“Above all, do not lie to yourself. A man who lies to himself and listens to his own lie comes to a point where he does not discern any truth either in himself or anywhere around him, and thus falls into disrespect towards himself and others.”

— Fyodor Dostoevsky, The Brothers Karamazov

In This Week’s Digest …

Cathie Wood on Passive Investing
Brian Chesky on Remote Work
Articles, Podcasts, and Videos
Twitter Threads

Cathie Wood on Passive Investing

Cathie Wood, Founder of Ark Invest, recently observed that passive fund investors missed out on Tesla’s strong price appreciation between the company’s initial public offering in Jun 2010 and its addition to the S&P 500 ten years later:

Cathie Wood @CathieDWood

Passive funds prevented many investors from enjoying a 400-fold appreciation in $TSLA from a $1.6 billion market cap at its IPO in June 2010 to ~$650 billion when it entered the S&P 500 ten years later in December 2020.

Elon Musk @elonmusk

@pegobry @pmarca Exactly. Right before he died, Jack Bogle (of Vanguard fame) said index/passive funds were too great a percentage of the market and he really knew what he was talking about! There should be a shift back towards active investment. Passive has gone too far.

Of course, it is always going to be possible to identify stocks that significantly outperform a broad-based index like the S&P 500. Hindsight allows us to identify such situations with certainty while simultaneously forgetting about the companies that underperformed or ceased to exist during the same period. Survivorship bias and hindsight bias are cognitive errors that we should try to avoid rather than embrace.

Cathie Wood was responding to Elon Musk’s tweet about Jack Bogle supposedly changing his opinion on passive investing shortly before his death in early 2019. In last week’s digest, I pointed out that Mr. Bogle expressed concern that passive investing might eventually become too dominant, but he never disavowed indexing.

The ARK Innovation ETF has given up all of its spectacular gains since the start of 2020 and has underperformed both the S&P 500 and the Nasdaq Composite during this period. It is normal for active managers have periods of underperformance. It is not unusual for active managers to be confident in their strategy or to question passive indexing, but it does seem irresponsible to project 50% compound annual returns on a television show viewed by millions of retail investors.

Jack Bogle was not initially a believer in passive investing during the 1960s when he was ascending the ranks at Wellington Management Company. In 1967, Mr. Bogle led the merger of Wellington with Thorndike, Doran, Paine & Lewis, a firm that bought into the go-go style of active investing popular in the late 1960s. This ended in tears and eventually led to the founding of The Vanguard Group and the first index fund available to retail investors. Indexing remains a viable option for investors today.

Rational Reflections is a reader supported publication. Weekly Digest is free for all readers. Paid subscribers receive additional content including monthly business analysis write-ups covering a specific company or industry. This month, I am looking at the dialysis care industry and will be publishing a write-up on DaVita.

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Brian Chesky on Remote Work

Airbnb recently announced that employees will be allowed to live and work from anywhere they want. Employees who choose to move to a low cost location from an expensive city like San Francisco will not be asked to accept a reduction in pay.

As part of a Twitter thread explaining this policy, CEO Brian Chesky made the following comment:

Brian Chesky @bchesky

But there’s a tension. The most meaningful connections happen in person. Zoom is great for maintaining relationships, but it's not the best way to deepen them. And some creative work is best done in the same room

The pandemic forced millions of workers to do their jobs remotely and the technology that enabled this shift reduced the negative impact on the economy. But we need to be careful to not take the wrong lessons from the relative success of remote work.

As Brian Chesky acknowledges, the most meaningful connections happen in person. The pandemic demonstrated that teams that once worked effectively in person could continue being effective remotely. However, this is not the same thing as proving that brand new teams comprised of people who have never worked together in person will be effective collaborating remotely.

When I worked in the software industry, I collaborated with a number of colleagues remotely. The most effective remote workers were those who I had previously worked with in person. In contrast, it was more difficult to work remotely with a brand new team that we created in India. While the engineers were well qualified and often even brilliant, there was significant miscommunication and cultural misunderstandings that were only partially corrected by a great deal of international travel.

In an ideal world, a company’s employees would collaborate closely in person. However, the tight labor market has shifted the balance of power to workers who often prefer remote arrangements. Airbnb and other companies, particularly in technology, have no choice but to try to make such arrangements effective.

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Articles

In Search of a Steady State: Inflation, Interest Rates and Value by Aswath Damodaran, May 6, 2022. “The inflation genie is out of the bottle, and if history is any guide, getting it back in is going to take time and create significant pain. It is the lesson that the US learned in the 1970s, and that other countries have learned or chosen to not learn from their own encounters with inflation. It is the reason that when inflation made itself visible in the early part of 2021, I argued that the Fed should take it seriously, and respond quickly, even if there existed the possibility that it was transient.” (Musings on Markets)

Jack Bogle Book Explores Radical Vanguard Founder by Eric Balchunas, April 29, 2022. This article is written by the author of a new book: The Bogle Effect: How John Bogle and Vanguard Turned Wall Street Inside Out and Saved Investors Trillions. “Perhaps the most astonishing fact about Vanguard is that, though it manages more than a quarter of the assets in the entire fund industry, it accounts for only 5% of the industry’s revenue. Bogle’s net worth was about $80 million when he died, a fraction of what his peers in finance had amassed. “In the history of Wall Street,” Michael Lewis, author of Liar’s Poker and The Big Short, told me, “the ratio of money touched to money taken was never so high.” (Bloomberg)

The Arc of the Practical Creator by Lawrence Yeo, May 2022. Some thoughtful and very practical advice regarding how creative people should view the necessity of earning money in jobs that they might not particularly like: “Here’s the harsh reality of any creative endeavor: in the beginning, no one cares. Every creator requires a balance of intrinsic motivation and external validation, but you’ll have to accept that the external piece will be missing at first. But even if you can embrace that, you face yet another conundrum: How will you manage the fact that you won’t be making any money from this? And without money, how will you cultivate the resilience to keep going?” (More to That)

How Patience Pays Off, April 26, 2022. “Patience requires endurance against obstacles, both known and unanticipated. The longer your time horizon, the more disasters you’ll experience. Most people don't bear hardship well and quit. Depending on luck, periods of extreme hardship and under-performance may come before any success, leading to an expectation of failure. And even if you’ve experienced a bit of success, or even a lot of success, the naysayers will always come out against you. See the many, many hit pieces on Warren Buffett at various stages of his career. The man has been “washed up” more times than a three-year-old’s t-shirt.” (Permanent Equity)

Who’s Afraid of Elemental Power by Harry Stevens, April 28, 2022. Nuclear power is capable of producing vast amounts of energy on a continuous basis without generating carbon emissions. In contrast, wind and solar installations depend on weather conditions and take up enormous amounts of land. However, nuclear power is widely feared. Could rebranding nuclear power as “elemental power” actually change public perception? “Elemental would not only shed the stigma of “nuclear” and its association with bombs and radioactive fallout, but it would also emphasize the fact that the technology takes advantage of a natural process, just like solar and wind.” (Washington Post)

This 100-Year-Old Man Sets Record for Longest Career at One Company by Joseph De Avila, May 4, 2022. “Walter Orthmann goes to his job at a Brazilian textile company every day—just like he’s been doing for the past 84 years. Mr. Orthmann has set the record for having the longest career with the same company, Guinness World Records recently announced. He turned 100 last month. Over the course of his eight-decade career, he never considered working for another company, Mr. Orthmann said in an interview. He’s had job offers over the years, but he didn’t take any of those seriously, he said. “I love my job,” Mr. Orthmann said. “I would not change that for anything in the world.” (WSJ)

Coke, Sugar, and War, May 9, 2022. This article is an excerpt from Citizen Coke: The Making of Coca-Cola Capitalism. Coca-Cola successfully convinced the government that favorable treatment during World War II was essential. “One passionate appeal came from US Surgeon General Thomas Parran, who exclaimed, 'In this time of stress and strain, Americans turn to their sparkling beverage as the British of all classes turn to their cup of tea and the Brazilians to their coffee. From that moment of relaxation, they go back to their task cheered and strengthened, with no aftermath of gastric repentance. There is no undue strain upon the purse; no physiological penalty for indulgence.’” (Delancey Place)

Luxury Beliefs are Like Possessions by Rob Henderson, May 8, 2022. “The endowment effect for beliefs suggests that we assign greater value to beliefs if we possess them. We see beliefs out there. They don’t have much worth to us. But once we decide to “own” one, we assign it greater value, and become reluctant to relinquish it. We also tend to decrease the value of beliefs held by others. We denigrate their views in order to bolster the relative value of our own beliefs.” (Rob Henderson’s Newsletter)

Why Pessimism Sounds Smart by Jason Crawford, April 25, 2022. “I’ve realized a new reason why pessimism sounds smart: optimism often requires believing in unknown, unspecified future breakthroughs—which seems fanciful and naive. If you very soberly, wisely, prudently stick to the known and the proven, you will necessarily be pessimistic.” (The Roots of Progress) h/t Farnam Street

18 Little Stories That Will Have Massive Impact On Your Life by Ryan Holiday, May 4, 2022. Sometimes, it is easier to remember important truths about life when they are represented in memorable stories, as illustrated in this article. (RyanHoliday.net)

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Podcasts

Ted Weschler Interview, April 27, 2022. This is a rare interview of Ted Weschler, one of Berkshire Hathaway’s two investment managers. The interview covers a lot of territory including how Mr. Weschler won the Glide charity auction for lunch with Warren Buffett two years in a row. Although his goal wasn’t to land a job at Berkshire, that is what eventually happened. All Berkshire shareholders should take the time to listen to this podcast. (I Am Home Podcast/NFM) h/t @norbertlou

Reversing the Aging Process, April 2022. “Biologist and genetics expert Dr. David Sinclair is out to prove he can live past 100 years old, and he thinks you can too. On this episode Sinclair goes in-depth on the process of aging and the techniques you can incorporate into your life that help you live a longer, healthier life, including optimizing your diet, the benefits of exercise, the role of a positive attitude, the importance of sleep, the three supplements he takes every day, why it’s never too late to slow the process of aging …” (Farnam Street)

Videos

Christopher Bloomstran and Adam Mead were interviewed during the Berkshire Hathaway panel at an event sponsored by the Gabelli Funds. Mr. Bloomstran’s client letters have covered Berkshire Hathaway in great detail in recent years. Mr. Mead is the author of The Complete Financial History of Berkshire Hathaway which I discussed briefly in a recent newsletter.

Tom Gayner of Markel Corporation was also interviewed at the Gabelli Funds event. Mr. Gayner was recently named as Markel’s sole CEO, to take effect at some point before March 2023 when co-CEO Richie Whitt retires. I recently wrote about whether Markel might be an attractive acquisition for Berkshire Hathaway.

Mohnish Pabrai recently participated in a Q&A session at a Harvard Business School Investment Conference.

Twitter Threads

Experts make their skills appear effortless. Most of us understand this at an intellectual level, but it can still be surprising when we try to pick up a skill that seems simple but is really more complex than we thought. This tweet is part of a thread of eighteen interesting paradoxes.

Sahil Bloom @SahilBloom

The Effort Paradox You have to put in more effort to make something appear effortless. Effortless, elegant performances are simply the result of a large volume of consistent, effortful, gritty practice. Small things become big things. Simple is not simple.

When CNBC runs a “Markets in Turmoil” segment, one year forward returns have been quite strong. However, I wouldn’t try to time markets based on this finding!

Charlie Bilello @charliebilello

CNBC ran its "markets in turmoil" special last night, the only indicator with a perfect track record...

CNBC @CNBC

TONIGHT on CNBC at 8p ET — A CNBC Special Report: Markets In Turmoil. After the Dow plunged 1,000 points and the Nasdaq dropped 5%, what's next for your money? Our reporters and guests will bring you the latest. https://t.co/LVLoBcX53L

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Rational Reflections

Weekly Digest - May 10, 2022