Circle of Competence Issue #83

QUOTE OF THE WEEK

"The purpose of bureaucracy is to compensate for incompetence and lack of discipline." - Jim Collins

FOOD FOR THOUGHT

When Wall Street took over this nursing business, profits grew and patients suffered (Bloomberg)

I admit it, I'm a card-carrying American Capitalist. Free market capitalism has done more to lift society out of poverty than any other economic force known to man in the last 300 years. But the spirit of free markets and capitalism require actors who wish to serve customer needs in a profitable manner - in other words, there is a certain base level of ethics assumed within the system, and without it, customers are secondary to dollars, and less-than-desirable outcomes abound. In theory, competitive forces would drive customers to a better company with better outcomes, products, or services. But reality often differs from theory.

Seth Klarman gave a great speech detailing the need for business leaders to rise above bare minimum shareholder needs to think about how their decisions impact their customers and the community. While the above story clearly has evidence of political leanings, Klarman's words ring loud and clear (emphasis mine):

"With an overly narrow focus on the near-term maximization of corporate profits and share price, business leaders leave themselves vulnerable to criticism and harsh regulation. When business owners and business schools fail to regularly ask hard questions about capitalism and its impact on people of every skill set and background, we increase the chance that when these questions are asked, they will be asked by ideologues seeking to point fingers, assign blame, and make reckless changes to the system. One US senator recently unveiled the Accountable Capitalism Act, which requires corporations of a certain size to procure a federal charter that would require 40 percent of corporate boards to be composed of employees. This seems both ill-considered and unlikely to work. I doubt this bill will become law. But when capitalism goes unchecked and unexamined, and management is seduced by a narrow and myopic perspective, the pendulum can quickly swing in directions where capitalism’s benefits are discounted and its flaws exaggerated, thereby leaving its future even more clouded and uncertain. While it’s hard to see how this proposed regulation would solve the problems that I’ve raised tonight, it’s exactly the kind of proposal that business will have to contend with when complex issues go unexamined, and when character, sound values, restraint, and long-term thinking fail to gain the upper hand."

The more I study the private equity industry, the more evident it has become that a heady mixture of short term incentives, leverage, and the pressure of LP hurdle rates result in business ethics taking a backseat to financial returns. This hurts customers, employees, vendors, communities, and ultimately the capitalistic system upon which our modern economies are built. The few are ruining it for the many who operate 'above the line'. We desperately need longer-term operators and incentives in place for our capitalist machine to continue to provide jobs, economic growth, and abundance for society. The time has come for us to choose: to regulate ourselves in our business decisions or to allow ourselves to careen right over the edge into a bureaucratic regulatory abyss.

Gold and the 'Bitcoin Standard' with Saifedean Ammous and Marty Bent (Real Vision Finance)

Most folks who read my weekly know that I'm not a huge bitcoin fan - see my summary of the crypto debate here. That being said, Saifedean Ammous makes some interesting points about crypto as a sort of alternative 'backup' currency to gold that will eventually have a fixed supply, and thus will never suffer from the debasement/devaluation problems suffered by all fiat currencies over time. This was an especially interesting interview covering the history of gold as currency and bitcoin's role as a currency going forward. While I don't buy all the points made, I do believe it is possible that a decentralized, fixed-supply digital currency could serve as an international backstop to abuses of local fiat currency and capital flight (e.g. Venezuela) when gold simply won't do the trick because of its physical nature and the difficulties of transacting/transporting large sums across borders.

At the end of the day, a currency's supply is either remaining fixed or growing and each results in different 'value' profiles over time - if you hold cash, over time it will be worth less due to inflation vs. if you hold physical or digital assets (a house, an acre of land, 1 oz. of gold, 1 BTC, etc.), theoretically it should hold its value due to the nature of its supply remaining relatively fixed. Is it any wonder that billionaires like John Milone are buying up land by the millions of acres?

"From a financial point of view, it’s a pretty decent hedge on devaluation of currency."

LINKS

The internet and the third estate (Ben Thompson)

Disrupting the IPO: challenging the banker-centric model (Aswath Damodaran)

All carrots, no stick: case study on social credit scores in Xiamen and Fuzhou (Berkman Klein Center)

Disney, IP, and the returns to marginal affinity (Matthew Ball)

Spotify saved the music industry. Now what? (Fortune)

The hard truth about open offices (Harvard Business Review)

Elad Gil on startups (Square One)

Mark Yusko on the endowment model of investing and innovation (The Investor's Podcast)

Jeff Bezos on space, Blue Origin, and expanding humanity's habitable horizons (International Space Conference)

Richard Hamming Lectures - highly recommend 1, 26, and 31 (h/t Connor Leonard)