034: A Change is Coming

A Change is Coming

Color Commentary

Dan Heath, Author of Upstream

Invested Quotecast

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Table of Contents

1. Berkshire

2. Upstream Design Thinking

3. Recession Companies: Spending Less
4. Recession Companies – Are ESG Companies Doing Better Than Others?
5. Wishlists Online
6. Let’s Get Practical


1. Berkshire

The Berkshire Hathaway annual general meeting was the big event of the value investing year, and of my weekend. 5.5 million people tuned into the livestream at least for a few minutes, which means there are 5.5 million people who are passably curious about Warren Buffett’s thoughts on the world. Not too shabby, WB.

If you missed it, here is a transcript, and here is the video.

I threw an online Pre-Berkshire Cocktail Party on Instagram Live, which was SO MUCH FUN I can’t even tell you. A mixture of seasoned Berkshire shareholders and new investors joined me on the show for a few minutes each, to share their excitement and memories of past Berkshire meetings in Omaha. I firmly believe having investors at all stages of the investing journey is an important mix because, usually, we only see or hear from the well-known successful investors. It’s much more relatable to see a variety of people who follow Buffett and Berkshire Hathaway, and I hope we were able to achieve that mix the other night. My guests had the best stories about meetings past, we made fun drinks, and generally rocked out.

By the time the meeting itself started, it was 10:45pm for me and I had been standing nonstop for two hours for the show, and was exhausted. I put the meeting livestream on my computer in my kitchen, and made spaghetti while the meeting began. Buffett used his time to teach the eyeballs upon him about his view of early American economic history. For 45 minutes. With slides designed with his patented Omaha folksiness that, if you missed them, really must be seen. They’re my new inspiration for slides now – and for sources. From now on, consider The Invested Practice to be “Source: Wild guess of D. Town”

Paul J. Hooper on Twitter: "Not many people could put up a slide ...

He emphasized over and over during this meeting that buying the index and betting on America for the long-term is the smartest investing move. “Bet on America” is clearly the headline he wanted to come out of this meeting. However, in a classic case of “do as I say, not as I do,” he then went to explain that Berkshire is ready and waiting to invest, lend money, and make big deals when the prices are right. Berkshire bought almost nothing in March, when the market was at its low, nor did they buy in April – which is a very strong indication that prices at that time were not cheap, in Buffett’s mind. Furthermore, he emphasized over and over that Berkshire is keeping its cash on hand, all $137 billion of it, to be ready in a worst case economic scenario. He also noted, worryingly, that the $137 billion “isn’t that huge, when I look at worst case possibilities.” One of those possibilities could be major litigation against Berkshire’s insurance companies for pandemic-related losses, though Buffett noted Berkshire hasn’t sold much business interruption insurance that might include a pandemic-related closure. The other, more likely possibility is a market-wide crash due to massive and lasting unemployment and lower US gross domestic product.

I think Buffett knew that if he came out and said “the economy is probably going to get a lot worse, possibly even fall into a depression,” the market would react, and he would get blamed if, somehow, we pull out of this thing and an effective treatment for the virus is found and we don’t actually end up in dire straits. So, he didn’t say that we’re heading for a depression – directly. He closed with these words:

“I would just say again that I hope we don’t, but we may get some unpleasant surprises. We’re dealing with a virus that spreads its wings in a certain way, in very unpredictable ways. How Americans react to it. There’s all kinds of possibilities. But I definitely come to the conclusion after weighing all that sort of stuff. Never bet against America.”

This is a man who has lived through more crashes as an investor than I can even relate to, AND he has access to a huge amount of internal data from Berkshire’s wide cross-section of companies. He’s got the second quarter information that we investors won’t have for months about insurance, cross-country rail shipping, discretionary retail purchases, aircraft manufacturing, oil production, home improvements…and more. I don’t know if he’s right, and he doesn’t know if he’s right, but he’s not telling us everything is going to be ok. He’s putting up his storm windows and planning to wait it out.

I am too, and I’m trying to find companies that will do well through this situation that – key point – are not already way too expensive. One mental model I’m using for my search is in the next section.

Oh yeah, Greg Abel…was there too. He didn’t add much.

2. Upstream Design Thinking

I got lucky enough to interview multi-time bestselling author Dan Heath, for his new book, Upstream. A second interview I did with him will run on the InvestED Podcast this Tuesday, but we in The Invested Practice get a special exclusive interview here with him, first. (Link to his interview is at the top of this issue.)

The idea behind Upstream is that rather than solving problems as they arise, drop-kicking each ninja as he shows up, it’s far more efficient and effective to solve problems before they arise, by not angering the ninjas in the first place. Or, as Dan describes it in his book, if you’re standing on the side of a river with a friend, and you see a kid float down towards you in danger of drowning, you jump in and save the kid. Then, right after you’ve got the kid safely on the bank, you hear another kid yelling from the river, and your friend jumps in and saves that kid. Then another kid, and another, and the next thing you know, your friend turns away from the river and starts heading up the bank. “Where are you going?” you yell. “To tackle the guy upstream who’s throwing all these kids in the river,” she yells back. That’s upstream thinking.

I, obviously, want to invest in businesses with upstream thinking. These businesses are able to put money behind the time and energy it takes to solve more than just their immediate problems, but also to try to prevent those problems from arising in the future – like, you know, suddenly adjusting their business for a worldwide pandemic. They’re the companies that are going to head off problems before we, the consumer or end user, ever even know about them, and the companies that are resilient in a crisis. That doesn’t mean they’ve got it all figured out immediately. It means they’ll bob and weave with the times, instead of standing still. It’s Google, instead of General Electric.

My first thought, however, when I think about implementing better upstream thinking in my investing practice, is that doing so takes time and energy. Dan agreed, and recommended the book Scarcity. When people have a scarcity of resources or scarcity of time, they don’t have the ability to attend to what they need to and have to behave in a near-constant state of emergency. He described that state of scarcity as tunneling. If you picture the mental image of being in a tunnel, the only way to go is forward, so any obstacle that arises, you have to somehow get it behind you so you can keep going forward and get out of the tunnel. When you’re tunneling, you are starved of attention to longer-term matters. Where am I going? Am I in the right tunnel? Might there be a tunnel that would get me where I’m going more efficiently? Tunneling is why downstream work happens more naturally than upstream work. There’s always another email. There’s always another bill to pay. There’s always something else to do. And then, twenty years later, we end up wondering why we are still in the same job, doing the same stuff, with the same messy kitchen cabinets that never got organized.

We seem wired for tunnels, but even a short escape from the tunnel can be really powerful. It’s the same as the mental model from Dan Covey: “urgent v. important”. The urgent stuff always crowds out the important stuff. Executives Dan has talked to say often it boils down is putting a fence around some block of time, on a regular basis, that allows you to look at the big picture. It might be as simple as booking an appointment with yourself. It might be as simple as taking a walk in order to relieve your mind and get bored. It might be as simple as showing up for your investing practice. Set out that time to take a larger view.

Investing practice is upstream thinking.

How much is what we’re doing really advancing us? Are we trying to get better at something we don’t need to get better at?

One way to figure it out is to immerse yourself into problem and imagine yourself or connect to the actual people involved to take the issue from being theoretical and academic to being human. When it comes to investing practice, it’s great to announce to myself that I’ll read the newspaper for twenty minutes every day because doing so is both important and urgent. But if days go by and I haven’t done it, then I need to think about what’s actually stopping me. Is it lack of interest? Is it more urgent tasks taking priority? Is it being too distracted? It’s something. Figure out the something for me, not for everyone else, and I’ll be one step closer to deciding if I’m in the right tunnel or not. Maybe the better investing practice tunnel for me is listening to a podcast or watching Youtube videos about business news. Perhaps it’s not reading at all during the week and then spending several hours on Saturday and Sunday. Perhaps it’s that I don’t understand the vocabulary used in business articles and it puts me off the topic without me really realizing it.

Then, once I’ve gone upstream on the issue, I need to set up my incentives so I’m armed with non-judgmental outcomes. As Dan says, data and measurement systems are the ultimate double-edged sword. It’s hard to make progress without targets, and data to know if I’m making those targets. But as soon as targets are declared, we as humans find shortcuts to those targets.

Dan looks for smart leaders who are well aware of the double-edged sword of incentives and measurements. You’ve got to always be looking at the unintended consequences of it. You’ve got to be iterating over and over to continually improve and make it work.

3. Recession Companies: Spending Less

I find myself spending less and less these days, which is great, but also weird, because it’s a confirmation of how much my life has contracted in the last two months. Entertainment? Netflix! Travel? Huh? Gas for my car? Got plenty still in the tank!

Without even trying to spend less, we spend less. My husband showed me our credit card spending graph from last month on his phone. 72% of our spending was on groceries. That’s great, but it’s not normal. We’re not the only ones, and if Buffett is right, this trend will continue.

Therefore, I’ve been thinking of the staples on which we absolutely have to spend money. Housing, food, internet service. Is transportation still a staple? We got a new car last year and decided to buy instead of lease because we were so annoyed with the requirements of the last lease. We paid to drive a certain amount, but not more, and give it up on a certain date, but not before. We wanted flexibility, so we bought this car, and the other day I realized how nice it is that WE are getting the benefit of not driving it much these days instead of the leasing company. Will this sort of thought process change car buying behaviors? Will more people switch to short-term car-sharing services like ZipCar or Mobility? How are Uber and Lyft going to adapt?

Also, WHO is buying cars these days when hardly anyone is driving? Essential workers? Why is everyone in such a rush to get car dealerships open?

So, thinking about recession/depression companies. Will the trend to buy less continue as we open up the world?

We were already heading for a digital change to many brick-and-mortar businesses. The coronavirus shutdown is rapidly accelerating that change. Where maybe it would have taken another ten years to choose to show your doctor your weird mole on a video call instead of in the office, or for suburban moms to start to prefer having their groceries delivered, now we’re being forced into adopting these online behaviors. And you know what? It’s actually not so bad. Even – easier. Faster.

Buy less, and buy online. How does that work?

Shipping companies seem like they should do well, but both FedEx and UPS are at low stock prices due to competition. Further down the supply chain, it’s fascinating to read about the cardboard boxes used to ship all these items, and the strides that have been made to reduce the amount of cardboard in each cardboard box. A company called Packsize fits cardboard to the size of the item inside, which is such a cool innovation. Packsize is private, but I spent a fun few minutes looking up their competitors on Owler to see if any are public, and what companies are doing with packaging is so cool. Two main players: Pakible, Packlane.

None of the time I spent on packaging companies led to discovering a direct potential investment in a public company, but it doesn’t matter. It was great investing practice for background information to understand how and why online retailers are behaving. Who spends extra money on branding a box? Who goes for utilitarian fit-the-thing cardboard? Who will come up with a different method of delivering? I’ve been following the online stylist company Stitch Fix quite closely through this downturn, and they’re a company that really pays attention to their boxes, their wrapping, and their delivery as they try to create a full experience of something special for their customer. I think we’ll start appreciating those details the more we get our products through delivery.

4. Recession Companies – Are ESG Companies Doing Better Than Others?

I’ve been saying for a while that companies with a consciously capitalist bent do better in the long-term than companies focused on profit to the expense of everything else. Another term for these companies is Environmental, Social, and Governance (ESG) companies, or impact companies., or consciously capitalist companies, or sustainable companies. So many names. I call them companies with a Mission. Dan Heath might call them upstream companies, because they’re thinking for the long-term by heading off potential problems. So, has my prediction been borne out? Have these sorts of companies done better during this downturn?

They seem to have, actually.

A recent report from RBC Capital found companies with better overall ESG profiles (which goes undefined, which is quite typical, I find, because it’s so complicated to explain what they mean by it) have outperformed those with worse profiles within sectors since the S&P market peak on February 19th. Finally, some evidence!

I joined an online call Barron’s held last week about “sustainable investing” or “responsible investing,” in which Barron’s reported that the three main ESG exchange-traded funds – the iShares ESG MSCI USA Leaders ETF, the MSCI USA ESG Leaders Equity ETF, and the Goldman Sachs JUST U.S. Large Cap Equity ETF – (the names of these things, geez) also beat the S&P500 during the March crash, probably because they held less oil stocks.

Barron’s announced that the companies on their “most sustainable list” (paywall) have outperformed the S&P 500 for 3 years running. Wow! That list is compiled by Calvert Research. They noted that Amazon had been excluded from the list because it was on a worker’s rights group’s list of most dangerous employers in the US. (I’d add that a VP at Amazon recently quit over Amazon firing warehouse employees who complained about working conditions, and wrote a blog about coming to his decision.) However, Amazon has they’ve increased pay for employees, doubled pay for every overtime hour worked, and provided extra time off for those with Covid – all of which they’ve recently ended, to the great displeasure of their warehouse employees. So this Barron’s reporter says it’ll take a while for them to make the lists, but they’re on the way. Berkshire Hathaway is also not on the Barron’s list. It doesn’t have much an independent board, it doesn’t rank highly in disclosure (ha! no kidding! They intentionally don’t spend time filling out the ESG forms.) and has investments in fossil fuels.

i take these lists as hugely helpful, but not dispositive. They aren’t reliable. They’re informative. Still, it’s really nice to have something to point to and announce that companies that are aligned with good values and oriented for the long-term do better overall than those companies that are not.

My last takeaway from the Barron’s call was that three-quarters of investors still don’t know anything about sustainable investing or sustainable funds. Which means these companies did well not because they’re trendy, but because they’re great companies. Well done.

5. Wishlists Online

I got GREAT suggestions from readers for my easy Wishlist source online. We are so lucky to have this community.

Again, here are my criteria: (1) free, (2) no login required, and (3) customizable so I can see the information I want as a long-term investor. Easy, simple, and as few barriers to usage as possible. We all have watchlists available on our online brokerages, but, on mine, anyway, I have to go through a fairly lengthy security process. It is a very good thing in general, and yay security etc. etc., but when it comes to just quickly checking prices, I wish something that doesn’t take me five minutes to log into.

Well. Prepare to spend a few hours playing with your Wishlist, because there are lots of good options, and I still haven’t decided which one I like best. Koyfin is pretty amazing, though, for a free tool. List is below. Enjoy!


Wishlist advice from fellow members:

The economic shutdown has started to permanently affect jobs at the unicorns. Airbnb laid off 1900 people and Uber laid off 3700 people on Wednesday. Lyft, which is much smaller, laid off about 1000 people last week.

Also, the NASDAQ index is back to its pre-shutdown level, on the…assumption? desire?….that everything will just go back to normal with no consequences.

I enjoyed reading this profile of Jack Dorsey and how Elliott Management is coming after Twitter.

Even Jim Cramer, a man who yells on TV for a living, is telling people to choose a wide variety of individual stocks rather than the broad market index right now. Cramer’s list is worth reading, if only to see his categories and what he chose as the winners of each category. It’s heavy on healthcare and cloud software, and surprisingly light on alcohol, grocery, and industrial staples.

As a palate cleanser – comedian John Mulaney has been cracking me up lately.

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