Seth Klarman on the sardine market craze

I love a great bubble story.

“There is the old story about the market craze in sardine trading when the sardines disappeared from their traditional waters in Monterey, California. The commodity traders bid them up and the price of a can of sardines soared. One day a buyer decided to treat himself to an expensive meal and actually opened a can and started eating. He immediately became ill and told the seller the sardines were no good. The seller said, ‘You don’t understand. These are not eating sardines, they are trading sardines.”

(Source: Margin of Safety by Seth Klarman, p 13)


Nassim Nicholas Taleb on success and self-esteem

Keep this in mind.

“For I have a single definition of success: you look in the mirror every evening, and wonder if you disappoint the person you were at 18, right before the age when people start getting corrupted by life. Let him or her be the only judge; not your reputation, not your wealth, not your standing in the community, not the decorations on your lapel. If you do not feel ashamed, you are successful. All other definitions of success are modern constructions; fragile modern constructions.”

Source: AUB Commencement Speech by Nassim Nicholas Taleb (link)

Umberto Eco’s unread books

I should keep a printed version of this quote near my personal library and give it to every one who asks me how many of the books on my shelves I’ve read. I tend to buy roughly two to three times as much books as I read, which equals 120 to 180 books per annum. Impact on my personal finances? In 2016 I’ve spend 15.8 pct of my income on books.

“The writer Umberro Eco belongs to that small class of scholars who are encyclopedic, insightful, and nondull. He is the owner of a large personal library (containing thirty thousand books), and separates visitors into two categories: those who react with “Wow! Signore professore dottore Eco, what a library you have. How many of these books have you read?” and the others—a very small minority—who get the point is that a private library is not an ego-boosting appendages but a research tool. The library should contain as much of what you do not know as your financial means … allow you to put there. You will accumulate more knowledge and more books as you grow older, and the growing number of unread books on the shelves will look at your menacingly. Indeed, the more you know, the larger the rows of unread books. Let us call this collection of unread books an anti-library.”

(Source: The Black Swan by Nassim Nicholas Taleb, p 1)


Ayn Rand on self-esteem and selfishness

To read and re-read.

“(…) The thing that is destroying the world. The thing you were talking about. Actual selflessness … It does exist—though not in the way they imagine. It’s what I couldn’t understand about people for a long time. They have no self. They live within others. They live second-hand. Look at Peter Keating. (…) In what act or thought of his [Peter Keating] has there ever been a self? What was his aim in life? Greatness—in other people’s eyes. Fame, admiration, envy—all that which comes from others. Others dictated his convictions, which he did not hold, but he was satisfied that others believed he held them. Others were his motive power and his prime concern. He didn’t want to be great, but to be thought great. He didn’t want to build, but to be admired as a builder. He borrowed from others in order to make an impression on others. There’s your actual selflessness. It’s his ego he’s betrayed and given up. But everybody calls him selfish. (…)

“(…) Yes! And isn’t that the root of every despicable action? Not selfishness, but precisely the absence of a self. Look at them. The man who cheats and lies, but preserves a respectable front. He knows himself to be dishonest, but others think he’s honest and he derives his self-respect from that, second-hand. The man who takes credit for an achievement which is not his own. He knows himself to be mediocre, but he’s great in the eyes of others. The frustrated wretch who professes love for the inferior and clings to those less endowed, in order to establish his own superiority by comparison. The man whose sole aim is to make money. Now I don’t see anything evil in a desire to make money. But money is only a means to some end. If a man wants it for a personal purpose–to invest in his industry, to create, to study, to travel, to enjoy luxury–he’s completely moral. But the men who place money first go much beyond that. Personal luxury is a limited endeavor. What they want is ostentation: to show, to stun, to entertain, to impress others. They’re second-handers. Look at our so-called cultural endeavors. A lecturer who spouts some borrowed rehash of nothing at all that means nothing at all to him–and the people who listen and don’t give a damn, but sit there in order to tell their friends that they have attended a lecture by a famous name. All second-handers.”

“- by others. At the price of their own self-respect. In the realm of the greatest importance- the realm of values, of judgment, of spirit, of thought – they place others above self, in the exact manner which altruism demands. A truly selfish man cannot be affected by the approval of others. He doesn’t need it. (…) You can fake virtue for an audience. You can’t fake it in your own eyes. Your ego is your strictest judge. They run from it. They spend their lives running. It’s easier to donate a few thousands to charity and think oneself noble than to base self-respect on personal standards of personal achievement. It’s simple to seek substitutes for competence- such easy substitutes: love, charm, kindness, charity. But there is no substitute for competence.”

“That, precisely, is the deadliness of second-handers. They have no concern for facts, ideas, work. They’re concerned only with people. They don’t ask: ‘Is this true?’ They ask: ‘is this what others think is true?’ Not to judge, but to repeat. Not to do, but to give the impression of doing. Not creation, but show. Not ability, but friendship. Not merit, but pull. What would happen to the world without those who do, think, work, produce? Those are the egotists. You don’t think through another’s brain and you don’t work through another’s hands. When you suspend your faculty of independent judgement, you suspend consciousness. To stop consciousness is to stop life. Second-handers have no sense of reality. Their reality is not within them, but somewhere in that space which divides one human body from another. Not an entity, but a relation – anchored to nothing. That’s the emptiness I couldn’t understand in people. That’s what stopped me whenever I faced a committee. Men without an ego. Opinion without a rational process. Motion without brakes or a motor. Power without responsibility. The second-hander acts, but the source of his actions is scattered in every other living person. It’s everywhere and nowhere and you can’t reason with him.”

(Source: The Fountainhead by Ayn Rand, pp 633-634)


“Notice how they’ll accept anything except a man who stands alone. They recognize him at once . . . . There’s a special, insidious kind of hatred for him. They forgive criminals. They admire dictators. Crime and violence are a tie. A form of mutual dependence. They need ties. They’ve got to force their miserable little personalities on every single person they meet. The independent man kills them—because they don’t exist within him and that’s the only form of existence they know. Notice the malignant kind of resentment against any idea that propounds independence. Notice the malice toward an independent man.”

(Source: The Virtue of Selfishness by Ayn Rand, p 141)


Look around, observe, do you recognize the second-handers in your vicinity?


Crusoe’s way of saving

And why we won’t be consuming ourselves richer by staying on a certain level of technology. Mark Spitznagel illustrates this perfectly with the parable of shipwrecked Robinson Crusoe.

To illustrate, we return to the parable of shipwrecked Robinson Crusoe. In their discourses, the Austrians seized upon the example of Crusoe (whose name was corrupted from the familial German “Kreutznaer”) to illustrate with simplicity the evolution of a one-person economy, as Crusoe’s very survival depends on him moving beyond the hand-to-mouth direct satisfaction of his needs to become ever-more roundabout.

On his remote island, which Defoe called the “Island of Despair” (the geographic location of which coincided with the island of Tobago, north of Venezuela and a short distance from Trinidad), Crusoe’s first priorities are the basics of life. To obtain food, he begins with the most primitive of approaches: He goes after what he needs with his hands—or as Böhm-Bawerk called it, “mit der nackten Faust,” literally meaning “with the bare fist.”6 (Defoe equips Crusoe with the means for hunting, growing basic crops, and raising goats; here we focus on fishing to meet his most immediate needs.) Standing in water, Crusoe tries to snatch fish as they swim by, but these slippery and fast-moving creatures are hard to catch. And so he upgrades his approach with a primitive tool (a first attempt at an intermediate good): a branch that he shapes into a spear. Although he misses frequently, he manages to catch five fish a day; but when the last bone is picked clean, he must rest up for another day of labor. Thus, Crusoe’s quandary is how to catch the same amount of fish in less time and with less labor, or a greater number of fish in the same amount of time. The answer is to become more roundabout.

The problem, however, is that even with his spear, Crusoe spends so much time trying to catch five fish for the day that the only way he can invest in better tools (improved intermediate goods) is to cut back on current production. In other words, he has to “save” some of his effort instead of expending it all catching fish. This requires him to decrease his fishing time and catch perhaps only three fish a day (which means he’s going to be hungry), so he can spend the remainder of his day making a simple boat out of a hollowed log and a fishing net woven from vines. The process takes weeks, all the while Crusoe foregoes full satisfaction of his current wants (a stomach full of fish) so that he can position himself for future advantage with the intermediate goods of a boat and net. Hungry, he labors upstream for more fish downstream. Putting it in economic terms, he makes use of his meager surplus time now in order to create more productive means for later.

This is Umweg: Crusoe ultimately catches more fish by first catching fewer fish, by focusing his efforts in the immediate toward indirect means, not ends.
Importantly, Crusoe demonstrates that savings is not mere renunciation, nor is it simply deprivation. Rather, it is highly strategic, yielding or “losing” now to realize an advantage in the future that—the saver hopes—more than justifies the setback and waiting to be paid for the fruits of one’s labor and investment (if, indeed, there is ever a payoff; entrepreneurial ventures naturally do not come with any guarantees of feasibility or profitability). Here again we find the exchange across time: loss now for greater gain later. Thus, as Böhm-Bawerk recognized, savings is not negative, but rather deferred consumption, which provides the productive resources for greater consumption later.

At last the boat and net are ready. The hungry Crusoe takes to the water and in less than two hours catches five fish. Now, with his daily needs met, he can invest in other roundabout production, such as, in addition to repairing his boat and net, a rack for drying fish and evaporating seawater to collect salt to preserve them. Soon, Crusoe has an exceedingly efficient fishing operation: catching far more fish than he can consume and accumulating a stockpile of protein for his diet—and, equivalently, a stockpile of time for replacing and creating even more capital goods.
Now that he is more roundabout thanks to his boat and net, Crusoe can draw from his stockpile of dried and salted fish to keep up consumption while he makes a second net to replace the first when it finally wears out. Capital must be thought of as a temporal structure that is always dwindling away. Moreover, the advantages and gains that are realized today are due to capital that was invested previously. The same process, we recognize, is occurring with our conifers of Chapter 2 that seed into the rocky, inhospitable places where they initially will fall behind—growing slowly and hungry for nutrients—but from which they will realize greater growth and opportunism later, thanks to their buildup of advantageous efficiency, position, and vantage point.
But what if it had turned out differently for Robinson Crusoe—and for the conifers? Instead of taking a few weeks to make a net and simple boat, during which time he had to reduce his daily consumption by two fish (to three from his usual five), suppose the process took two months to complete? Similarly, for the conifers, what if it took longer for them to reach a faster growth stage, or if there were fewer land-clearing fires and thus less turnover in the fertile areas? What if it all took too long, because time is so costly? For Crusoe, the issue is whether the productivity gained from the net and the boat would offset his cost in time, which he measures in terms of forfeited fish (two fish times 60 days, or 120 fish)? How much weight would he have lost from caloric deprivation? To be sure, he would use the boat and net if someone gave them to him as a free gift, but would he invest the time and effort to make them at a cost of 120 fish? Would the increased productivity justify that cost? In Crusoe’s very real terms, would the payoff make up for the anguish—both physical and psychological—of being near starvation for two months? (Humans’ constant necessity of caloric intake creates a natural impediment to the immediate privation of capitalistic production.) Here, again, we can see economic productivity in action: It is not just enough to be physically more productive; it has to make economic sense as well.

Again, it is naïve to think that just because a process is more roundabout it will automatically be more advantageous. To take a silly example, Crusoe could use a “process” that involved climbing a tree every time he wanted to catch another fish; this obviously would confer no advantage over the more direct approach. However, Böhm-Bawerk concluded that the only reason for Produktionsumweg to take longer is to acquire a future productivity advantage (made better and/or with less labor, energy, or raw materials) in creating things that someone really wants—and when they’ll want them. Sometimes the roundabout method exhibits its physical superiority by making more units of output with the same amount of inputs. In other cases, however, the roundabout process yields a desired output good that literally cannot be produced by any shorter, more direct process. Thus, by using what Böhm-Bawerk called “wise circuitous methods,” “the superiority of the indirect way manifests itself in being the only way in which certain goods can be obtained; if I might say so, it is so much the better that it is often the only way!”7
As Crusoe shows us, entrepreneurs engaging in roundabout production must contemplate the basic considerations of how long it takes, what it costs, how many resources must be invested to get increased output, and how long one has to wait for a payback (all of which, as we will see, are impacted by the level of interest rates).

(Source: The Dao of Capital by Mark Spitznagel, pp 109-111)