#22 - Democratic Dissent or Descent ?
On leadership lessons from previous US Presidents, market definitions and tech monopolies, how forecasters predict, and key ideas from Buffett's letter to shareholders (1985)
Hello,
Greetings from the Curious Cat.
Democracy as a political system is a bet that people collectively take on themselves and the stakes have been increasing every year. A few decades ago, democracies functioned within the broad regulated frameworks of credible institutions which left a narrow scope for uncertainty. Democratic processes were governed by protocols and rules which were rarely breached and presided over by comprehensive systems of checks and balances. As times have progressed, gradually, every element has become murkier. A gradual decline in collective trust among the institutions like the media, judiciary, bureaucracy, academia, the emergence of social media which has provided a voice to millions resulting in creation of tribal identities and echo chambers. The language of politics through systemic coarse insulting and ‘memeification’ of any contrary opinion has resulted in shallower political discourse. The lofty ideals that have defined democracies like equality, justice, liberty, freedom of speech, expression, etc. are under attack, not from non-democratic forces but from processes that are democratic.
An interesting counter argument is that what is truly lost is the thin veil of legitimizing hypocrisy which made democracy look more noble than it truly was. Institutions were never credible, bureaucracy was corrupt, media was always suppressed in its reporting and never free, divisions in society were a fact of life, and everyone pretended otherwise. That pretense has disappeared and what stands is a heightened sense of awareness making democracy naked in the collective sphere. The problem with this shift is the normalization of any aberrant behavior and disconnecting the need to believe in the right things.
As power dilutes from institutions designed for neutrality and objectivity to ensure that the ideals of democracy are safeguarded, there is little incentive for any political formation or a noble individual to restore it. When ideological positions get entrenched and inability of political parties to innovate increases, electoral politics becomes an ass kicking contest of choosing between the lesser of the two evils. It reduces the elections to a game between political players where people, who are at the fulcrum, forget the existential reason for why politics exists.
The ideals that democracies take for granted globally might be up for getting compromised not merely for now, but for good. It is not a comforting thought which is why it is worth thinking (and writing) about.
General Aladeen (Sacha Baron Cohen) explains the virtues of dictatorship through a thought experiment in this video from the movie “The Dictator”
In today’s edition, we look at -
Some Business Leadership Lessons From Past USA Presidents
How The Best Forecasters Predict Events Such As Election Outcomes
Market Definitions & Tech Monopolies
Key Ideas from Buffett’s letter to shareholders - 1985
Happy Reading.
Some Business Leadership Lessons From Past USA Presidents
Read the article here (Read Time ~ 7 mins)
As the elections in the USA have been the flavour of the week, let us internalize some lessons in leadership from the past Presidents of the United States.
Temperament is the great separator: Intelligence is important but it’s useless if not paired with the correct temperament. FDR helped guide USA through some dark days following the Great Depression and the years leading up to World War II. His confidence and optimism were a big reason the country made it through those difficult times. You always have to be realistic but no one wants to follow someone who isn’t upbeat and positive about the future. Pessimists don’t make great leaders.
Strong opinions, weakly held: When his formal education was cut short at age 9, Abraham Lincoln was forced to educate himself. It was through this self-education that Lincoln developed an open mind. He pledged to his constituents early on in his political career that if his opinions on a subject later turned out to be wrong he was more than “ready to renounce them.” There’s nothing wrong with being confident in your own abilities but there is a fine line between confidence and ego. When you’re ego gets too big you never want to admit you’re wrong. True confidence comes from the ability to change your mind when necessary.
Storytelling is more important than statistics: Some people are born story-tellers but this is a skill you have to master if you ever hope to get others to buy into your ideas, opinions, business or product. Storytelling can be the difference between getting a “yes” or a “no” from a customer, your boss or a prospective employer. Few people remember a good statistic but everyone remembers a good story.
Simple is better than complex: Speaking plain English allowed Lincoln to get his point across to jurors and voters alike because his stories were so accessible. It doesn’t matter how smart you are if your audience doesn’t understand what you’re talking about. One of the best ways to prove your expertise over a subject matter is through the ability to explain a complex topic in such a way that anyone can understand it.
Patience is key: During the 1962 Cuban Missile Crisis the country was on the brink of nuclear war. John F. Kennedy was being pulled in a million different directions by his cabinet members and advisors. Throughout his first couple of years as a young president, Kennedy was provoked and put to the test by Soviet premier Nikita Khrushchev. At times, it seemed like Kennedy was outmatched. But in the 13 days that put an end to the threat of nuclear war, Kennedy was more than up to the task. Instead of acting quickly and aggressively, as many of his advisors urged him to do, he took his time to think through his options and allow cooler heads to prevail.
Timing and luck will always play a role: Luck, both good and bad, often plays a larger role in how things shake out than most are comfortable admitting. This means you have to be ready when an opportunity presents itself.
How The Best Forecasters Predict Events Such As Election Outcomes
Read the article here (Read Time ~ 6 mins)
A constant theme of this newsletter has been developing judgment and what constitutes a good judgment. In the past we have written on how an ability to foresee probable range of outcomes is a key precursor to developing good judgement. This piece extrapolates on the ability to make a good forecast.
Most of us do not spend our lives forecasting the future, but any decision we make depends, in part, on our implicit predictions.
To understand the science of accurate predictions, the Good Judgment Project, a research effort led by Barbara Mellers and Philip Tetlock, recruited thousands of volunteer forecasters and asked them nearly 500 questions about the future. Out of the thousands of participants, the Good Judgment Project identified “super-forecasters,” those who demonstrated uncanny skills in predicting the future and even did so better than intelligence analysts with access to classified information. The best forecasters must learn to navigate the twin risks of underreaction and overreaction.
It was found that individuals with high confirmation propensity were generally inaccurate forecasters—they tended to assign high probability to events that did not happen and low probability to events that did occur. In contrast, those who updated their beliefs frequently were highly accurate forecasters. Finally, individuals who updated their beliefs in small increments outperformed their peers who made more drastic changes.
Like Aesop’s proverbial tortoise, frequent updaters showed better subject-matter knowledge, more open-mindedness and a higher work rate. They were not always spot on with their initial forecasts, but their willingness to change their opinion allowed them to excel over time.
In contrast, incremental updaters resembled Aesop’s hare: they were not especially hardworking, knowledgeable or open-minded. But they scored well on tests of fluid intelligence—which included questions on logical, spatial and mathematical reasoning—and were unusually accurate with their initial estimates for a question.
The best forecasters combined the good qualities of both the tortoise and the hare. The pattern of frequent incremental forecast revisions was a reliable mark of being good at prediction. How forecasters update their beliefs is a very personal process, drawing on different thinking styles, life philosophies and predictive abilities.
Market Definitions and Tech Monopolies
Read the article here ( Read Time ~ 6 mins)
Ben Evans defines markets in the context of tech monopolies.
One of the basic building blocks of any competition case is market definition. If you’re claiming that a company has market dominance, and that it’s abusing that dominance, what market are we talking about? Very obviously, the company being prosecuted tries to draw the definition as widely as possible - ‘we compete with the entire planet!’ - and the prosecutor tries to draw it as narrowly as possible - ‘Ferrari has a monopoly of rear-engined Italian sport cars with horse logos!’
The fun part of this is that both of these definitions are true, and so you have dig rather deeper and work out what problem you’re trying to solve to work out what definition to use, because very often, picking the definition decides the outcome of the case, before it’s even started.
Looking at Google and Facebook, no-one would dispute that Google has 80-90% of web search, and Facebook and Google combined have half to two thirds of online ad spending. Online advertising is now about $250bn and total advertising is $500bn or so, and total marketing is $1tr. You could try to argue for a broad, $1tr market definition, but for most of Google and Facebook’s advertisers, online is the market - they’re not going to run a TV campaign. This seems like an easy definition.
Instead, the interesting argument comes when Google’s lawyer says that the competition in search isn’t Bing, but Amazon, and Facebook, and that the next threat is what Apple does with privacy on iOS. The government’s lawyer would laugh and say ‘that’s what everyone says!’ - and this would be true, but that wouldn’t mean the Google lawyer didn’t have a point. What do we think Sundar Pichai spends more time thinking about - whether Bing will catch up, or how far Amazon moves up the sales funnel and displaces product purchasing away from general web search entirely? How much does he look at DuckDuckGo and how much does he look at Pinterest?
The big shifts in dominance in tech in the last few decades have not generally come from a new product that does the same thing as the old one, but from a company doing something that changes the field of play. Microsoft didn’t overturn IBM’s dominance of mainframes - instead, PCs made mainframes irrelevant. Google didn’t make a new Windows, and Facebook didn’t take on Google at web search - instead, they carved out something new.
It may well be the case that Google faces existential threats from things that don’t look like Google, but that doesn’t mean that we should ignore how it runs search today. AR glasses might overthrow Apple’s dominance of the US smartphone market, but that doesn’t mean we should just ignore how it runs the App Store and tell Spotify to go home. However, you do need to have a theory of what your remedies will achieve in a ‘market’ this complicated.
Key Ideas from Buffett’s letter to shareholders - 1985
While we summarize the key ideas in the letter, we encourage the readers to read the entire letter to capture the context in which the thoughts were expressed by Warren Buffett.
On experts: You might think that institutions, with their large staffs of highly-paid and experienced investment professionals, would be a force for stability and reason in financial markets. They are not: stocks heavily owned and constantly monitored by institutions have often been among the most inappropriately valued.
On sustainable growth and returns: An iron law of business is that growth eventually dampens exceptional economics. Just look at the records of high- return companies once they have amassed even $1 billion of equity capital. None that I know of has managed subsequently, over a ten-year period, to keep on earning 20% or more on equity while reinvesting all or substantially all of its earnings. Instead, to sustain their high returns, such companies have needed to shed a lot of capital by way of either dividends or repurchases of stock. Their shareholders would have been far better off if all earnings could have been reinvested at the fat returns earned by these exceptional businesses. But the companies simply couldn’t turn up enough high-return opportunities to make that possible.
On market prices: Management cannot determine market prices, although it can, by its disclosures and policies, encourage rational behavior by market participants. My own preference, as perhaps you’d guess, is for a market price that consistently approximates business value. Given that relationship, all owners prosper precisely as the business prospers during their period of ownership. Wild swings in market prices far above and below business value do not change the final gains for owners in aggregate; in the end, investor gains must equal business gains. But long periods of substantial undervaluation and/or overvaluation will cause the gains of the business to be inequitably distributed among various owners, with the investment result of any given owner largely depending upon how lucky, shrewd, or foolish he happens to be.
On value contributing factors in General Foods sale: We benefited from four factors: a bargain purchase price, a business with fine underlying economics, an able management concentrating on the interests of shareholders, and a buyer willing to pay full business value. While that last factor is the only one that produces reported earnings, we consider identification of the first three to be the key to building value for Berkshire shareholders. In selecting common stocks, we devote our attention to attractive purchases, not to the possibility of attractive sales.
On good managerial records: My conclusion from my own experiences and from much observation of other businesses is that a good managerial record (measured by economic returns) is far more a function of what business boat you get into than it is of how effectively you row (though intelligence and effort help considerably, of course, in any business, good or bad). Some years ago I wrote: “When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.” Nothing has since changed my point of view on that matter. Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.
On stock options and executive compensation: Many corporate compensation plans reward managers handsomely for earnings increases produced solely, or in large part, by retained earnings - i.e., earnings withheld from owners. Many stock options in the corporate world have gained in value simply because management retained earnings, not because it did well with the capital in its hands. Ironically, the rhetoric about options frequently describes them as desirable because they put managers and owners in the same financial boat. In reality, the boats are far different. No owner has ever escaped the burden of capital costs, whereas a holder of a fixed-price option bears no capital costs at all. An owner must weigh upside potential against downside risk; an option holder has no downside. In fact, the business project in which you would wish to have an option frequently is a project in which you would reject ownership.
On conditions for use of stock options: Despite their shortcomings, options can be appropriate under some circumstances. My criticism relates to their indiscriminate use and, in that connection, I would like to emphasize three points: First, stock options are inevitably tied to the overall performance of a corporation. Logically, therefore, they should be awarded only to those managers with overall responsibility. Managers with limited areas of responsibility should have incentives that payoff in relation to results under their control. Second, options should be structured carefully and priced at true business value. Absent special factors, they should have built into them a retained- earnings or carrying-cost factor. Equally important, they should be priced realistically. When managers are faced with offers for their companies, they unfailingly point out how unrealistic market prices can be as an index of real value. Third, I want to emphasize that some managers whom I admire enormously - and whose operating records are far better than mine - disagree with me regarding fixed-price options. They have built corporate cultures that work, and fixed-price options have been a tool that helped them. By their leadership and example, and by the use of options as incentives, these managers have taught their colleagues to think like owners. Such a Culture is rare and when it exists should perhaps be left intact - despite inefficiencies and inequities that may infest the option program.
On performance management at Berkshire Hathaway: At Berkshire, however, we use an incentive compensation system that rewards key managers for meeting targets in their own bailiwicks. If See’s does well, that does not produce incentive compensation at the News - nor vice versa. Neither do we look at the price of Berkshire stock when we write bonus checks. We believe good unit performance should be rewarded whether Berkshire stock rises, falls, or stays even. Similarly, we think average performance should earn no special rewards even if our stock should soar. “Performance” is defined in different ways depending upon the underlying economics of the business: in some our managers enjoy tailwinds not of their own making, in others they fight unavoidable headwinds. At our various business units, top managers sometimes receive incentive bonuses of five times their base salary, or more, and it would appear possible that one manager’s bonus could top $2 million in 1986. We do not put a cap on bonuses, and the potential for rewards is not hierarchical. The manager of a relatively small unit can earn far more than the manager of a larger unit if results indicate he should. We believe that such factors as seniority and age should not affect incentive compensation (though they sometimes influence basic compensation)
What We Are Reading
We decided to publish few links to interesting articles that we have found across the Internet. We hope you find them interesting.
Apple, Google, And A Deal That Controls The Internet [New York Times]
Why It Is Getting Harder To Mine Gold [BBC]
Why Do We Think Learning About History Can Make Us Better? [Chronicle]
What Is The Internet Doing To Boomers’ Brain [Huffington Post]
Why Business Leaders Should Think Like Comedians? [Strategy - Business]
How Your Brain Tricks You Into Taking Risks During The Pandemic [Propublica]
State of Surveillance [Chinafile]
The Most Famous Paradox In Physics Near It's End [Quanta]
A Stock Market Bubble Is Forming [Morningstar]
Reviewing Stratechery by Tim Wu [Medium] and Is the Internet Different? [Stratechery]
Afterthought
Nothing is more wonderful than the art of being free, but nothing is harder to learn how to use than freedom.
-Alexis De Tocqueville
And that is a wrap for the week. We hope you enjoyed binge reading this edition. If you found this newsletter useful and worth your time, do share it with your friends.
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Take care, stay safe and have a nice weekend. We shall see you next Saturday