2021 Books

Posted: 4 April 2021

How to Avoid a Climate Disaster - Bill Gates

4th April 2021. First book of the year! I’ve been slowly working my way through the Japanese Economy textbook. I should be done with that by H2 2021. I’ve always been a fan of GatesNotes and of course Bill Gates himself, so it’s natural that when this book was released, I immediately ordered it and finished it quickly.

In this book, Gates broke down all global emissions into five major components. How we make things (31%), make electricity (27%), grow things (19%), get around (16%), keep cool and stay warm (7%). EVs aren’t the moonshot solution if the electron used to move that EV is a dirty electron. At the end of the day, we need to fix “making electricity”. That’s a really hard problem, as storage and distribution is even harder. The technology to make clean energy already exists.

Let’s use Singapore as an example. For Singapore to be 100% solar sufficient, we need to generate 200% worth of energy in a day. The first 100% assumes that energy is generated from 7am to 7pm when the Sun is up. The second 100% needs to be generated during the same period, stored, and then consumed at night. This of course simplifies the whole situation a lot, as there’s cloud cover, rain, the Sun moving throughout the day, etc. In 2019, Singapore consumed 51.7TWh (see EMA website). From NASA’s site, we can see that 1360W per square meter of energy reaches the top of atmosphere, if it’s directly facing the Sun. For ease of calculation, we will just assume that 1000W hits the Earth’s surface, a gross overestimation. If we assume 20% efficiency for solar panels (most commercial ones hit around 20%), and 12 hours of “full sunlight”, then a square meter in Singapore can generate 2.4KWh. 51.7 TWh translates to 141GWh in a day and 11.75GWh in an hour. This translates to 4.8 million square meters, An area about 2Km by 2Km. Hmmm… This is extremely back of the envelope and I hope I’m getting the interpretation of watts correctly. Let me know if I am not! I cross checked with this article and it seems to make sense. From this perspective, it does seem that Singapore can truly be 100% solar self sufficient…? If we could install battery technology in each HDB, and have central cooling systems, that might be very interesting. As stated above, the generation part is very feasible - the technology exists and it’s about scaling up. The storage part is really hard. Gates mentioned a hypothetical scenario about a three day power outage in Tokyo. If Tokyo was fully running on clean energy and has long term battery technology in place, then it would need more than 14 million batteries just for these three days - more storage capacity than the world produces in a decade. Averaged over the lifetime of the batteries, that’s an expense of 27 billion (data here cited from Gates’ book). I can’t say this enough because I keep coming back to this - storage and distribution is REALLY hard.

Gates talked about fertilizers as well, something of interest to me recently. Microorganisms in the soil that make nitrogen expend a lot of energy in the process of making nitrogen. They have evolved to only produce nitrogen when they absolutely need to, when there’s no nitrogen in the soil around them. This is why synthetic fertilizers disrupt the natural ecosystem in the soil. I’ve not used synthetic fertilizers in my garden and my plants are thriving. Gates also introduced CGIAR, the world’s largest agricultural research group, and the various alphabet soup organizations related to CGIAR. This is the first time I’ve heard of this. Last but not least, I learnt about Scuba Rice - that’s super cool.

Climate change involves more than just technology. Politics matter at the end of the day because the party that wants to increase prices of gasoline and food for the masses will not get voted in. However, the politicians can still play a part in crafting policy that encourages industry to go green. Everyone has to play a part in perhaps this greatest challenge of my generation (?).

The Ministry for the Future - Kim Stanley Robinson

13th May 2021. I can’t remember where I saw the recommendation for this book. It’s an interesting science fiction book that puts out some radical ideas. For example, using the expertise of oil and gas firms to drill holes on glaciers to pump out the meltwater under the glaciers to slow down the movement of glaciers. Or colouring the ocean yellow to reduce the heat absorption. There were quite a few radical geoengineering ideas. I think the most interesting of all was the carbon coin idea, where central banks get together to issue this new “global” currency. I wonder if it’s possible for our world today?

The Japanese Economy - Takatoshi Ito and Takeo Hoshi

15th May 2021. A heavy read that I read over 6 months. Takeaways below:

  1. Club of Rome’s 1972 report. Pollution in Japan was also reaching the point where many people thought something had to be done (p. 66). This seems to be the narrative that we see constantly in history. Is the same thing happening now for the pollution in China and the world in general? Is this time different?
  2. At the end of the 1980s, many economists as well as policymakers around the world were praising the Japanese economy for its excellent performance. Although a few economists raised concerns, many financial analysts and bankers were not alarmed at the apparent high value of stocks and land compared to their cash-flow earnings. In retrospect, it is obvious that the Japanese economy was experiencing a bubble (p. 166). Once again, is this time different? As of May 2021, stocks in general are at all time highs, land prices have also been increasing. The increase in price seems to be disjoint from reality, though anaylsts like to say markets are “forward looking”. Bridgewater also released an article in Feb 2021 here. “Bubble” stocks have taken a huge correction since then, but is it over? I think what’s interesting about financial markets is that you can draw a correlation between many pairs of events. For example, one can say that Bridgewater released this article and retail investors and analysts all took “some” of it as advice and started unwinding their positions, creating a self-fulfilling prophecy. This hypothesis is hard to prove and also hard to disprove.
  3. Now, many researchers conclude that the course of current Japanese fiscal policy is not sustainable, and that a serious crisis will occur in less than ten years unless fundamental changes in fiscal policy (such as increasing tax revenues) take place (p. 198). “Now” refers to 2020, the year of publication of the book, I think? Or at least 2015 onwards. I think it’d be interesting to talk to a Japanese debt expert on this.
  4. In Japan, all of a decedent’s property is subject to inheritance tax, which is imposed on the recipients (p. 214). Having more statutory heirs for a given decedent would lessen the total tax liability on the estate (p. 214). In Japan, land and structures account for more than 60 percent of bequeathed assets (p. 215). In 2009, a little more than 1 trillion yen was collected as inheritance tax (p. 216). Based on OECD’s records, (I didn’t fact check the website, URL checks out), estate tax was 1.35T in 2009 and was 2.23T in 2019 - it has more than doubled in ten years. Given Japan’s ageing population, could the estate tax end up paying for itself? See (3) as well.
  5. In sum, the researchers find that Japan’s fiscal policy is not sustainable at the current tax rates and expenditure pattern (p. 227). This statement appears once again. Is there truth to that?
  6. Big three trading companies are Mitsubishi, Mitsui and Sumitomo (p. 308).
  7. Life in a Large Company (p. 370). The preference to work in large companies among Japanese college graduates implies that it is competitive to get into a large company.
  8. The tradition of lifetime employment seems to be ending in Japan (p. 372).
  9. Indeed, most of the little economic growth that Japan experienced during the Lost Two Decades came from growth in external demand of automobiles and electronics (p. 390).
  10. Gravity equation in trade (p. 407). I thought this was cool.
  11. Although the US has been running current account deficits for a long time, it does not have to worry about a currency crisis because foreigners are content to hold US dollar-denominated securities, either as foreign reserves in the official sector or as investment portfolios in the private sector (p. 475).
  12. The magnitude of a bubble is difficult to know in real time. A sharp asset price increase usually can be recognized as a bubble only after it bursts.
  13. Run on toilet paper in the 1973 oil crisis (p. 557). Seems like humans just don’t change. This time it was not different.

I picked up this book as Japan has been in a low or zero interest rate policy era for the longest time. They have experience dealing with it. Now that almost all central banks around the world have low interest rates, they are probably looking to Japan as a model. What’s different now is that everyone is in ZIRP at the same time. What effects would this bring? If every country is increasing money supply, and increasing at the same ratio (bad assumption of course), would exchange rates change? Where is all the money supply going?

The Intelligent Investor - Benjamin Graham

13th July 2021. I often hear growth investors or other investors say “this time is different”. Governments are printing money! Inflation is everywhere! Buy BTC! I’ll touch on “this time is different” in another book, which in almost comical fashion, is titled “this time is different”. A sneak quote from that book: “never before have these four words been so dangerous”. As a contrarian, I like to go against the norm. More importantly though, I’m not comfortable with the lofty valuations in equities now. Many tech equities are now priced based on future earnings and growth, which has the issue of a large margin of error. A compounded growth of 25% vs 30% over a few years can result in a large difference in the present value of the stock! Here is a lengthy list of quotes and my notes on the book:

  1. But it should be remembered that between 1949 and 1969 the price of the DJIA had advanced more than fivefold while its earnings and dividends had about doubled. Hence the greater part of the impressive market record for that period was based on a change in investors’ and speculators’ attitudes rather than in underlying corporate values (p. 27).
  2. On this point we can be categorical. There is no close time connection between inflationary (or deflationary) conditions and the movement of common-stock earnings and prices. The obvious example is the recent period, 1966 - 1970. The rise in cost of living was 22%, the largest in a five-year period since 1946 - 1950. But both stock earnings and stock prices as a whole have declined since 1965. There are similar contradictions in both directions in the record of previous five-year periods (p. 51). In the current “inflationary” environment (July 2021), investment managers are scratching their heads on how to hedge their portfolios against inflation. Graham states there is no correlation between earnings (and prices) and inflation. Therefore, when I see financial news sites publish headlines like “make the inflation trade”, I am unclear of what they actually mean.
  3. Peter Bernstein feels that Graham is “dead wrong” about precious metals, which has shown a robust ability to outpace inflation. Keeping precious metals to say 2% of your total assets is a good hedge as it may outperform spectacularly in bad times (p. 55 footnote). This is good advice in general - is BTC then the new “precious metals fund”? Investors seem to be keen to allocate a small portion of their portfolios to it.
  4. These 14% and better returns were documented in 1963 (1949 to 1966 had a compounded rate of 14%), and later, in a much publicized study. It created a natural satisfaction on Wall Street with such fine achievements, and a quite illogical and dangerous conviction that equally marvelous results could be expected for common stocks in the future. Few people seem to have been bothered by the thought that the very extent of the rise might indicate that it had been overdone. The subsequent decline from the 1968 high to the 1970 low was 36% for S and P composite and 37% for the DJIA, the largest since the 44% suffered in 1939 - 1942, which had reflected the perils and uncertainties after Pearl Harbor. In the dramatic manner so characteristic of Wall Street, the low level of May 1970 was followed by a massive and speedy recovery of both averages, and the establishment of a new all-time high for S and P composite and DJIA in early 1972 (p. 69). The latter part of this paragraph reminds me of the COVID crash. In 1970, a 36% crash took 1.5 years before an ATH was hit. In 2020, a 32% crash took 0.5 years before an ATH was hit. What gives the difference in speed of recovery? The simplest answer is stimulus packages from governments globally. Is this the best answer?
  5. To us, the early 1971 market’s disregard of the harrowing experiences of less than a year before is a disquieting sign. Can such heedlessness go unpunished? We think the investor must be prepared for difficult times ahead - perhaps in the form of a fairly quick replay of the 1969 to 1970 decline, or perhaps in the form of another bull market fling, to be followed by a more catastrophic collapse (p. 78). There’s a lot of context to this statement, as Graham talks about P/E ratios and bond yields and a whole bunch of other stuff. His assessment of that year is that things are unattractive for a conservative investment then. True enough, the bull run continued to Jan 1973, before dropping about 40% to a low in Sep 1974. Nonetheless, one thing holds true here. If you aren’t an enterprising investor, buying and holding the index would tide you through.
  6. Some general rules on the common stock component (p. 114).
    1. Diversify. Hold 10 to 30 issues. In today’s context, an ETF would automatically diversify. 2. Each company should be large, prominent and conservatively financed. 3. Each company should have a long record of continuous dividend payments. 4. Limit the P/E to 25X on average earnings and 20X on the LTM.
  7. The only attractive feature was the income yield, averaging about 4.25% (against 2.50%) for first-grade bonds, an advantage of 1.75% in annual income). Yet the sequel showed all too soon and too plainly that for the minor advantage in annual income the buyer of these second-grade bonds was risking the loss of a substantial part of his principal (p. 136). I personally experienced something similar. When writing covered calls, I optimize for the annual income yield. However, to squeeze out an extra 2% in extra annual income yield, would mean that I have to write the call at a lower strike, potentially at a price I was comfortable to sell but not happy to sell. The lesson here is that don’t look at pure income yield. In this specific instance, Graham argued that some of the bond yields offered were amazing but can’t be backed by fundamentals, so you risk losing the principal.
  8. Our one recommendation is that all investors should be wary of new issues - which means, simply, that these should be subjected to careful examination and unusually sever tests before they are purchased. There are two reasons for this double caveat. The first is that new issues have special salesmanship behind them, which calls therefore for a special degree of sales resistance. The second is that most new issues are sold under “favorable market conditions” - which means favorable for the seller and consequently less favorable for the buyer (p. 139).
  9. One fairly dependable sign of the approaching end of a bull swing is the fact that new common stocks of small and nondescript companies are offered at prices somewhat higher than the current level for many medium-sized companies with a long market history (p. 142).
  10. The majority of the 126 “growth funds” did worse than S and P or DJIA during 1961 to 1970 (p. 158). A similar thing happened in the 2000 dot-com bubble, where many growth funds imploded. Sure, these funds can have spectacular one or two year gains, but you have to make sure you don’t become the bagholder. Graham talks about this as well - you might end up selling too early at like a 100% return over 2 years, only to see it skyrocket to 1000% over the following year. You might end up having regret during that period and buy back in, only to see it crash 99%. If one is to engage in these activities, a plan that is strictly followed is of utmost importance.
  11. But is it not true, the reader may ask, that the really big fortunes from common stocks have been garnered by those who made a substantial commitment in the early years of a company in whose future they had great confidence, and who held their original shares unwaveringly while they increased 100-fold or more in value? The answer is “Yes.” But the big fortunes from single company investments are almost always realized by persons who have a close relationship with the particular company - through employment, family connection, etc. - which justifies them in placing a large part of their resources in one medium and holding on to this commitment through all vicissitudes, despite numerous temptations to sell out at apparently high prices along the way. An investor without such close personal contact will constantly be faced with the question of whether too large a portion of his funds are in this one medium. Each decline - however temporary it proves in the sequel - will accentuate his problem; and internal and external pressures are likely to force him to take what seems to be a goodly profit, but one far less than the ultimate bonanza.
  12. The Relatively Unpopular Large Company (p. 163). The entire section is worth reading. The gist is that large popular companies have a tendency to be overvalued, so relatively unpopular large companies can be bargain buys. The best example would be oil and gas firms during the COVID pandemic. Everyone’s going to need oil eventually - it’s a matter of time.
  13. Purchase of Bargain Issues (p. 166). The entire section is worth reading. The easiest bargain issue to identify is one in which a stock that sells for less than the company’s net working capital alone, after deducting all prior obligations (p. 169).
  14. In fact, at least subconsciously, they calculated that any price was too high for them because they were heading for extinction - just as in 1929 the companion theory for the “blue chips” was that no price was too high for them because their future possibilities were limitless (p. 171).
  15. The investor can scarcely take seriously the innumerable predictions which appear almost daily and are his for the asking (p. 189). Note to self: financial news makes money because of the viewers. I would assume hyperbole is rewarded.
  16. Formula Plans (p. 194). The entire section is worth reading. Formula planners tried to time the market and sold all their stocks at the end of 1954, after a 52.6% rise. However, the market doubled over the next five years and these investors never bought back in because they expected a bear. A lesson for myself is that I should take profit when I think the stock is overvalued, and reallocate that capital into a stock that I think is undervalued. In the climate of July 2021, it’s unclear what’s undervalued though.
  17. A substantial rise in the market is at once a legitimate reason for satisfaction and a cause for prudent concern, but it may also bring a strong temptation toward imprudent action. Your shares have advanced, good! You are richer than you were, good! But has the price risen too high, and should you think of selling? … It is for these reasons of human nature, even more than by calculation of financial gain or loss, that we favor some kind of mechanical method for varying the proportion of bonds to stocks in the investor’s portfolio. The chief advantage, perhaps, is that such a formula will give him something to do (p. 197).
  18. A stock does not become a sound investment merely because it can be bought at close to its asset value. The investor should demand, in addition, a satisfactory ratio of earnings to price, a sufficiently strong financial position, and the prospect that its earnings will at least be maintained over the years (p. 200).
  19. In 1938 the business was really being given away, with no takers; in 1961 the public was clamoring for the shares at a ridiculously high price (p. 202). The takeaway here is that when there are no takers for shares, it’s time to really look at some good buys.
  20. The true investor scarcely ever is forced to sell his shares (p. 203).
  21. Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times, he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies (p. 205).
  22. On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is much higher than can be justified by well-established standards of value (p. 206).
  23. Several of the circumstances surrounding the “performance” phenomenon caused ominous headshaking by those of us whose experience went far back - even to the 1920s - and whose views, for that very reason, were considered old-fashioned and irrelevant to this “New Era”. In the first place, and on this very point, nearly all these brilliant performers were young men - in their thirties and forties - whose direct financial experience was limited to the all but continuous bull market of 1948 to 1968 (p. 233). In finance, I would be really wary of someone who comes and tells me “this time it’s different”.
  24. Manhattan Fund in 1969 was a mess (p. 235). It basically imploded, and even investment funds, university endowment funds, trust departments of large banking institutions, bought into it. Therefore, large institutions that invest in a particular issue may not be a good signal. It can be a signal, but be careful when it’s used.
  25. The higher the growth rate you project, and the longer the future period over which you project it, the more sensitive your forecast becomes to the slightest error. If, for instance, you estimate that a company with EPS of $1 can raise that profit by 15% a year for the next 15 years, it’s EPS would end up at $8.14. If the market values the company at 35X EPS, the stock would finish the period at roughly $285. However, if earnings grow at 14% instead of 15%, the company would have an EPS of $7.14 at the end of the period, and because of this shock, investors might not pay 35X earnings. At say 20X earnings, the stock would end up at $140 (p. 282). Huge price swings can happen because of a single misstep. An example recently would be Fastly (FSLY), which plummeted because of a bad earnings call. Needless to say, I know because I hold a small amount.
  26. The ideal choice for most investors is a total stock market index fund, a low-cost way to hold every stock worth owning (p. 290).
  27. Wall Street’s “expert” forecasters are equally inept at predicting the performance of the market as a whole, industry sectors and specific stocks (p. 293). Takeaway: financial news is mostly just entertainment.
  28. Graham’s formula for valuing growth stocks: Current Earnings * (8.5 + 2G), where G is expected annual growth rate in %. Note that the growth here is in earnings and not in revenue.
  29. The investor cannot have it both ways. He can be imaginative and play for the big profits that are the reward for vision proved sound by the event; but then he must run a substantial risk of major or minor miscalculation. Or he can be conservative, and refuse to pay more than a minor premium for possibilities as yet unproved; but in that case he must be prepared for the later contemplation of golden opportunities foregone (p. 299).
  30. When looking at per share figures, one needs to be very conscious of accounting tricks (p. 316).
  31. Recent history - and a mountain of financial research - have shown that the market is unkindest to rapidly growing companies that suddenly report a fall in earnings (p. 321).
  32. In early 2003, the yield on 10-year, AA-rated corporate bonds was around 4.6%, suggesting - by Graham’s formula - that a stock portfolio should have an earnings-to-price ratio of at least 100/4.6=21.7. Graham recommends that the average stock be priced at about 20% below the maximum ratio.
  33. A low-cost index fund is the best tool ever created for low-maintenance stock investing - and any effort to improve on it takes more work (and incurs more risks and higher costs) than a truly defensive investor can justify (p. 367). This is a comment from Jason Zweig, the commentator for this book.
  34. They seek the industries with the best prospects of growth, and the companies in these industries with the best management and other advantages. The implication is that they will buy into such industries and such companies at any price, however high, and they will avoid less promising industries and companies no matter how low the price of their shares (p. 379).
  35. The enterprising investor may confine his choice to industries and companies about which he holds an optimistic view, but we counsel strongly against paying a high price for a stock (in relation to earnings and assets) because of such enthusiasm. If he followed our philosophy in this field he would more likely be the buyer of important cyclical enterprises - such as steel shares perhaps - when the current situation is unfavorable, the near-term prospects are poor, and the low price fully reflects the current pessimissm (p. 383). While learning about investing in 2020, I spread my bets and opened a small position in steel and oil and gas stocks. They did really well - much better than the tech positions because I went in at a high.
  36. These comparative results undoubtedly reflect the tendency of smaller issues of inferior quality to be relatively overvalued in bull markets, and not only to suffer more serious declines than the stronger inssues in the ensuing price collapse, but also to delay their full recovery - in many cases indefinitely (p. 388). I can’t imagine how they did portfolio analysis back in the 1970s, when computers were not prevalent. They must have compiled the data and computed everything by hand.
  37. It always seemed, and still seems, ridiculously simple to say that if one can acquire a diversified group of common stocks at a price less than the applicable net current assets alone - after deducting all prior claims, and counting as zero the fixed and other assets - the results should be quite satisfactory (p. 391). Such stocks are really hard to find though, when you entirely discount fixed and other assets.
  38. There is another contrast that comes to mind. When the going is good and new issues are readily salable, stock offerings of no quality at all make their appearance. They quickly find buyers; their prices are often bid up enthusiastically right after issuance to levels in relation to assets and earnings that would put IBM, Xerox, and Polaroid to shame. Wall Street takes this madness in its stride, with no overt efforts by anyone to call a halt before the inevitable collapse in prices (p. 392).
  39. We do know, however, that the group of convertible issues floated during the latter part of a bull market are bound to yield unsatisfactory results as a whole. The poor consequences must be inevitable, from the timing itself, since a wide decline in the stock market must invariably make the conversion privilege much less attractive - and often, also, call into question the underlying safety of the issue itself (p. 404).
  40. Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions (p. 516).