Insights

COVID-19: The CIDRAP Viewpoint
by Dr. Michael Osterholm

As the renowned epidemiologist Dr. Michael Osterholm recently noted, COVID-19 is the first pandemic to become the leading cause of death in the U.S. in just six weeks since the historic and horrific 1918 influenza. Our team took some time over the past month to read Dr. Osterholm’s book along with another on the 2014 Ebola outbreak and one more on the 1918 flu. Two of the authors, Dr. Osterholm and John M. Barry, teamed up with others to publish their current thinking regarding COVID-19. We came away with a deeper understanding of viruses in general and a broader appreciation of the range of potential economic outcomes in particular.

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The Great Influenza: The Story of the Deadliest Pandemic in History
by John M. Barry

In this read, the author recounts the deadliest pandemic in history with remarkable thoroughness and readability. This highly entertaining book details the history of American medicine and the tragic consequences of the common refrain… “this was influenza, only influenza.”

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Crisis in the Red Zone: The Story of the Deadliest Ebola Outbreak in History, and of the Outbreaks to Come
by Richard Preston

Picking up on John M. Barry’s “detective novel” non-fiction style, the author of this read expertly narrates the devastating 2014 Ebola outbreak in Western Africa.

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Deadliest Enemy: Our War Against Killer Germs
by Michael T. Osterholm

The author caps off a remarkable career in public health with a book that summarizes the most notable infectious diseases facing the world. This 2017 book reaches its maximum effect as it portrays a hypothetical future pandemic that nearly matches today’s COVID-19 headlines.

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Published first after the 2008 market rout, the book chronicles the diary of a Youngstown, OH middle-class attorney between 1931 and 1941. The leadership at River Road has recommended we keep a diary of events around this volatile time and this book sets a wonderful precedent for us to follow. Benjamin Roth recounts the margin-driven bubble and the Depression consequences from a middle-class professional’s point of view. He outlined the constant searching for signs of economic improvement and fears what the New Deal meant for a balanced budget and future inflation. It was his personal investigation into how to create, keep and grow wealth over a lifetime that was most illuminating. Maybe the original asset allocator, Mr. Roth learned the hazards of common stocks and real estate and the importance of government bonds and cash to maintain liquidity and practice value investing most effectively. This book highlights the value of personal reflection and commitment to continuous learning.

An entertaining introduction to the run-up of the 1920s stock market and the crash/depression that followed. The parallels with today are present, but almost certainly not predictive. The U.S. had enjoyed a 10-year bull market by 1929, a massive rise in leverage and share buybacks, and public support from leading academics (Professor Irving Fisher), industrialists (the first statement by John D. Rockefeller in decades), politicians and bankers. Investors then relied on “organized support” to keep stock prices elevated and their dreams alive, which first included the big operators like Durant, Raskob and Livermore and later the big banks like J.P. Morgan. The American entrepreneur and economist Roger Babson noted a crash was coming in September 1929 (the “Babson Break”), which began the wave of selling and the periodic rallies when investors (according to the New York Times) felt “secure in the knowledge that the most powerful banks in the country stood ready to prevent a recurrence of panic.” Unlike today, politicians, economists and bankers were then committed to a balanced budget, which meant higher taxes, less spending, and the gold standard limited the flexibility of the Federal Reserve’s monetary policy. A quick and easy read, this book may be perfect during this national lockdown.

We try to read The Outsiders at least annually. It is our favorite, and most recommended, book on the topic of shareholder orientation. The author compares eight unique CEOs and their legendary track records with the traditional example of a successful CEO…GE’s Jack Welch. The “Outsiders” share a common philosophy that includes several similarities: a preference for cash flow over earnings, opportunistic share buybacks, decentralized operations, the thoughtful use of leverage and infrequent, but meaningful acquisitions. Despite stock performances that trounced the market and their peers, this group of extraordinary leaders were not “charismatic”, but, rather were often humble, independent, highly analytical (more engineers than MBAs) and family-oriented. We are always on the “look-out” to partner with Outsider-like CEOs.

This book provides a great framework for understanding the current transition from fossil fuels to renewable energy by examining past energy transitions such as wood to coal and animal power to oil.  The basic thesis is that energy transitions are about cost, they are slow, and they have profound effects on society. The transition to renewables for electricity generation has accelerated in recent years as wind and solar power have become considerably less expensive than fossil fuels, even without tax credits.  However, renewables are still held back by the cost of battery storage, which is required to address wind and solar’s intermittency issue. Electric vehicles are approaching cost parity with internal combustion engines enabling a transition away from fossil fuels for transportation.  The speed of the renewable energy transition is hard to predict, but this book is well researched and provides wonderful insight into why the transition is occurring and how it is likely to develop.

A nice complement to The Man Who Solved the Market, this book traces the remarkable life of the original “quant” Ed Thorp. The first part of the book describes his childhood and his love for math and science, which eventually earned him a Ph.D. in math and an MIT post. He spent the 1960s literally writing the book on how to take on the casinos (Beat the Dealer) and the market (Beat the Market). It is particularly entertaining to read about Thorp and fellow MIT professor / “father of information theory” Claude Shannon tinkering with roulette equipment in Shannon’s basement and then the game of bridge with Warren Buffett in 1968. Thorp spent the next several decades developing option pricing theory and mastering hedged strategies, including convertible and statistical arbitrage, for his Princeton Newport and Ridgeline hedged funds. The book is highly recommended for those interested in the beginnings of the quant investing revolution.

The Man Who Solved the Market, holiday reading for River Road associates, tells the remarkable story of former math professor Jim Simons and the secretive investment firm he built, Renaissance Technologies. With an annualized return of +39% (after fees) over the past 30 years, and not a single year of negative returns, Renaissance’s Medallion Fund is arguably the most successful investment fund in history. The book describes how Simons assembled a team of brilliant, and often quirky, mathematicians and computer programmers to identify complex patterns in the market. We especially enjoyed the author’s insights about the many challenges Renaissance faced in developing its algorithms and Simon’s perseverance.

This book is for true value investing junkies that perk up when something is “happening” (e.g. M&A, recapitalizations, asset sales, reorganizations, self-tenders, and liquidations). A Warren Buffett quote comes immediately to mind upon reading this book…taken from his 1988 shareholder letter, “Give a man a fish and you feed him for a day. Teach him how to arbitrage and you feed him forever.” Through conversations with 17 risk arbitrageurs / value investors ranging from John Paulson to Paul Singer and Michael Price, the authors trace the natural evolution many of these investors have taken from pure risk arbitrage (providing liquidity for those not interested in waiting for a deal to close) to activist investing (use influence to close the “value gap”) and finally distressed investing (the natural end to the investing cycle). Several common themes among the investors include the importance of thoughtful valuations, robust risk controls, and portfolio construction.