “Only the disciplined ones in life are free. If you are undisciplined, you are a slave to your moods and your passions.”

Con artists change the context which changes the mood. Their victims are emotionally involved. My grandmother-in-law was emotionally involved. Discipline is a buffer. Contexts change, emotions rise, but  discipline remains. 

Black Friday JTBD

JTBD (vacuums, meals, multitools) exists to find the implicit motivator. Humans stink at admitting, acknowledging, and understanding the scope of our motivations. JTBD finds gaps between those shortcomings and the lived results.

“I’m going to go Black Friday shopping,” Krista told me, “as an excuse to get lunch with my girlfriend.”

It seems like shopping is shopping – but one distinction is experience or convenience. Are we doing something to get it done or doing something to have done it? Shopping as an excuse to get lunch is a different job than shopping for deals.

Happy Black Friday.

The best uncorrelated asset

One framework for investing is the bathtub model. Individuals (but also managers of OPM like pension funds, endowments, etc.) aim to fill the tub as much as possible. An individual’s main stream is their salary. Maybe some salary first goes to an investment, and then pours in the tub. A rental property, a second job, a military retirement are inputs too. 

But the tub doesn’t just fill up, it drains too. Losses in the market are like leaks in the tub, hopefully we can mop these up and dump them back in. The big four unexpected costs: health, house, job, spouse are major leaks. Retirement is the intentional draining of the reserves.

More water and more pressure is good. Fewer and less severe leaks are good. One way to add on net are uncorrelated assets. What flows faster as something leaks more? Real estate and gold are classic examples. Bitcoin too – kidding! ‘All weather’ and ‘cockroach’ are portfolios which blend assets for uncorrelated returns. The goal is to prevent major mop ups or total losses. 

But the best and only uncorrelated asset is mindset. 

A common mindset during drawdowns for investors who dollar cost average is that stocks are on sale. This attitude goes beyond investing. When something bad happens it’s a chance to get stronger. Another is, you’ll have a great trip or some really good stories

The world is complex. There’s a lot going on, sure. But also ‘a butterfly flaps its wings in Kansas and causes a Tsunami in Guam’ complex. How does someone plan for just what’s happened since 2016?! How do investors (but also managers of OPM like pension funds, endowments, etc.) find that someone? Not only is our mindset the best and only uncorrelated assets, it’s ours to control. We can want less or more. We can view the obstacle as the way. We can match expectations to reality.

Russian Reading List

There’s a financial advisor axiom that the best plan is the one you’ll stick with. For trainers, it is exercises done through a full range of motion. The best endocrinologists find an achievable plan, not an ideal one. There should be one for education too. With that in mind, here’s a list of Russian resources optimized for consumption rather than comprehensiveness.

We’ve done this before with books about China and related, history books that are business books.

The Rest is History (podcast). Some podcasts are better than books because the host(s) add context. Dan Carlin is great at this. Tom and Dominic do too, and their series on Vladimir Putin is excellent.

Red Notice. A finance thriller? Yep. Bill Browder spent decades opening, running, and closing a fund in Russia during the switch from communism to oligarchy.

Muppets in Moscow A 2022 book, h/t Marginal Revolution about Sesame Street in Russia.

Exporting Raymond. We love Phil Rosenthal’s Netflix travel/food show Somebody Feed Phil. This is the story of taking the show Everybody Loves Raymond to Russia.

Koylma Tales via Agustin Lebron called it “a collection of stories of people who lived in the Gulag, possibly the most revealing book on human nature I’ve ever read.” Takes place through the 1930s and 40s.

Sandworm: A New Era of Cyberwar and the Hunt for the Kremlin’s Most Dangerous Hackers. Forgot this source. “The true story of the most devastating cyberattack in history,” notes Amazon, “and the desperate hunt to identify and track the elite Russian agents behind it.” 2,000 reviews averaging 4.7.

Are older people worse politicians? (& 4 good questions)

CBS News presents a survey suggesting people want younger politicians. Okay, sounds great! But not so fast. We’ve got questions.

Why am I seeing this? Courtesy of Sir David Spiegelhalter, this question wants us to consider why this is on a screen eighteen inches from our nose. Is it because it’s essential information for the functioning of our lives, like the weather or the email about our daughter’s swim meet location change? Or rather than essential it’s emotional like politics, religion, or social media brouhahas?

Am I switching questions? Courtesy of Daniel Kahneman, this question wants us to consider what question we are really answering. Sometimes we answer an easier question because life’s questions are really freaking difficult. Plus, we’re lazy. ‘Should centenarians be senators?’ doesn’t lead us to balance the merits of experience and patience relative to bias and cognitive decline. Rather, we’re reactionary and switch the questions to: ‘Are these politicians good?’

Am I thinking symmetrically? Courtesy of Bob Moesta, this question wants us to consider when opposites are the wrong solutions. Is it that legislators are too old or that their policies are antiquated? The solutions to loud, more, and high are not necessarily quieter, less, and lower. The solution to older may not be younger.

Why is this the right metric? Courtesy of Billy Beane, this question wants us to consider the best metric for the chosen outcomes. What if rather than age, the best metric was presence (or absence!) of a law degree. About half of the 117th US senate went to law school. Is that good? About two-thirds went to college in the state they represent. Is that good? Is education a better predictor of senator success?

Spiegelhalter was first with this idea (in my notes) but it’s Tim Harford’s Data Detective that I suggest.

Kahneman talks about A LOT of related ideas in Thinking Fast and Slow.

Moesta talks about symmetrical suggestions in his Circuit Breaker podcast. It’s also in Rory Sutherland’s Alchemy.

Beane’s story is told in Moneyball.

Why and Am I are hard questions because they force us towards discomfort. Why takes work, sometimes impossible amounts. It’s easier not to. Am I forces us to face our ego. Sometimes we are wrong.

Courage is Calling (review)

For some things podcasts are better than books. I’d never read about their subjects but The Rest is History and Hardcore History podcasts are consistently great. 

But books aren’t bad. They’re different. Fiction is great for books. Non-fiction is harder to execute. Ryan Holiday’s book, Courage is Calling, is a different form of non-fiction. Part of the four stoic virtues series, Courage is a collection of vignettes and the mini-stories give the reader many hooks to hang onto. Appearing are philosophers, writers, officers, statesmen, stoics, men, women – they’re all here. It reads fast, which is a good thing! I took away four aspects for courage: 

Act now. Douglas McArthur summarized life’s failures as being too late

Don’t fear the imagined. Hurrying to make a rendezvous through the Texas countryside, Ulysses S. Grant remarked to a companion that there were many wolves about, maybe surrounding them. Pushing through the brush Grant and his companion eventually came upon the wolves. Only two, who scattered. Grand reflected later “there are always more before they are counted.” 

Courage and fear are required conditions. Fighting the Nazis and rallying the French, Charles de Gaulle wrote “The intervention of human will in the chain of events has something irrevocable about it.” The important stuff has weight. And that responsibility has “a moral element.” 

We grow. “The willingness to accept responsibility for one’s own life, “Joan Didion observed, “is the source from which self-respect springs.” 

Courage is Calling is not a quake book, it’s a wake book. It’s what to read instead of checking your phone first thing in the morning. It’s different non-fiction. It’s more holistic than linear. It’s a mental refresher. It’s a reminder from another version of yourself, a version that encourages courage.

Here’s a tip, better copywriting

“First time seeing this at restaurants…,” posted Mrs Monroe, “way to guilt customers to spend more”.

Commenters added: “tipping is a sham”, “servers don’t really get that money”, “I hate seeing this at…”. Some suggested subterfuge, a special and spiteful $0.01.

It’s too bad, and a chance for good copy.

There are many restaurants because there are many restaurant jobs: fast, casual, formal, status, and so on. Diners want to feel good.

Broadly, businesses like restaurants, sell two things: steak and sizzle. The tangible, measurable, structural aspects are the steak: how fast, how good, how much. The intangible, spiritual, and attitude components are the sizzle: how nice, how friendly, how fun. Intangibles can be measured, though not as easily (so we often don’t).

Part of a place’s sizzle is their copywriting, even when it’s time to pay.

The good. ‘Good’, ‘Great’, ‘Wow!’. Translating feelings (this service was good) into actions (tip 15%) helps customers. People, like rivers, follow the least resistance. Make it easy. Also good are the calculated tips.

The bad. (1) Misuse leads to dislike. One commenter claims their local Taco Bell uses this same interface – tips and all. That’s fine, I guess, but doesn’t jive with the TB strategy. Hence the frustration.

Also interesting is why Mrs. Monroe feels guilty. Was this a serve-yourself place? Family style? Buffet? There’s a disconnect between her expectations and experiences.

(2) People like choices. There’s technically thousands of tip amounts, but we only see six. Especially with money, people do not like to be told what to do. Better would be a slider like for a phone’s brightness, or a knob like for a stereo’s volume.

(3) ‘Best Service Ever!’ is a twenty-five percent tip? Whoever programmed that has not (or forgot about) eating out with kids. Best ever deserves more. Setting this upper amount also frames the range a customer sees.

(4) ‘Skip’ could be ‘Skip and speak with the manager’. This forces diners to match their words and actions. Was it bad, or just a bad mood?

The confusing. None.

This image lacks context: the quality, service, and kind of meal, the representativeness of the commenters, the individual’s profile. None of what’s written may be a solution. But thinking through the options might get to one.

Good copy sits within the broader bucket of communication which sits within strategy which works best when the sub-actions align.

Winning’s Structure

Good advice is hard. Our This Time is Different series is built around asking: Are these the correct lessons?

Part of the uncertainty is the truth and fit between the big idea and the story. Start with No is an example. The big idea is our ego, the story is sales, and the fit is that good salespeople have the right ego. Do people have egos? Are people in sales? Does the right ego for sales still matter? Yes – so the book is good advice. 

Wanting by Luke Burgis is an example too. The big idea is network types. The story is about mimetics. The fit is that we are mimetic because of our network structure. That checks out too (though I had my doubts about the effect size). 

Winning by Tim Grover follows this pattern. The big idea is intentionality told through the story of competition. Winning like Jordan or Kobe requires intentional actions. That checks out too. An opposite story but the same big idea is Early Retirement Extreme. The big idea is still intentionality but the story is financial philosophy. 

Grover focuses on intentionality in two ways: wants and outsider status.

For Grover, wants like winning are preceded by actions. Kobe and Jordan wanted to win so they had to take actions that lead to that.  “If you don’t get on the same level,” Michael Jordan told one teammate, “It’s going to be hell for you.” Jordan was one of the first players to switch from carb heavy meals to eating steak before games. Before Jordan, few players trained during and before the season. For Kobe the actions were learning Slovenian to trash talk Luca Donic. In 2008, preparing for the Olympic Games, Kobe was going to the gym when the rest of the team came back from a party at five in the morning. 

Intentional living requires wants which require actions.

Grover’s second point is how it feels to be an outsider. Howard Marks popularized the idea that outperformance means being different and being right. Easy to say, hard to do. 

Investors, like Marks, can be different and right with good stakeholders. If limited partners don’t ‘get it’ the business plan can’t work. Investors then look for LPs who will ‘stick with’ a plan. It’s easier to be an outsider when surrounded by a (small) group of insiders. 

Grover’s clients are in the entertainment business so the ‘get it’ is social. Why succeed unconventionally when you can fail traditionally? 

There are ways to deal with outsider status. Have a plan and stick with it rather than stick your finger in the wind. “No,” Grover writes, “is a complete sentence.” Build up the don’t give a fuck muscle too. Some think it’s weird? Who cares! 

Successful outsiders design easier paths. We are wired to not stand out. Kobe Bryant had the most ingenious form and LARPed as the Black Mamba. Winning wasn’t a great book. I hoped for more insider stories. But the big idea was a good reminder.