The Diff - Longreads + Open Thread

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Longreads

• Thursday's Diff ($) looked at Cliff Asness' paper arguing that the market has gotten less efficient due to meme stocks and indexing. Right on cue, here's a paper arguing that you can still get a value-style systematic strategy by using a model that better incorporates companies' investments in growth. Of particular interest is the chart showing how their value metric correlates with the classic systematic value approach of just ranking companies by price-to-book. The correlation is high in the 60s, spikes again in the early 80s, rises again in the early 90s and has a big spike around 2000. Of those time periods, three of the four were times that value investors reminisce about (the 90s one is an exception).
• And also on the topic of reevaluating value investing, Owen Lamont argues that Warren Buffett's advice to run a highly concentrated portfolio is a bad idea (to be fair, Buffett's more recent advice has been to buy an S&P 500 index fund; he doesn't come out and say this, but there's also an index of companies that earn more than their cost of capital, trading under the ticker "BRK"). One way to rescue the argument for concentration is to complicate the model by incorporating the cost of research. It takes time to get to know a company well enough to prudently put a third of your portfolio into it, and the opportunity cost of that researcher's time is high if they're good at what they do. But it's also true that there's a difference between the alpha generated by coming up with a handful of ideas and betting big on them, and the alpha generated by incorporating those ideas into a portfolio that's optimized to deliver the best risk-adjusted return, and then levering it up. As the piece notes, a great stock picker's returns get even better if they run with optimal diversification.
• Justin Germain talks about which ancient sources we have, which we know about, and which texts were completely forgotten and then subsequently rediscovered. It's a very fun piece, and it portrays studying the classics as a kind of detective work where new clues pop up every few generations—Xenophon used to be a more trusted source than Diodorus, but the Hellenica Oxyrhynchia, discovered in 1906, turns out to take Diodorus' side more often. And it turns out that Aristotle's Politics, while it's been known for a long time, wasn't rediscovered as an important work until the early 19th century. A good piece to whet your appetite for more scrolls.
• Charlotte Klein profiles Ezra Klein in NYMag. In the last few years, star writers have discovered that they were subsidizing many of their colleagues, and that they'd do better going out on their own and getting subscriptions from fans, but Ezra Klein moved in the opposite direction: from blogging to the Washington Post, then to founding Vox, and then back to big media at the New York Times. He notes that he could have made more money as a Substacker, but that 1) it's probably a good thing for him to subsidize the kinds of news that are important but not lucrative, and 2) that even for someone as well-known as he is, the Times brand name still matters. So it's another story of a high earner choosing to consume a lot of their marginal product in the form of intangibles like supporting good causes and having influence, rather than in pure dollars.
• Felix Stocker reviews Changing How the World Does Business, the story of FedEx as told by an early employee. There's a lot of contrarian wisdom in the book: FedEx hired consultants to help validate its business plan, and then brought some of those consultants in full-time. That's not the conventional advice today, but the world was more information-impoverished back then; if you wanted to know the growth rate in air freight and to figure out which cities specialize in high value-to-weight ratio products, you couldn't just poke around Statista until you found something plausible. And another area where things have changed is the funding environment, specifically the fact that once FedEx demonstrated its model, there weren't a dozen well-funded competitors trying to duplicate it (in fact, FedEx set a record for the biggest private placement ever in 1973).
• In Capital Gains this week, we look at how there are multiple functional equilibria in regulations, and they all work reasonably well if everyone's able to follow the rules. That doesn't mean that there are some rules that are worse or better than others, but it does mean that a suboptimal set of rules is surprisingly tolerable. And sometimes, the ideal regulations just aren't feasible to implement.
• This week in The Riff, we're covering taxes on unrealized capital gains, whether or not this would destroy the startup ecosystem (no, but it's still not a great idea), Uber and autonomous vehicles, and "founder mode." Listen with Twitter/Spotify/Apple/YouTube.

Open Thread

• Drop in any links or comments of interest to Diff readers.
• What's new and exciting in the world of AI custom silicon? The Diff will be digging into the topic soon and we'd appreciate readers' thoughts—feel free to reply directly if you'd prefer not to post a comment publicly.

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