In this series, we suggest worthwhile reading material on a variety of topics, not all of which are directly related to investing.
The World’s Largest Hedge Fund Is Building an Algorithmic Model of its Founder’s Brain – The Wall Street Journal, December 22, 2016. Succession planning is important for all companies, especially those with a leader who will be difficult to replace. Ray Dalio has approached the problem at Bridgewater by putting software engineers to work on creating a system that would automate most of the firm’s management. Mr. Dalio believes that humans work like machines except they are afflicted by “emotional interference” that computers would disregard. The article describes Bridgewater’s unusual corporate culture and the mechanics of the new system. Skepticism seems to be warranted. (Update: On January 3, 2017, Ray Dalio posted a reply to the Wall Street Journal article on LinkedIn.)
Hedge Fund Fees Take a Trim – Financial Times, December 22, 2016. The standard hedge fund industry charge of a 2 percent management fee and a 20 percent performance fee (2 and 20) has been under attack for some time. For new fund launches, the average management fee is now 1.49 percent with a 17.5 percent performance fee. With passive investments available at virtually no cost, hedge funds that are failing to outperform their benchmarks are likely to face continued pressure while new entrants will be viewed with even more skepticism.
What is Your Edge? – Base Hit Investing, December 12, 2016. John Huber identifies three main advantages that can be had in markets: informational advantage, analytical advantage, and time-horizon advantage. Most investors focus only on informational advantages where there is a great deal of competition from other investors trying to do the exact same thing, and even when obtained, informational advantages tend to be short-term in nature. Technology has reduced the ability of investors to benefit from informational and analytical advantages but the advantage accruing to time-horizon advantage has increased. We came to a similar conclusion in an article posted last year.
The Birth & Death Of A Consumer Franchise: Waldbaum’s – Intelligent Fanatics Project, December 16, 2016. This article is a summary of the rise and fall of a retail chain that most people have probably not heard about. Waldbaum’s was a supermarket chain that started from humble beginnings and grew to dominate its market under the leadership of the Waldbaum family. Izzy Waldbaum’s philosophy was to “pile it high and sell it cheap” which is reminiscent of the attitudes of other “fanatic” retailers including Sam Walton and Rose Blumkin. When Izzy died in 1947 at the age of 55, his wife Julia and their son Ira took over operations until the company was sold to A&P in 1986. Waldbaum’s then began a long decline and the brand eventually died. Julia Waldbaum’s obituary is also interesting reading. Readers might also be interested in our recent review of the Intelligent Fanatics Project.
Inequality and Skin in the Game – Medium, December 27, 2016. This is an excerpt from Skin in the Game, an upcoming book by Nassim Nicholas Taleb who is well known for his Incerto Series which is comprised of Fooled By Randomness, The Black Swan, Antifragile, and The Bed of Procrustes. The excerpt goes into some detail regarding different types of inequality, delineated by the type of inequality that people tolerate versus those that people typically find intolerable. This is a distinction that is rarely made in political debate and worth some consideration. Also, the excerpt goes into differences in social mobility between the United States and Europe.
A Breakthrough in Miniaturizing Lidars for Autonomous Driving – The Economist, December 24, 2016. The pace of development of self driving cars has been accelerating lately with more tests taking place on public roads. There are a number of technologies available to allow vehicles to partly replicate the image processing power of the human brain with most taking a “belt and suspenders” approach by combining multiple technologies. Lidar employs laser scanning and ranging to build up a detailed three dimensional image of a vehicle’s surroundings. Until recently, lidar units have been bulky and expensive but new technology could allow car makers to deploy tiny lidar units that cost less than $250 each. It is notable that Elon Musk’s Tesla Motors has, to this point, spurned the technology preferring to use cameras, radar, and ultrasonic systems in the Tesla autopilot system. For more on Elon Musk, please see our recent review of Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future.
The Best of Farnam Street 2016 – Farnam Street, December 29, 2016. If you are not reading Farnam Street on a regular basis, you are missing out on some great content. Shane Parrish lists sixteen of his posts and this is a good place for readers to start. Get 5% Better is a good article to read for anyone contemplating a new year’s resolution.
Happy New Year!