I came to it expecting a novel about a swindler. Everyone knows The Way We Live Now as the Melmotte book - the one about the great financier whose fortune turns out to be made of air. And Melmotte is in it, enormous and unforgettable. But he is not, it turns out, what the book is about. He is what the book is about, happening to one man. The subject is the water he swims in, which is to say all of us, and the most uncomfortable discovery of its nine hundred pages is how little of it has dated.

It is a very long book - a hundred chapters, several intertwined plots, dozens of characters - and Trollope wrote it in the white heat of disgust. He had come home from abroad in the early 1870s and found, as he saw it, an England in which a particular kind of dishonesty had stopped being shameful and started being admired: dishonesty grand in its scale, commercial in its character, and so widespread that to object to it marked you as naive. The novel is his attempt to put the whole disease on the page at once - finance, politics, literature, marriage, friendship - and to show that it is, everywhere, the same disease.

The genius of the opening is that it does not begin with money at all. It begins with book reviews.

Lady Carbury, a not-very-good authoress in need of income, sits at her desk writing flattering letters to the editors who might notice her new book, Criminal Queens. She does not pretend, even to herself, that the book is good or that her flattery is sincere; she is simply working the machinery as it actually works. And Trollope then turns to one of those editors, Mr Booker, who is asked to review it - and who is, we are explicitly told, an honest man, a critic who has fought against the cheap tricks of his trade. He will nonetheless write warm praise for a book he can barely bring himself to cut the pages of, because a favourable notice will be repaid with a favourable notice, and because:

I think that may be the truest sentence in the book, and Trollope places it on page twenty, long before the financial plot has stirred. It is not the dishonest who undo a society; it is the honest, who can see exactly what is happening and decline to be the one who stands against it, because standing against it is futile and lonely and costs more than it is worth. Booker is not corrupt. He is merely reasonable. The distinction, the novel will spend nine hundred pages arguing, is smaller than we would like.

Only once this is established does Melmotte arrive - and he arrives, brilliantly, as a thing that has already been decided. No one knows where he came from or whether his money is real; everyone agrees, nonetheless, to behave as though it is, because behaving otherwise would mean missing out. His vehicle is a railway, the Great South Central Pacific and Mexican, which is to run from Salt Lake City to the Gulf of Mexico and which interests no one, least of all its promoters, as an actual railway. What it offers is shares, a story, and the chance to be early.

The apex of his ascent is one of the great set-pieces in Victorian fiction: a dinner for the visiting Emperor of China, to be held in Melmotte’s own house, on the theory that some private Englishman ought to show the Emperor how an English merchant lives. The choice of Melmotte gives Trollope his cleanest shot:

He was not a citizen, not a merchant, possibly not even honest. But he could pay, and the willingness to pay had quietly become the only qualification that still meant anything. The cabinet jostles for tickets. So does the opposition. So do the peers. The honest objection - that the man may be a fraud - is everywhere, and everywhere overruled, not by argument but by appetite.

You see the same rot, in miniature and almost as a joke, at the Beargarden, the club where the young aristocrats gamble. They play for sums none of them can pay, settling in scribbled I.O.U.s that everyone knows are worthless. Everyone accepts anyway - one young man, who could no more raise four hundred pounds than forty thousand, hands over his note “with an easy air,” and the note circulates as if it were money. It is the Melmotte economy in a single room: paper standing in for value that is not there, honoured because to question it would break the game everyone is enjoying.

The same arithmetic governs the marriage market, which Trollope treats as one more exchange where paper passes for worth. Lady Carbury’s son, Sir Felix, is a baronet of perfect uselessness - handsome, charming, idle, ruinously in debt - and his mother’s plan for him is the plan his whole set understands without needing to say it: he must marry money. The money is Marie Melmotte, the financier’s daughter, whose fortune is “supposed to be fathomless, bottomless, endless,” and whose suitors multiply in precise proportion to that supposition. Felix cannot manage even this. He is too lazy to court her convincingly, too hollow to feel what he is required to perform, and too compromised to be trusted with the elopement that Marie - who turns out to have more spine than anyone around her - is brave enough to attempt herself. What makes the strand land is that nobody in it pretends it is about love, except in a manner. A daughter’s worth is a number; a son’s task is to capture one; affection is a formality observed, like a clause, and waived when inconvenient. It is the railway again, and the Beargarden again - value asserted, transacted, and never once examined - except that now the paper being passed around the table is people.

Against all of this, Trollope sets one man, and the cost of setting him there is the book’s deepest sadness. Roger Carbury is an honest country gentleman, old-fashioned to the bone, and he will not pretend. He will not enter Melmotte’s house. He will not shake the hand the world is shaking:

Roger is right about everything and powerless over almost all of it. He is not a hero who wins; he is a man being left behind, the representative of an older and plainer notion of honour that the new world finds quaint. “I am old-fashioned, Hetta,” he says, and he is, and the book loves him for it and grants him almost nothing. That is Trollope’s honesty about honesty: in the world he is describing, integrity is not rewarded. It is merely retained, at a price, by people who are increasingly alone.

I keep returning to why a satire this savage does not read as a period piece, and the answer is that its target was never a particular swindle. It was complicity - the small, reasonable, universal willingness to shake hands with what we privately suspect, because everyone else already has, and the cost of being the lone holdout is real. Melmotte falls, in the end, with great speed: a whisper of forgery, a hesitation, and the machine that built him runs in reverse. He dies alone with a dose of prussic acid, found on the floor by a maidservant in the morning. And then - Trollope’s coldest stroke - society dusts itself off, decides it had always seen through him, and turns to find the next one. Nobody has improved. Booker was right. No one was strong enough to put the world straight.

A note on how to read it.

This one is a campaign, not an afternoon - a hundred chapters and the better part of a thousand pages, with several plots running at once. Do not try to keep every thread taut. Trust that they are the same thread: the marriage plots, where people pursue money while pretending to pursue love, are the financial plot in different clothes, and the literary plot is both of them again. Let the panorama accumulate. And read it for its two fixed points, Booker and Roger Carbury - the honest man who gives in and the honest man who doesn’t - because everything Trollope thinks about the way we live is contained in the distance between them. It is long. It earns its length.

When did you last decide, quietly and correctly, that a thing was not quite honest - and then shake its hand anyway, because everyone you respected already had?

This week’s Thursday post takes the same idea into a different room.

Thanks for reading. Let me know your thoughts in the comments. — Attila

If you enjoyed this, explore more articles and ideas on my blog here.

Book discussed in this article:
The Way We Live Now
By Anthony Trollope
Available free at Standard Ebooks and Project Gutenberg

If this essay was worth your time, you can support the work here.

Disclaimer

The views and opinions expressed on this website are for educational and informational purposes only, and should not be considered as investment advice. The author may hold positions in the stocks mentioned on this website. The author of this website is not a licensed stockbroker or financial advisor. Nothing contained herein should be construed as a recommendation to buy, hold, or sell any securities or financial products. Always seek the advice of a financial advisor and do your own independent research before making any trade or investment decisions.

We do not guarantee the accuracy or completeness of any information on this website. Such information is provided “as is” without warranty or condition of any kind, either express or implied. Past performance may not be indicative of future results. This website could include inaccuracies or typographical errors.

We are not liable or responsible for any damages incurred whatsoever from actions taken from information provided on this website, including financial losses. Since all readers who access any information on this website are doing so voluntarily and of their own accord, any outcome of such access is understood to be their sole responsibility. In no event shall we be liable to any person for any decision made or action taken in reliance upon the information provided herein.

This content is published by a private individual who is not a regulated investment firm, investment adviser, or financial intermediary under MiFID II or any applicable EU or Hungarian financial services legislation. This publication does not constitute a financial promotion, investment research, or a personal recommendation within the meaning of applicable law. References to specific financial instruments, funds, or companies are for illustrative and informational purposes only and do not constitute a solicitation or offer to buy or sell any security or financial product. European investors should be aware that certain financial products referenced in this content may not be available for direct purchase in their jurisdiction due to applicable regulations, including MiFID II PRIIPS requirements, and should consult a regulated financial adviser before acting on any information contained herein.

In the high Atacama Desert of northern Chile, roughly 3,000 metres above sea level, three salt flats sit quietly in the thin mountain air. They are called Aguilar, La Isla, and Grande. Beneath their crusted surfaces lies one of the largest concentrations of lithium-rich brine yet identified anywhere on earth - more than 15 million tonnes of lithium carbonate equivalent, enough to supply a meaningful fraction of the batteries the world has decided it urgently needs.

In July 2025, Rio Tinto - one of the most experienced mining operators on the planet - signed a binding agreement with Chile’s state mining company ENAMI to develop these salt flats jointly, committing an initial $425 million toward a project that will require $3 billion in total investment. The operating contract from Chile’s government was signed in September 2025. The lithium beneath the Atacama has been known about for years. The world’s demand for it is not in question. Every electric vehicle mandate, every battery gigafactory announcement, every government net-zero commitment points toward the same conclusion: this lithium is needed. The first tonne of production from Salares Altoandinos is scheduled for 2032, at the earliest.1

Between the urgency of the demand and the arrival of the supply stands a project manager at 3,000 metres above sea level, holding a schedule that has already slipped once and knows it will slip again. Ahead of her: environmental assessments whose outcome depends on hydrological studies not yet complete, community consultations with Atacameño peoples whose timeline is set by the communities, not the sponsors, and the commercial-scale proof of a direct lithium extraction technology that has never been deployed at this scale in Chile. Behind her: a boardroom in London and a government in Santiago, both of which have announced that this lithium is needed urgently. The lithium does not receive the announcement.

The Myth of the Weightless Economy

There is a story the modern economy tells about itself, and it is mostly wrong. The story goes like this: wealthy nations are dematerialising. As economies develop, they shift from making physical things to providing services - software, finance, healthcare, education. GDP grows while the extraction of raw materials plateaus. We are getting more from less. The physical world is becoming less important.

Ed Conway spent several years travelling through the world’s mines, quarries, salt flats, and smelters to examine this claim directly. His conclusion, documented in Material World with the forensic patience of a journalist who has counted every tonne, is that the story is almost entirely false - and false in a specific way. Wealthy nations are not using fewer materials. They are using the same materials, or more of them, while outsourcing the extraction to countries they do not have to look at and statistics they do not have to count. The mountain is still being blown up. It is simply being blown up somewhere else.2

The numbers are striking in their scale. In 2019, humanity extracted more materials from the earth’s surface than in all of recorded history before 1950. Not slightly more. More in a single year than in all the centuries of mining, quarrying, and drilling from the earliest human settlements through the industrial revolution and both world wars combined. And 2019 was not an anomaly: the same statement was true of every year since 2012. The appetite for raw materials is not plateauing. It is accelerating. For every tonne of fossil fuels we extract, we exploit six tonnes of other materials - sand, stone, metals, salts, chemicals. The energy transition has not reduced this ratio. If anything, it is about to increase it.

The Transition That Requires More of Everything

This is the central paradox that Conway documents, and it is one that most coverage of the energy transition carefully avoids stating plainly: the path to a lower-carbon economy runs directly through the largest materials procurement exercise in human history. An electric vehicle requires roughly six times more mineral inputs than a conventional car. A wind turbine requires nine times more mineral inputs than a gas-fired power plant of equivalent generating capacity. Solar panels, battery storage systems, grid infrastructure - all of it requires copper, lithium, cobalt, nickel, manganese, and rare earth elements that must be dug out of the ground, processed, refined, and assembled in supply chains that span continents and decades.3

None of this is an argument against the energy transition. It is an argument about what the energy transition actually requires - and about the gap between what it requires and what the physical supply chains are currently capable of delivering. The International Energy Agency has documented this gap in successive reports. On a net-zero trajectory, demand for lithium alone would need to increase by a factor of forty-two by 2040. Copper demand would need to roughly double. Cobalt, nickel, and rare earth elements face similarly demanding supply requirements. These are not projections that can be met by recycling existing stockpiles or by incremental productivity gains at existing mines. They require new mines, built in new places, over the timescales that new mines actually require.

And those timescales are not determined by the urgency of climate policy. They are determined by geology, hydrology, permitting law, environmental assessment, community consultation, construction lead time, and the pace at which new processing technologies can be validated at commercial scale. The world can declare that it needs more lithium by 2030. The Atacama does not receive the declaration.

Demand moves at the speed of policy. Supply moves at the speed of geology.

What the Atacama Actually Teaches

Return to Salares Altoandinos. A single project in a single country proves nothing on its own, and the global lithium supply chain consists of many projects at many stages of development. The pipeline is real. Argentina’s lithium triangle is expanding. Australia’s hard-rock spodumene mines are already in production. Direct lithium extraction is being tested at multiple sites. Is the supply constraint real, or is it merely a lag that the market is already correcting?

The lag is real, and it is structural rather than temporary, for three reasons that Salares Altoandinos illustrates with unusual clarity. First, the technology. The project intends to use direct lithium extraction - a method that uses significantly less water than conventional evaporation ponds and is well-suited to the Atacama’s fragile ecosystem. It has been tested at Rio Tinto’s Rincon project in Argentina. It has not been deployed at commercial scale in Chile. The step from pilot to commercial operation is not merely an engineering problem; it is a financing problem, a regulatory problem, and a community acceptance problem, all simultaneously. Rio Tinto is one of the most capable organisations in the world at navigating these problems. The timeline still says 2032.4

Second, the community dimension. The Atacama is home to indigenous Atacameño communities whose relationship with the salt flats - as a source of water, spiritual significance, and cultural identity - precedes the lithium economy by centuries. Their consultation is not a procedural formality. It is a substantive negotiation whose outcome is uncertain and whose timeline is set by the communities themselves, not by the project’s financial sponsors. Several lithium projects in the region have been delayed or restructured as a result of community objections. Salares Altoandinos is not exempt from this reality.

Third, and most fundamentally: the pipeline of projects now under development globally is the response to the price signals of 2021 and 2022, when lithium carbonate prices spiked to record highs and governments published their most ambitious electrification targets. That pipeline will take the better part of a decade to materialise as production. In the interim, the metals the world needs for the transition it has decided to make must come from existing mines, existing capacity, and existing supply chains - which are, on current trajectories, insufficient to meet the stated demand.

The investor who exited mining in 2022 - when lithium prices were at records and the energy transition narrative was at its most compelling - made a rational career decision. Returning now, when prices have corrected and the consensus has moved on, requires acknowledging that the exit was premature. That acknowledgment is not something most institutional mandates, quarterly reviews, or investment committees are structured to reward.

What the Arithmetic Describes

There is a valuation observation worth making at precisely this point, because it sits in direct tension with the structural picture above. The global mining sector - the industry responsible for producing the materials the energy transition requires - currently trades at approximately 8 times EV/EBITDA, against technology at over 22 times and US equities at approximately 18 times. Major gold miners trade at 0.75 times net asset value, below their long-term historical average. The MSCI Metals and Mining Index delivered a roughly 90 percent gain in 2025 - outperforming semiconductors, global banks, and the Magnificent Seven - and still trades at a 20 percent discount to price-to-book relative to the MSCI World.5

These figures are not forecasts. They describe what the market is currently pricing in: that the sector responsible for supplying the physical inputs the energy transition requires will generate substantially less value per dollar of assets than almost any comparable category of equity. Whether that pricing is correct - whether the supply constraints documented above, the capital cycle dynamics of a decade of underinvestment, and the acceleration of material demand will resolve in favour of the producers or the consumers of these materials - is precisely the question the framework was built to help investors examine for themselves.

The Salt Flats, Still Waiting

Aguilar, La Isla, and Grande sit at 3,000 metres above sea level in the Atacama mountains, 1,000 kilometres north of Santiago. The brine beneath them has been accumulating for millennia, in a closed hydrological system from which it cannot flow away. It will be there in 2032. It will be there in 2035. It will be there when the permits are final, the technology is validated, the communities have been genuinely consulted, the infrastructure has been built, and the first pump sends the first litre of brine to the first evaporation pond or extraction module. The lithium is patient in a way that the policy is not.

Conway’s central insight, earned through years of travelling through the physical infrastructure of modern civilisation, is that the material world operates on its own timeline - one that has not changed because the spreadsheets say it should. The mountain does not care about the net-zero target. The brine does not read the government mandate. The supply chain from salt flat to battery cell is not shortened by the urgency of the demand at its end.

It is lengthened by it.

How long can policy outrun geology?

Thanks for reading. Let me know your thoughts in the comments. — Attila

If you enjoyed this, explore more articles and ideas on my blog here.

If this essay was worth your time, you can support the work here.

Disclaimer

The views and opinions expressed on this website are for educational and informational purposes only, and should not be considered as investment advice. The author may hold positions in the stocks mentioned on this website. The author of this website is not a licensed stockbroker or financial advisor. Nothing contained herein should be construed as a recommendation to buy, hold, or sell any securities or financial products. Always seek the advice of a financial advisor and do your own independent research before making any trade or investment decisions.

We do not guarantee the accuracy or completeness of any information on this website. Such information is provided “as is” without warranty or condition of any kind, either express or implied. Past performance may not be indicative of future results. This website could include inaccuracies or typographical errors.

We are not liable or responsible for any damages incurred whatsoever from actions taken from information provided on this website, including financial losses. Since all readers who access any information on this website are doing so voluntarily and of their own accord, any outcome of such access is understood to be their sole responsibility. In no event shall we be liable to any person for any decision made or action taken in reliance upon the information provided herein.

This content is published by a private individual who is not a regulated investment firm, investment adviser, or financial intermediary under MiFID II or any applicable EU or Hungarian financial services legislation. This publication does not constitute a financial promotion, investment research, or a personal recommendation within the meaning of applicable law. References to specific financial instruments, funds, or companies are for illustrative and informational purposes only and do not constitute a solicitation or offer to buy or sell any security or financial product. European investors should be aware that certain financial products referenced in this content may not be available for direct purchase in their jurisdiction due to applicable regulations, including MiFID II PRIIPS requirements, and should consult a regulated financial adviser before acting on any information contained herein.

Ed Conway did not travel to the Cortez gold mine in Nevada to blow up a mountain. He had gone, as journalists do, because of a spreadsheet - a trade statistics anomaly that showed gold briefly overtaking cars and pharmaceuticals as the United Kingdom’s largest export, despite Britain having no gold-mining industry to speak of. The trail led to Nevada, to Barrick Gold’s Cortez operation, to a man with a walkie-talkie counting down at the edge of a pit so deep that the house-sized trucks at the bottom looked like toys. And then, because his producer was braver, Conway stepped back from the detonator and watched someone else press the buttons.

What he felt as the shockwave hit - pressure first, then the ground shaking, then the rumble booming around the valley - was not the story he had come to tell. It was something underneath it. For a standard gold bar, 400 troy ounces, Barrick’s trucks move roughly 5,000 tonnes of earth. Ten fully laden Airbus A380s, for one bar. Standing at the rim of Mount Tenabo - which was no longer a mountain so much as an absence of mountain - Conway looked down at what he was wearing on his finger. He had recently married. The wedding ring was almost certainly the product of techniques identical to the one he was watching. He had thought to check whether his wife’s diamonds were conflict diamonds. He had not thought to ask what was destroyed for the gold.1

The book that followed from that moment of discomfort is the most important work of economic journalism published in the last decade. Not because it is radical, or polemical, or because it takes a position. But because it takes you somewhere - into the mines, the quarries, the salt flats, the smelters, the chip foundries - and shows you the physical infrastructure of the modern world with a precision and patience that changes how you see everything above it.

What Conway Actually Found

The book’s central argument begins with a question Conway says economics could not answer for him: what is the difference between the price of something and its importance? The standard answer - that price is the best available signal of importance, since it reflects what people are willing to pay - is elegant and mostly wrong for the specific category of materials Conway is investigating. Sand, salt, iron, copper, oil, lithium: these are the six materials around which the book is structured. None of them is expensive in the way that luxury goods are expensive. All of them are essential in a way that luxury goods are not. And the gap between their market price and their civilisational importance is, Conway argues, precisely the gap that the modern economy’s statistics are designed not to measure.

The dematerialisation thesis - the claim that advanced economies are growing while consuming fewer physical inputs - turns out on inspection to be a measurement artefact. Wealthy nations have not reduced their material consumption. They have exported the extraction to countries whose environmental and labour costs do not appear on their balance sheets, and then counted the services that result while ignoring the dirt that enabled them. Conway documents this with the care of someone who has actually been to the places where the dirt is produced. For every tonne of fossil fuels extracted, six tonnes of other materials come out of the ground. Since 2012, every single year has seen more material extracted from the earth than in all of recorded human history before 1950. Not slightly more. Incomparably more. And not a single category of mineral extraction - from sand and metals to oil and coal - declined in the period Conway examined.2

The book’s most counterintuitive chapter concerns the energy transition. Conway is neither a climate sceptic nor a transition opponent. He is simply honest about what the transition actually requires. An electric vehicle needs roughly six times more mineral inputs than a conventional car. A wind turbine needs nine times more minerals per unit of generating capacity than a gas-fired plant. The path to a lower-carbon economy is paved with copper, lithium, cobalt, nickel, and rare earths that must be extracted from the ground at a scale that dwarfs anything previously attempted. The transition is not a departure from the Material World. It is its largest chapter yet.

The Pencil and the Supply Chain

The book’s most intellectually resonant passage is Conway’s use of Leonard Read’s 1958 essay ‘I, Pencil’ - a text in which a pencil narrates its own supply chain: cedar from Oregon, graphite from Sri Lanka, clay from Mississippi, lacquer from Indonesian castor beans, brass from copper and zinc mined on opposite sides of the world, an eraser assembled from chemicals produced across multiple continents. Read’s pencil concludes that not a single person on earth knows how to make it - that the supply chain is the product of a spontaneous, distributed coordination among millions of people who have never met and never will.

Conway uses this observation to make a point that Read’s original essay, written at the height of the Cold War, did not emphasise: that our ignorance of supply chains is not merely a philosophical curiosity. It is a practical vulnerability. The supply chain crises of the pandemic years - semiconductors, carbon dioxide, timber, shipping containers, fertiliser - were not unusual disruptions to an otherwise robust system. They were the system revealing itself: fragile, geographically concentrated, and far less legible to the governments and businesses that depend on it than anyone had assumed. The lesson Read drew was about the futility of central planning. The lesson Conway draws is about the cost of not understanding what you depend on, whoever you are.3

This is where the book speaks most directly to investors. The supply chains Conway documents are not academic abstractions. They are the physical infrastructure through which the materials the modern economy requires must pass, and their characteristics - long lead times, geographic concentration, regulatory complexity, community dependency - are precisely the characteristics that determine how quickly supply can respond to demand. Conway does not draw this conclusion explicitly. He does not need to. The logic assembles itself as the reader moves through the six materials.

Price is not the same thing as importance - and the gap between the two is where the physical economy hides.

The Cost of Getting There

The most uncomfortable chapter in the book is not the one about climate change or the energy transition. It is the one about Juukan Gorge - a ravine in the Pilbara region of Western Australia where Rio Tinto, in May 2020, blasted two Aboriginal rock shelters that had been continuously occupied for 46,000 years. The artefacts inside included a braided belt of human hair that was a genetic match for the Puutu Kunti Kurrama people who still lived nearby. The caves were destroyed to access 8.1 million tonnes of iron ore worth approximately $135 million. The archaeology had been assessed. The cultural significance had been documented. The approval had been granted. The paperwork was done.

Conway recounts this episode with scrupulous care - the archaeologist standing on the lip of the valley asking the operations manager what they planned to do with the gorge, his non-committal reply, her mistaken belief that the caves would be saved. He is not interested in assigning blame. He is interested in what the episode reveals about the relationship between the visible economy - the iron ore, the steel, the buildings and infrastructure that depend on it - and the costs that do not appear in any GDP figure. The caves were 46,000 years old. The ore will be consumed within a human generation. The statistics record the production of the ore. They record nothing of what was destroyed to obtain it.4

This is the book’s deepest argument, and it is one that sophisticated readers will carry into domains Conway does not visit. If the costs of extraction are systematically undercounted - environmental, cultural, hydrological, social - then the prices of extracted materials are systematically too low. And if prices are too low, investment in finding and developing new sources has historically been insufficient. The supply deficit does not arrive as a surprise. It arrives as the predictable consequence of decades of prices that told producers the material was less valuable than it actually was.

What the Book Is, and What to Read After It

Material World is a work of serious popular non-fiction in the tradition of Robert Caro or Daniel Yergin - journalism elevated by the depth of its research and the patience of its argument into something that changes the reader’s frame of reference permanently. Conway spent years travelling through the physical infrastructure of modern civilisation. The book is the record of that journey, told through six materials that are the foundational inputs of everything else. It is not a light read. The chapters on copper and iron are dense with industrial history. The chapter on oil is the most technically complex. The chapter on lithium, which is also the most contemporary, is the one most likely to be overtaken by events - Conway’s projections about the lithium supply chain have already been partially reshaped by developments in Chile and Argentina that postdate the 2023 publication.

The honest limitation to name is this: Conway is a journalist and broadcaster, not an economist or a geologist, and his conclusions about supply constraints and transition timelines are the conclusions of a very well-informed observer rather than a domain expert. On specific questions - the pace of direct lithium extraction technology deployment, the relative costs of different mining methods, the regulatory trajectories of specific jurisdictions - specialist sources will be more current and more precise. What Conway provides that specialists rarely provide is the whole picture: the physical, the historical, the human, and the statistical assembled into a single argument that no specialist report has the scope to make.

Read it slowly. The ring Conway was wearing when the mountain exploded is on the last page in everything but name.

Which costs does a price systematically refuse to count?

Thanks for reading. Let me know your thoughts in the comments. — Attila

If you enjoyed this, explore more articles and ideas on my blog here.

Book discussed in this article:
Material World
By Ed Conway
WH Allen, 2023

If this essay was worth your time, you can support the work here.

Disclaimer

The views and opinions expressed on this website are for educational and informational purposes only, and should not be considered as investment advice. The author may hold positions in the stocks mentioned on this website. The author of this website is not a licensed stockbroker or financial advisor. Nothing contained herein should be construed as a recommendation to buy, hold, or sell any securities or financial products. Always seek the advice of a financial advisor and do your own independent research before making any trade or investment decisions.

We do not guarantee the accuracy or completeness of any information on this website. Such information is provided “as is” without warranty or condition of any kind, either express or implied. Past performance may not be indicative of future results. This website could include inaccuracies or typographical errors.

We are not liable or responsible for any damages incurred whatsoever from actions taken from information provided on this website, including financial losses. Since all readers who access any information on this website are doing so voluntarily and of their own accord, any outcome of such access is understood to be their sole responsibility. In no event shall we be liable to any person for any decision made or action taken in reliance upon the information provided herein.

This content is published by a private individual who is not a regulated investment firm, investment adviser, or financial intermediary under MiFID II or any applicable EU or Hungarian financial services legislation. This publication does not constitute a financial promotion, investment research, or a personal recommendation within the meaning of applicable law. References to specific financial instruments, funds, or companies are for illustrative and informational purposes only and do not constitute a solicitation or offer to buy or sell any security or financial product. European investors should be aware that certain financial products referenced in this content may not be available for direct purchase in their jurisdiction due to applicable regulations, including MiFID II PRIIPS requirements, and should consult a regulated financial adviser before acting on any information contained herein.

Somewhere in a bank vault in the 1950s, a man kept a safe-deposit box he rarely opened. Inside were stock certificates — a few dozen of them, bought over the years on the quiet recommendation of his wife’s investment adviser. He had followed the adviser’s purchase ideas faithfully and ignored, just as faithfully, every instruction to sell. He put roughly the same modest sum into each, locked the certificate away, and forgot it. When he died, and the portfolio passed to his widow, the adviser was startled by what all that neglect had produced. Most of the holdings were unremarkable; several had withered to almost nothing. But a handful had grown into six-figure positions, and one - a small stake in a photographic-paper company called Haloid, later renamed Xerox - had swollen into a single holding worth more than his wife’s entire managed account. He had done nothing to earn it except decline, for decades, to interfere.

The story is the origin of what came to be called the coffee-can portfolio, and it sits near the front of Chris Mayer’s 100 Baggers - a study of the stocks that returned $100 for every $1 invested. It is a charming anecdote. It is also faintly insulting, because it suggests that the best thing this man ever did for his money was to be too forgetful to touch it.

Here is the puzzle I want to settle. The tools of valuation are not secret. A price-to-earnings ratio is printed free on every terminal in the world; a discounted-cash-flow model is taught in every business school and sold in every textbook. If value investing worked because value investors could see something others could not, the edge would have been competed away the moment the second person learned to read a balance sheet. And yet a small number of investors — Buffett, Munger, Klarman, the forgetful man in the vault — have compounded fortunes out of exactly these public tools. If everyone can see what a business is worth, where does the advantage actually come from?

The section that settles this is “The Only Door Left.” To get there I first have to say what investing is - precisely enough that the answer has nowhere left to hide.

What Investing Actually Is

Investing, stripped to its frame, is a single comparison. The value of anything that produces cash is the sum of all the cash it will ever produce for its owner, each future amount discounted back to today at the return you require for parting with your money in the meantime. That number - its intrinsic value - is then set against the price the market is asking. When value exceeds price by a comfortable margin, you buy; when it does not, you wait. John Burr Williams wrote this down in 1938, in a book called The Theory of Investment Value, and nothing important has been added to the definition since. A stock is a claim on a stream of future cash. Its worth is that stream, discounted.

The definition looks academic, but it is generative: it tells you exactly, and exhaustively, where an edge could live. Because value is nothing but future cash flows discounted, the whole enterprise has only two moving parts - the stream and the discounting - and one thing the equation quietly hides: time. Every advantage anyone has ever had over the market has come through one of those three, and no other. Before I open the three doors, though, I have to explain why you need an edge at all - and why, without one, the honest expectation is not a modest disappointment but the plain average.

Why Average Skill Earns Average Pay

Consider any trade you like. To earn more than the average software engineer, you must be a better software engineer than the average one. To earn more than the average doctor, you must be a better doctor. To earn more than the average footballer, you must be, unavoidably, an above-average footballer. This is not a moral claim; it is supply and demand. If you can be swapped for someone else at no loss - if nothing you bring is scarce - then you will be paid what a substitute is willing to accept, which is to say, the going rate. Above-average pay is the wage of being hard to replace. There is no other source of it anywhere in economic life.

Markets are the same competition with the substitution made brutally explicit. Every purchase you make is a sale by someone on the other side, someone who has looked at the same public price and reached the opposite conclusion. If you bring nothing to that encounter that your counterparty lacks - no better reading of the stream, no advantage the equation can convert into money - you have no more reason to expect above-average returns than the average participant does. An edge, in the end, is only ever one thing: non-substitutability. It is the quality of being difficult to replace at the exact moment of the trade.

Markets add one feature that ordinary labour markets do not, and it makes the situation harsher, not gentler. In a career, you must work to earn even the average wage; the average is not handed to you. In the market, the average is handed to you for free. An index fund delivers the return of the whole game at almost no cost and almost no effort. Which means active effort is only rational if it clears the edge bar - if you can reliably do better than the free default. If you cannot, the disciplined thing is not to try harder. It is to accept the average and index.

And here is the strange part, the part I did not appreciate for years. Accepting that free average turns out to be the single hardest thing an investor is ever asked to do. Working to beat the average feels like effort; accepting it feels like surrender, because it means saying out loud that you are not special here - that in this particular arena you have no edge worth backing. In three decades of watching people invest, I have found that almost no one can say it. Buffett’s remark that a know-nothing investor who buys the index will beat most professionals lands precisely because the know-nothing’s real advantage is not ignorance. It is the absence of an ego that has to be overcome.

An edge is only ever one thing: being hard to replace. In a market of millions, the last place left to be irreplaceable is in time.

The Three Doors

If value is the discounted sum of future cash flows, then an edge can come through one of exactly three doors, and it is worth walking up to each in turn.

The first door is forecasting the stream. This is the largest door and the most crowded. It contains everything about the future of the business: how fast the cash grows, how durable it is, what counts as earnings in the first place - reported earnings or the owner’s earnings that survive the accountants - and what the enterprise will be worth at the far end, the terminal value that so often dominates the sum. Being reliably better at this than everyone else is not impossible, but it is very close to it. Millions of intelligent, well-resourced people model the same companies with the same data. To have a durable edge here is to be consistently right about the future where a crowd of professionals is consistently less right. A few can. Most who believe they can are mistaking a good environment for a good process - which is the error this whole series has been circling since it began.

The second door is discounting. It is worth being precise about what lies behind it, because the door is smaller than people think. Discounting is only the mechanism: taking a future cash flow and calculating its present value at the required rate of return. It is arithmetic. Everything about which cash flows there will be, and how large, and how long they last, belongs to the first door, not this one. And the arithmetic itself has been shared property since Williams set it down. There is no better long division waiting to be discovered; no one earns a durable advantage by discounting more cleverly than the person across the trade. This door is, for practical purposes, closed.

That leaves the third door, and almost no one walks through it.

The Only Door Left

The third door is time. Not timing - time. It is the willingness to hold, once you have bought right, for far longer than the people you are trading against. And it is a real, structural edge for a reason that is arithmetic rather than temperamental, even though temperament is what closes it to most.

Consider what valuation can and cannot do. Over a single year, the price you paid tells you almost nothing about the return you will get; sentiment, momentum and macroeconomic accident swamp it entirely. That is the whole burden of the earlier essays - that in the short run, as I argued in “When Luck Rules” [link], results are dominated by luck, and that valuation is the one referee, as “The Referee You Cannot Bribe” [link] put it, that cannot be paid off. But the referee is slow. The correlation between the valuation you buy at and the return you earn is weak over one year and strong - decisively strong - over ten to fifteen. Starting valuation only pays out on a horizon most investors never hold to. It is a promissory note written in a currency of years.

And here the market has done something extraordinary on your behalf: it has almost entirely vacated that horizon. Through the 1950s and 1960s the average holding period for a share on the New York Stock Exchange ran at seven to eight years. It has been under a year for most of this century. One caveat belongs with that number, because it is the first thing a sceptic will reach for. It is derived from turnover - the value of shares traded set against the value of shares outstanding - so it averages together every holder of every share, including high-frequency traders who account for roughly half of volume and hold for seconds. No actual person holds the average. But the objection does not rescue the horizon. Whatever the true figure is for a human being with a brokerage account, the direction and the scale of the change are not in dispute, and the time frame in which starting valuation actually pays is emptier than it has been in a hundred years. The crowd has stampeded out of it, and that vacancy is the edge. It is not that you can see the price-to-earnings ratio and others cannot - everyone can see it. It is that you are still willing to hold when the number finally does its work, and almost no one else is. This is non-substitutability of a peculiar kind: not intellectual, but psychological. You do not have to be cleverer than the analyst on the other side of the trade. You have to be more patient than he is - which, because patience means looking wrong for years at a stretch, turns out to be the rarer quality by far.

Mayer’s hundred-baggers are simply this arithmetic made visible. He calls the sources of a hundred-fold return the twin engines: growth in earnings, and a rising multiple on those earnings. When both fire together, the result is multiplicative rather than additive, which is how a modest company becomes a vast one. But the engines need a runway, and the runway is measured in decades - the implied holding period across his study of hundred-baggers was on the order of twenty-seven years. Underneath it all sits one requirement he keeps returning to: a business that earns a high return on its capital and can reinvest its profits at that same high return, again and again, for a very long time. Which means the investor’s job is not clever entry and clever exit. It is to identify such a business, buy it at a sane price, and then still own it many years later while the compounding does the work. The forgetful man in the vault had no analytical gift. He had tenure.

I want to tell you I have always held. I have not. I have sold winners early more often than I can defend - usually to book a gain that felt like prudence and was really just the itch to do something, to convert a paper number into a settled one before the market could take it back. Every one of those sales felt responsible in the moment. Collectively, they are the most expensive habit of my investing life, and it took me an embarrassingly long time to build the only defence that works: I no longer buy anything I am not willing to own for ten years. The rule has cost me a handful of comfortable, satisfying exits. It has also saved me from every one of my worst decisions, because my worst decisions were never purchases. They were sales.

It is worth being honest about the other cost, too. Holding a hundred-bagger is not a serene experience. Every one of them fell by half at some point - many by far more than half - on the way up, and the investor who held did so through drawdowns that would empty most people’s stomachs. The forgetful man’s account was not a wall of triumphs; it was a graveyard of withered stubs worth a couple of thousand dollars each, redeemed by a small number of giants he happened not to sell. That is the real shape of the strategy. It tolerates being wrong constantly. What it will not tolerate is selling the right thing.

One caveat belongs here, because the review of Mayer’s book makes it and this essay would be dishonest to leave it out. The hundred-baggers were identified after they had already become hundred-baggers, and the forgetful man is remembered because one of his certificates happened to be Haloid. Tenure applied to a business that is quietly decaying is not an edge; it is the slowest available way to lose money. The third door pays only for the investor who has already walked correctly through the first one.

For the Practitioner

A few objections, for readers who already live here. Holding is not the same as never selling; Phelps himself, whose phrase “buy right and hold on” gives this idea its liturgy, was careful to say the counsel was meant to defeat unproductive fidgeting, not thinking - you still sell when the thesis breaks, when the business decays, when a far better use of capital appears. There is also a quiet mechanical bonus to tenure that the impatient forfeit: the tax you defer by not selling is an interest-free loan from the state, and that loan compounds alongside everything else. And none of this argues against valuation discipline; it depends on it. Buying right is the price of admission. Holding on is merely the part that almost no one pays for.

The Man in the Vault

Return, then, to the safe-deposit box. What the forgetful man did was not analysis, and it was not timing, and it was certainly not a secret reading of value that his wife’s adviser lacked - the adviser had picked the very same stocks. What he had, and what the adviser did not, was the ability to leave them alone. He walked through the one door that stays open to everyone and that almost no one uses. He did not out-think the market. He refused, for decades, to trade against himself.

The lesson of the whole enterprise is smaller and harder than it sounds. You will not find your edge in seeing a number others cannot see. You will find it, if you find it at all, in your willingness to keep holding the business long after the number stopped being interesting to everyone else.

He was not a better analyst. He was a better owner.

The Investor’s Takeaway

Before your next purchase, ask a question different from the usual one. Not whether the price looks low against where it traded last month, but whether you would be content to own this business, untouched, for the next ten years at today’s starting valuation - because it is over ten to fifteen years, not over one, that the relationship between the price you pay and the return you earn actually asserts itself. The discipline that beats the market is not brilliance; brilliance is crowded and, at the discounting step, closed. The discipline is tenure. Buy things worth owning, pay a sane price, and then let the twin engines run for longer than the person on the other side of the trade can bear to. Which valuation regime you choose to stand in - whether the pond you are fishing is a favourable one at all - is a question a later essay takes up. But the edge itself, once you are standing in the right place, is mostly a matter of refusing to leave.

Are you a business owner or a price renter?

Thanks for reading. Let me know your thoughts in the comments. — Attila

If you enjoyed this, explore more articles and ideas on my blog here.

If this essay was worth your time, you can support the work here.

Disclaimer

The views and opinions expressed on this website are for educational and informational purposes only, and should not be considered as investment advice. The author may hold positions in the stocks mentioned on this website. The author of this website is not a licensed stockbroker or financial advisor. Nothing contained herein should be construed as a recommendation to buy, hold, or sell any securities or financial products. Always seek the advice of a financial advisor and do your own independent research before making any trade or investment decisions.

We do not guarantee the accuracy or completeness of any information on this website. Such information is provided “as is” without warranty or condition of any kind, either express or implied. Past performance may not be indicative of future results. This website could include inaccuracies or typographical errors.

We are not liable or responsible for any damages incurred whatsoever from actions taken from information provided on this website, including financial losses. Since all readers who access any information on this website are doing so voluntarily and of their own accord, any outcome of such access is understood to be their sole responsibility. In no event shall we be liable to any person for any decision made or action taken in reliance upon the information provided herein.

This content is published by a private individual who is not a regulated investment firm, investment adviser, or financial intermediary under MiFID II or any applicable EU or Hungarian financial services legislation. This publication does not constitute a financial promotion, investment research, or a personal recommendation within the meaning of applicable law. References to specific financial instruments, funds, or companies are for illustrative and informational purposes only and do not constitute a solicitation or offer to buy or sell any security or financial product. European investors should be aware that certain financial products referenced in this content may not be available for direct purchase in their jurisdiction due to applicable regulations, including MiFID II PRIIPS requirements, and should consult a regulated financial adviser before acting on any information contained herein.

Some decades ago, a portfolio manager named Robert Kirby inherited a small problem that turned into the most useful story of his career. A long-standing client’s husband had died, and she moved his stock portfolio into Kirby’s care. Kirby had advised the wife for a decade, and as he looked over the husband’s holdings, he realised, with some amusement, that the man had been quietly piggybacking his recommendations all along. Then he looked at the size of the estate and stopped being amused. The husband had applied one small twist of his own to the advice: he had paid no attention whatsoever to the sell recommendations. He put about five thousand dollars into each idea, dropped the certificate into a safe-deposit box, and forgot it.

The result was lopsided, as only real compounding is. Plenty of the positions had gone nowhere, shrinking to a couple of thousand dollars apiece. But several had grown into six-figure holdings, and one — a modest early stake in a company called Haloid — had turned into a jumbo position worth more than eight hundred thousand dollars, larger by itself than his widow’s entire professionally managed account. Haloid had changed its name to Xerox. The man had done nothing to deserve the fortune except neglect it thoroughly enough to let it happen.

This anecdote gives Chris Mayer’s 100 Baggers its emotional centre, and it is characteristic of the book that its most memorable figure is a man who never decided on the first one. Mayer set out to study every stock that returned $100 for every $1 invested — the hundred-baggers — across the American market over five decades. What he found is not a stock-picking system, whatever the title promises. It is an argument about time, and it is one of the more instructive things a serious investor can read, even when its evidence is dressed up as a treasure hunt.

The Twin Engines

Mayer’s central mechanic is disarmingly simple. A hundred-bagger is produced by two forces working together, which he calls the twin engines: growth in the company’s earnings, and a rising multiple that the market is willing to pay on those earnings. Either one alone gets you a respectable return. Both at once get you something closer to a miracle, because their effects multiply rather than add. A company whose earnings rise seventeen-fold while its valuation multiple triples has not delivered twenty times your money; it has delivered something far larger, the product of the two rather than the sum.

An investor should recognise this immediately as intrinsic value compounding in plain view. The rising earnings are the growing cash-flow stream; the expanding multiple is the market slowly conceding that the stream is more valuable and more durable than it first assumed. What looks, on a chart, like a magical ascent is really the market re-rating a business as the future it promised keeps arriving. The lesson is not that one should chase multiple expansion — that way lies speculation — but that the enormous winners require both engines, and both engines require years.

The One Thing That Matters

If the twin engines describe the outcome, Mayer is insistent about the input that drives them, and he returns to it so often that it becomes the book’s true thesis. What you want is a business that earns a high return on its capital — twenty per cent or better — and, crucially, one that can reinvest its own profits back into the business at that same high rate, over and over, for a long time. A company that earns twenty per cent on a hundred dollars and can only pay the twenty out as a dividend is pleasant. A company that can take that twenty, redeploy it at twenty again, and then do it with the growing base year after year is a compounding machine. Reinvestment at a high return, sustained over time, is the single characteristic Mayer finds beneath almost every hundred-bagger.

This reframes the investor’s job entirely. It is not to be clever about entry and exit. It is to find one of these rare reinvestment machines, buy it at a price that is not insane, and then — the hard part — still own it many years later while the machine does its work. Mayer’s admiration for owner-operators, managers who hold large personal stakes and allocate capital as though the money were their own, follows directly: they are the people most likely to keep feeding the machine rather than dismantling it for short-term applause. The analytical work is real, but it is front-loaded. After the purchase, the discipline is mostly about sitting still.

What the Book Gets Right, and Where It Stops Short

Where Mayer is strongest is precisely in describing why patience pays: the twin engines, the primacy of reinvestment, the coffee-can portfolio as a device for keeping your worst instincts from hurting you. On these he is clear, well-evidenced and genuinely useful. Where the book is weaker is in what it quietly implies about finding these companies in advance.

The study is, unavoidably, a list of survivors. It identifies the hundred-baggers by looking backwards, once they had already become hundred-baggers, and the patterns it extracts are patterns among winners. That is valuable for understanding what a great long-term compounder looks like. Still, it is close to useless as a screen, because a great many companies exhibit high returns on capital and long reinvestment runways at some moment and then decay — competition arrives, the runway shortens, the moat leaks — and never compound for twenty years at all. Mayer underweights this mortality. For every reinvestment machine that ran for decades, a graveyard of plausible candidates stalled after five years, and no chapter tells you reliably, in advance, which is which.

The second understatement is psychological. Almost every hundred-bagger in the appendix fell by half at some point on its way up, and many fell by far more. The coffee-can works in the retelling because we already know how it ended. Lived forward, it means holding through drawdowns that feel, at the time, exactly like ruin. The book is honest about how hard this is; it is less honest about how few people can actually do it. Read as a description of why long holding periods produce the largest returns, 100 Baggers is excellent. Read as a promise that you can go and find the next Xerox on a Tuesday afternoon, it will mislead you.

The Number That Isn’t About Stock-Picking

Buried in Mayer’s data is the figure that matters most, and it has nothing to do with which stocks he chose. The implied holding period across his hundred-baggers ran to something like twenty-seven years. He notes, almost in passing, that this sits in an age when the average holding period for a share is measured in months. Set those two numbers side by side and the real subject of the book comes into focus. The scarce ingredient in a hundred-bagger is not the identification of the company. It is the owner’s tenure.

This is why the forgetful man in the vault is the book’s truest hero. He had no analytical edge — he was copying someone else’s buy list — yet he outperformed the professional who compiled it, for one reason: he could not be bothered to sell. His edge was availability, not acuity. He was willing to occupy a time horizon the rest of the market has almost entirely abandoned, and he was rewarded for the occupancy rather than for any insight. That is the uncomfortable heart of Mayer’s book, and it is worth far more than any list of tickers: the largest returns in the market are collected not by the cleverest participants but by the most patient ones, and patience, being psychologically scarce, remains one of the last durable advantages left.

The Certificate in the Box

Kirby turned the story of his client’s husband into the coffee-can portfolio: pick the best businesses you can, put the certificates away, and leave them for a decade or more, incurring almost no cost and — more importantly — giving your worst instincts nothing to act on. It sounds like laziness dressed up as strategy. It is closer to the opposite: a structural defence against the one behaviour that reliably destroys long-term returns, which is trading against yourself out of boredom, fear, or the itch to convert a paper gain into a settled one.

The man in the vault did not know that Haloid would become Xerox. Neither did the professional whose recommendations he copied. The difference between them was not foresight. It was that one of them sold and one of them did not.

That is also, in a single sentence, the whole argument for the long-term investor: the edge is not in the choosing, but in the holding.

The companion essay to this review, “The Edge That Cannot Be Copied” [link], takes up exactly this claim — that in a market where everyone can read the same valuation, the one advantage still available to almost anyone is the willingness to hold longer than the crowd — and asks where, precisely, an investor’s edge is permitted to come from.

The last time you sold a winner, were you managing risk - or scratching an itch?

Thanks for reading. Let me know your thoughts in the comments. — Attila

If you enjoyed this, explore more articles and ideas on my blog here.

Book discussed in this article:
100 Baggers: Stocks That Return 100-to-1 and How To Find Them
By Christopher W. Mayer
‎ Laossez-Faire Books, 2018

If this essay was worth your time, you can support the work here.

Disclaimer

The views and opinions expressed on this website are for educational and informational purposes only, and should not be considered as investment advice. The author may hold positions in the stocks mentioned on this website. The author of this website is not a licensed stockbroker or financial advisor. Nothing contained herein should be construed as a recommendation to buy, hold, or sell any securities or financial products. Always seek the advice of a financial advisor and do your own independent research before making any trade or investment decisions.

We do not guarantee the accuracy or completeness of any information on this website. Such information is provided “as is” without warranty or condition of any kind, either express or implied. Past performance may not be indicative of future results. This website could include inaccuracies or typographical errors.

We are not liable or responsible for any damages incurred whatsoever from actions taken from information provided on this website, including financial losses. Since all readers who access any information on this website are doing so voluntarily and of their own accord, any outcome of such access is understood to be their sole responsibility. In no event shall we be liable to any person for any decision made or action taken in reliance upon the information provided herein.

This content is published by a private individual who is not a regulated investment firm, investment adviser, or financial intermediary under MiFID II or any applicable EU or Hungarian financial services legislation. This publication does not constitute a financial promotion, investment research, or a personal recommendation within the meaning of applicable law. References to specific financial instruments, funds, or companies are for illustrative and informational purposes only and do not constitute a solicitation or offer to buy or sell any security or financial product. European investors should be aware that certain financial products referenced in this content may not be available for direct purchase in their jurisdiction due to applicable regulations, including MiFID II PRIIPS requirements, and should consult a regulated financial adviser before acting on any information contained herein.

A note before we begin: this is an extra piece, outside my usual Saturday rhythm, and not a sign of more to come at that pace. I’m running it now because it’s tied to something that just happened. Australia’s fuel-excise relief expired on 2 August, and the argument below turns on what followed at the pump in the days after. Wait a few weeks and the moment passes, so it goes out today rather than in the queue. Normal service resumes next week.

On a Tuesday in late March, more than one hundred service stations across the Australian state of Victoria ran out of petrol. In New South Wales the same day, 165 stations had no diesel and 298 were missing at least one grade of fuel.

Australia’s energy minister, Chris Bowen, had an explanation ready. The country was not running out of fuel. Every scheduled shipment was arriving. The problem, he said, was panic buying there was no need to hoard.

He may have been right about the proximate cause. But that sentence is diagnostic: there is enough, and the trouble is only that people are buying too much of it. It is what a government says when a price has been kept from telling the whole truth. In the country where I grew up, it was said for forty years.

This essay is not about price controls. Australia imposed none. It is about what happens when a government prevents a price from carrying the full weight of an adjustment, and my claim is not that the decisions which followed were irrational. Nearly all of them were reasonable taken one at a time, made quickly, by people trying to prevent hardship they could see coming. The claim is narrower and, I think, more uncomfortable. Scarcity has to be absorbed somewhere. If the visible price is not allowed to carry the full adjustment, the adjustment does not disappear; it migrates to other margins, to the quality of the fuel, to appeals to civic duty, to the buffer stock, to the hunt for profiteers, and, at the end of the line, to rationing proper: the queue and the priority list. Each of these is an attempt to make the same shortage add up on a different margin.

A hard case

Australia is not Sri Lanka, and it is not Argentina. It is a wealthy OECD democracy with deep capital markets, an independent central bank, a competition regulator with real powers, and one of the freest economies in the world on any standard ranking. It did not cause the shock that hit it. On 28 February 2026, following US and Israeli strikes on Iran, the Strait of Hormuz effectively closed to commercial shipping. Five months on, it remains shut. None of that was Canberra’s doing.

That is what makes the case worth studying. What happened next cannot be waved away as the pathology of a badly governed state, or as ideology overriding markets. It is what a competent, broadly market-friendly administration does when the price of something essential rises faster than voters will tolerate. If the pattern holds here, it is not a story about socialism. It is a story about what governments do.

And what Canberra did, step by step over five months, was reconstruct the machinery a shortage economy runs on. Not deliberately, and not with any reference to precedent. But the sequence it arrived at is one that Hungary lived inside for four decades, and it arrived there by the same logic: a price was not permitted to ration, so something else had to.

A necessary definition

Australia never capped the retail price of fuel, and nothing here claims it did. What it did was attenuate the price signal: it widened the gap between what a driver paid at the bowser and what the marginal litre cost to supply. That gap can be opened two ways, by adding a distortion or by removing one. The distinction matters enormously in moral terms and not at all in informational terms, because a driver adjusts to the number he sees, not to its provenance. This is why a tax cut belongs in the same analysis as a price control, though the two are opposites in every other respect. The excise reduction did not stop the wholesale price from rising; refiners and importers still faced the full cost of the disruption. What it did was absorb part of that cost into the federal budget before it reached the driver, so the retail price rose by less than it would have under unchanged tax policy. The signal was not silenced; it was taxpayer-funded into a whisper. Households that heard a smaller price change had a smaller incentive to cut back, precisely when supply was tightest. That is a claim about the direction of the effect, not its size, and I will not pretend to measure how much conservation was thereby forgone. But the direction is not in doubt: fiscal cushioning weakens the demand response relative to leaving tax policy unchanged.

A price does at least two things at once: it communicates how scarce something is, and it decides who goes without. Attenuate the signal and neither task disappears; only the mechanism that used to discharge them quietly, without anyone being told they were less deserving than someone else. The work has to be done somewhere else, on some other margin. The rest of this essay is a tour of those margins, roughly in the order Australia reached for them.

How the exposure was built

First, though, it is worth asking why an advanced economy on the far side of the world from the Persian Gulf should be quite so exposed to a chokepoint closure. The answer took twenty-five years to construct.

Around the turn of the century Australia had eight operating refineries. Port Stanvac closed in 2003, Clyde in 2012, Kurnell in 2014, Bulwer Island in 2015, and then, within five months of each other, the two largest. In October 2020 BP announced it would stop refining at Kwinana in Western Australia; in February 2021 ExxonMobil said the same of Altona in Melbourne. Two refineries remain: Ampol’s Lytton in Brisbane and Viva Energy’s Geelong.

The stated reasons matter. BP cited regional oversupply, sustained low refining margins, and the growth of large-scale export-oriented refineries across Asia and the Middle East. Australian refineries were small, old, and competing against Asian plants many times their size. On any commercial reading, closing was correct. By 2021 the country was importing roughly 90 percent of its liquid fuels.

One detail from the Altona closure deserves to be held onto, because it returns later in this story. Among the pressures on the plant was the significant capital investment required to upgrade it to new fuel quality standards, an expense that, for a marginal refinery, was a bridge too far. Regulation designed to clean up Australian fuel added to the costs that were making marginal Australian refining uneconomic. Five years later, as we shall see, the government would suspend those same standards because Australia no longer refined enough of its own fuel.

The state did not simply watch. In 2021 it legislated the Fuel Security Services Payment, a variable subsidy paid to the surviving refineries when margins fall. In its first quarter of operation Viva received $12.45 million and Ampol received nothing, because its payment rate was zero. The scheme continues. In March 2026, with the strait closed, Bowen adjusted it again to give the refiners easier access to funds. Between them the two plants supply about a fifth of Australia’s refined fuel, and the industry association was warning even then that they remained at risk of closure.

The stockpile told the same story. Australia has been the only International Energy Agency member not meeting the 90-day obligation, and has failed to comply since 2012. In early March 2026 the department’s own figures showed 36 days of petrol, 32 of diesel and 29 of jet fuel. The industry’s defence is not unreasonable; the IEA’s methodology dates from 1974 and fits the Asia-Pacific market badly, and the Lowy Institute has argued that compliance would cost billions for benefits Australia may not need. Both points may be right. Neither changes the fact that when the strait shut, the buffer was thin, and everybody had known it was thin for fourteen years.

This is the ex ante half of the story, and it is not a story about price controls. It is about a country that let its refining capacity go for defensible commercial reasons, declined to pay for the insurance that would have covered the resulting exposure, and then met the consequences with the only instruments left to it. What follows is what those instruments were.

Adjustment by quality: the revealed margin

Australia tightened its petrol sulfur ceiling to 10 parts per million on 15 December 2025, concluding a long argument about air quality. Ten weeks later, on 12 March 2026, it went back to 50ppm, a change that freed roughly 100 million litres a month by letting fuel bound for export be sold at home. Twelve days after that, the minimum flash point for diesel dropped from 61.5°C to 60.5°C, permitting refiners to blend more jet-fuel fractions into the diesel pool. In April both relaxations were extended to September, with a staged return to 10ppm scheduled for January 2027.

It would be easy, and wrong, to call this a hidden tax. Readers here will object that 50ppm is a standard much of the world lives with, and that relaxing a binding regulation moves the market closer to what consumers would freely choose. The objection is correct, and I will not pretend otherwise.

What matters is not the direction of the change but its timing. The air-quality benefit of 10ppm did not diminish between December and March. The standard simply began to bind, and once it bound its cost became visible and immediately intolerable. A rule whose price is paid in fractions of a cent during calm conditions turns out, under stress, to have been an option written against future supply, unpriced when granted, exercised within ten weeks of the first shock.

And the loop closes. The quality standards that had added to the cost of keeping Australian refining open were suspended because Australia had too little refining, both decisions defensible on their own terms, neither aware of the other. Which is the lesson, and it is not one about environmental policy. Scarcity does not merely raise prices; it forces governments to disclose which margins they were trading off all along, and at what rate. Australia discovered in March that it valued a 10ppm ceiling at rather less than 100 million litres a month. That number existed in December. Nobody had to state it, so nobody did.

Adjustment by exhortation

Degrading the product bought volume. It did nothing directly about demand, whose incentive to adjust had meanwhile been cushioned, and so the government moved from supply to persuasion.

Alongside a four-stage National Fuel Security Plan, the government launched a campaign urging Australians to adopt simple, practical behaviours to use less fuel, so supply would go further and be saved for truckies, farmers and essential services.

When a price rations, nobody must be asked to conserve, and nobody must adjudicate whose consumption is worthy. The price asks everyone at once and settles the question without a hearing. When it cannot ask, the government must, and having asked, it must decide which uses are legitimate.

Note what that list contains. Truckies, farmers, essential services. Not commuters, not tradespeople driving between jobs, not the family visiting relatives four hours away. The categories are not arbitrary and they are not stupid, but they are categories, chosen in Canberra, and they now stand where a continuous and impersonal reckoning of millions of competing uses used to stand. An appeal to civic duty is the gentlest possible instrument of allocation. It is still an instrument of allocation.

Adjustment by suspicion

Once conservation is voluntary, somebody has to decide whose consumption is legitimate. And once legitimacy is the test, illegitimacy becomes a category the state needs to fill.

On 25 March, Treasurer Jim Chalmers introduced what was presented as a crackdown on fuel price gouging. The bill doubled the maximum penalty for false or misleading conduct and cartel behaviour, from $50 million to $100 million, across the entire economy. It created no gouging offence. In the Senate the next day, the government was accused of misleading the chamber by describing it as a gouging measure at all, and on the text, the accusation holds.

The gap between branding and statute is the point. Whatever the intent, the effect was not to create a gouging law but to be seen hunting profiteers, with an economy-wide penalty increase for existing offences serving as the nearest instrument to hand. The regulator opened an investigation into four major suppliers. Stock released from reserves carried conditions specifying it must not go to customers seeking to profiteer from global price spikes, panic purchasing or stockpiling.

Hoarders. Profiteers. Speculators. This is the native vocabulary of the shortage economy. János Kornai spent a career documenting the pattern in socialist Hungary in Economics of Shortage: the controlled price produces queues, the queues produce hoarding, and the hoarding is blamed for the queues. Buying two tanks when you expect none next week is not profiteering. It is the rational response to a number told to stop conveying information. The behaviour the state condemns is the behaviour the shock already made rational and its own policy then made cheaper. And scarcity makes the charge of illegitimate pricing politically potent, because a consumer cannot easily tell a scarcity rent from the exercise of market power. The accusation does real work whether or not anyone in office cynically intends it to: it supplies an answer to the question of who is responsible for the queue, an answer other than the policy itself.

The comparison is institutional, not constitutional, and Kornai earns his place here not because Australia resembles socialist Hungary but because he supplied unusually exact language for watching allocation happen without prices. His shortage was chronic and structural, a product of state ownership and soft budget constraints, the system’s permanent equilibrium rather than its emergency. Australia’s is episodic, externally caused, legislated with sunset clauses and argued over in a functioning parliament. The two systems are not comparable and I do not compare them. Kornai’s economy is best read as one extreme configuration of a general phenomenon: what a society looks like when almost the entire adjustment has been forced off price and onto other margins, permanently. Australia shows the same migration in miniature and for a season. It requires no socialism, only scarcity meeting an electorate.

Adjustment across time: eating the insurance

Persuasion and blame are slow, and neither produces a litre of fuel. Only one instrument delivered volume immediately, and it was the one held in reserve for exactly this.

Australia’s Minimum Stockholding Obligation was created in 2023, during the supply pressure that followed the invasion of Ukraine, precisely because the IEA position had been inadequate for a decade. It required fuel companies to hold roughly 1,067 million litres of petrol, 663 million of jet fuel and 2,742 million of diesel inside the country.

Thirty-two months later, at its first real test, the government cut the requirement by up to 20 percent, releasing up to 762 million litres, an insurance policy consumed rather than claimed.

It is worth being precise about what this was and was not. It was not a strategic petroleum reserve release, because Australia had no government-held strategic reserve to release. It was a decision to let private companies hold less of the buffer that had been legislated three years earlier for exactly this contingency. Drawing down a buffer in a disruption is what buffers are for; there is nothing absurd in it. What the drawdown does is convert tomorrow’s resilience into today’s supply. It is adjustment across time: the present shortage is relieved by accepting greater exposure to the next one, to be met from a thinner reserve if it arrives before the buffer is rebuilt. The obligation was not relaxed because the risk had passed. It was relaxed because the risk had arrived.

The fuel nobody votes on

There is a reason the excise cut dominated the coverage and the flash-point change did not, and it is not that one mattered more.

Petrol is the politically visible price in Australia, as it is nearly everywhere. It is printed in metre-high numerals on signs beside the road, updated daily, and legible to every driver in the country whether or not they are buying. No other price in the economy is advertised this way. Diesel is sold at the same forecourts and almost nobody who does not buy it could tell you what it costs.

Yet diesel is the larger exposure by a wide margin. Australia’s stockholding rules required 2,742 million litres of diesel against 1,067 million of petrol, nearly three times as much, because diesel is what moves freight, works farms, runs mines and powers the trucks that restock the supermarkets. A petrol shortage is an inconvenience distributed across millions of voters. A diesel shortage is a supply-chain event.

Now look at where each instrument was aimed. The excise cut, the measure everyone saw, applied to the fuel everyone watches. The flash-point relaxation, which passed almost unremarked, was a diesel measure, permitting more jet-fuel fractions into the diesel pool to stretch the supply. And the categories the government named when it decided who should be served first were truckies, farmers and essential services. Every one of them a diesel user.

The pattern is worth stating plainly. The visible price was managed politically. The invisible one was managed physically. Whether by design or by the ordinary logic of which fuel matters to freight and farming, the exposure was addressed through quality standards, stockholding rules and allocation guidance rather than through anything a driver would notice. This is not a criticism of the individual choices, most of which were reasonable. It is an observation about what happens to accountability when the instrument that would have communicated the problem has been muffled: the response migrates to places the electorate cannot see, and is therefore much less likely to be argued about.

Why the substitutes are worse

The strongest objection to all this is that the price system’s verdict is not always right. A litre of diesel in an ambulance is worth more to a society than a litre in a boat trailer, and willingness to pay does not perfectly track that. The answer is not that ambulances should bid for fuel; a narrow priority for genuine emergency services is easy enough to write. It is that the rulebook gets rapidly worse as it tries to allocate the vast, heterogeneous middle of ordinary uses.

The knowledge required to allocate fuel well is dispersed among millions of people, each holding something no authority can observe: which delivery can wait a week, which crop is at a stage where a missed day costs a season, which small firm is three days from insolvency, which trip is discretionary. A price aggregates all of it and revises the answer hourly, without anyone having to explain themselves.

An administrator sees none of it. He must substitute categories: regional, agricultural, maritime, essential services, truckies, farmers. Those are the actual terms of Australia’s conditions on the stock release: fuel prioritised for regional and agricultural customers, allocated to bulk distributors in reasonable additional volumes, withheld from anyone buying above normal quantities. They are not foolish categories; they are the best available to someone who cannot observe particulars. But no category distinguishes the farmer who needs diesel this week from the one who needs it next month, or sees the high-value use that falls under no heading at all.

Reasonable. Additional. Normal. Every one of those words is doing work no rule can do. They are placeholders where a price used to be, and their vagueness is not sloppy drafting but the only honest way to write a rule for circumstances the drafter cannot foresee. The vagueness is unavoidable, and so is the misallocation that follows from it.

None of this is an argument that governments should not intervene. They must. It is an argument that some interventions preserve the information carried by scarcity, while others hide it and force the adjustment to reappear somewhere less visible.

The part that is not a distortion

An honest account must concede what does not fit. The most visible intervention, halving the 52.6 cent-per-litre fuel excise from 1 April, is the least objectionable. Cutting a tax moves the pump price toward the undistorted market price, not away from it. Letting people keep their own money is not central planning.

It belongs here for one reason: it attenuates the signal in the sense defined above. The scarcity is now paid from the Commonwealth budget rather than at the bowser, and the demand response is blunted exactly when supply is tightest. That is a real cost, and a different category of error from the sulfur ceiling or the profiteering statute.

Nor did these measures cause the shortages, and it matters to be exact about the claim. The Victorian and New South Wales outages came before the excise cut took effect: the closed chokepoint created the scarcity. What the interventions changed was not whether Australia was short of fuel but the mechanism through which that shortage was allocated and made visible. The shock produced the deficit; policy decided who felt it, in what form, and how late. Where the price system was left alone, it did its work. Crude went from about $72 a barrel before the war to above $120, and by 6 July, as cargoes rerouted and non-Gulf supply came forward, back to $72.36. That reversal is a useful illustration of the mechanism, not a counterexample to it.

The exporter’s paradox

One objection deserves a fuller answer. Australia is among the world’s largest energy exporters. Why should it be exposed at all, and why could it not simply trade its way out, coal and gas for refined product, with partners who want what it sells?

Because leverage and shortage sit in different molecules. Australia exports coal and LNG; what it lacks is refined petroleum. You cannot put liquefied natural gas in a delivery van, and the contracts under which most Australian LNG is sold cannot be repriced in a fortnight to buy diesel. Worse, the counterparties are short of the same thing. Australia’s refined fuel comes largely from Singapore, South Korea, Japan and Malaysia, refineries running on crude shipped through Hormuz. The customers for Australian gas are the suppliers of Australian diesel, and the closure hit them upstream. Bargaining power can reallocate scarcity between buyers. It cannot manufacture a barrel.

The bill

The relief was always temporary: halved from 1 April to 30 June, then extended at 16 cents per litre for a single further month. In his second reading speech in June, Chalmers called it tapering support as the country returned to more normal settings, and set the end date at 2 August to coincide with the scheduled excise indexation.

He said something else in that speech which aged badly within weeks: welcoming the June memorandum between the United States and Iran, he told the House that Australia could not afford another false dawn. It was one. On 23 July, Brent rose more than 7 percent in a single day to around $101 a barrel, its highest since May, after Houthi attacks on two Saudi tankers, renewed US strikes on Iran, and Kazakhstan halting exports through the Caspian Pipeline Consortium terminal. The relief expired into a rising market, on an assumption that had already broken.

And this time it expired. After a week of speculation that the bridge might be extended a third time, the Treasurer confirmed on 31 July that the relief would end at midnight on Sunday, saying it had never been meant to be permanent. On 3 August the excise returned, not to where it had been, but to 53.7 cents per litre, the 16-cent reduction removed and a further 1.1 cents added by the CPI indexation the end date had been chosen to coincide with. The bridge did not merely close. It closed at a toll higher than the one drivers had paid before it was built.

The number that had been deferred then arrived, and it arrived where the essay said it would. The excise cut had been the visible measure, applied to the visible fuel. But in the month to 29 July, as the relief tapered, diesel terminal-gate prices across the five largest cities rose by as much as 63.8 cents per litre, against 36.8 for petrol. The national average retail diesel price reached 227.2 cents per litre in the week to 26 July, up from 180.9 on the eve of the crisis in March. The bill came due in the fuel nobody watches, roughly twice as hard as in the fuel everybody does.

And it came due gradually, which is the detail worth pausing on. Alex Prineas, a Sydney reader who checked the state government’s own FuelCheck app for me in the first week of August, watched the twenty-eight-day average for standard unleaded sitting at 183.7 cents and the daily average already at 205, the line on the chart climbing steadily from around 171 in early July rather than spiking on the third of August when the excise returned. At one Sydney forecourt he photographed, a BP where he had worked as a student three decades earlier, regular unleaded was posted at 206.9 and premium diesel at 256.9, the diesel fifty cents dearer than the standard petrol grade beside it.

The rise did not wait for the deadline. It had been under way for a month, as the relief tapered and as conflict flared again in the Gulf, and no single cause can be cleanly separated from the others. That is not a complication for the argument. It is the argument. A wall of scarcity that arrives all at once is a shock; one that seeps back as the paint wears off is consistent with what a cushioned price looks like from the inside. The subsidy never removed the cost. It smeared it across enough weeks that no single morning could be blamed.

Two more announcements in the final week of July completed the picture. Where the price system had been left alone, it did its work: Viva Energy reported that the refiner margin at its Geelong plant had risen to USD 21.1 a barrel, from USD 8.2 a year earlier. The same disclosure noted that Viva drew no Fuel Security Services Payment for the half, because the regional margin had stayed above the subsidy’s trigger price, the support switching itself off precisely as the price returned. Higher prices were improving the economics of a marginal refinery, which is the mechanism the essay has described throughout. How much of that margin reflects a durable signal and how much an extraordinary moment is a fair question; the direction is not in doubt. And on 28 July, the Federal and Western Australian governments announced funding for a feasibility study into a new oil refinery in Western Australia, potentially the first large-scale refinery built in the country since the 1960s. It was not an isolated impulse. The government’s May fuel-security package had already committed to studying new refining capacity and, in its own words, to retaining Australia’s current refining capability in the decade beyond 2030. A nation that had let its refineries close on commercial logic across twenty years now proposed, by political decision, to hold the survivors open and build another. The loop, which this essay traced from 2003, closed in public and on the record, much of it in the same fortnight the bill arrived.

None of this required anyone in Canberra to have acted in bad faith. The measures were adopted quickly, under real pressure, by people trying to prevent hardship they could see coming. That is the point. The sequence ran like this: degrade the product, appeal to civic duty, spend down the reserve, name the profiteers, sort the citizens into deserving categories, and finally watch the deferred price seep back in. None of it required a plan or an ideology. It required only that a price be prevented from delivering bad news at the moment the news was worst, and what followed did so with a regularity that ought to unsettle us.

Australia is interesting precisely because it is not exceptional. Which is why the case is worth the attention of people who will never buy a litre of Australian petrol. Most developed democracies have some essential good whose scarcity price would become politically intolerable long before it became economically ineffective. Energy in Europe. Housing almost everywhere. Food in a bad year. The instinct to intervene will be humane and the interventions will be defensible one at a time, and the shortage economy is not a system anyone chooses. It is a set of moves that governments discover, independently, whenever a number begins telling the public something the public will not accept being told.

Reality does not accept deferral. It only sends the bill later, and with interest, as Australian drivers found on the third of August.

Thanks for reading. Let me know your thoughts in the comments. — Attila

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The views and opinions expressed on this website are for educational and informational purposes only, and should not be considered as investment advice. The author may hold positions in the stocks mentioned on this website. The author of this website is not a licensed stockbroker or financial advisor. Nothing contained herein should be construed as a recommendation to buy, hold, or sell any securities or financial products. Always seek the advice of a financial advisor and do your own independent research before making any trade or investment decisions.

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Picture a town that has stopped happening. The baker opens at six, as he did yesterday and will tomorrow, and draws the same four hundred loaves from the same oven. His flour arrived this morning at the price it has always cost - not a guess but a settled fact, agreed so long ago that no one recalls it being negotiated. The bread sells out by noon, as it always does, to the same families walking the same streets home. In the evening, the baker counts his takings, pays the miller and his help and the interest on the oven, and what remains is nothing. Not a loss. Nothing. The ledger closes to the penny, and it will close to the penny next year, and the year after, until the end of time.

This town is not poor. Its shelves are full, its people fed, its capital whole. It is merely a place where nothing surprises anyone any longer - and in that single respect, it is the eeriest location in all of economics, because it is a busy, prosperous market with no profit anywhere inside it.

A town that has finished happening

Mises called this place the evenly rotating economy, and he built it the way a physicist builds a frictionless plane: not because it exists, but because removing one force lets you see the others clearly. Strip every change out of a market - no new tastes, no new methods, no shocks, no discoveries, the same goods produced by the same hands and sold at the same prices, turning over forever - and you are left with the pure machinery of exchange running in a closed loop. Mises was insistent that no such world is real; the whole value of the construction lies in its impossibility. It is a question wearing the costume of a place.

The question is simple, and it is the one the entire series is built on: when nothing is changing, what is a business actually earning?

The town answers it. Walk into any shop and look for the surplus - the margin above costs that we casually call profit - and you will not find it. Not because anyone has banned it, but because every price has already finished adjusting to every other price. The baker pays exactly what his flour, oven, labour, and waiting are worth, because everyone already knows, to the loaf, what the bread will fetch. There is no gap left to step into. Competition has not been suppressed in this town. It has simply finished its work and gone home.

Where the profit went

This is the first unsettling lesson, and it runs against everything an income statement trains us to believe. We treat profit as the ordinary wage of competent enterprise: you run a good business, you earn a return, that is how the world is supposed to work. The town at rest says otherwise. In a world that has stopped moving, competence earns nothing above its costs. The meticulous baker and the lazy one both clear zero, because there is nothing left to be meticulous about - the future is simply the present, photocopied.

Look across the street, and the point hardens. The café that knows, to the cup, how many flat whites it will pour next March has no judgement left to exercise - only a recipe to repeat. It cannot guess better than its rivals, because there is nothing left to guess; it cannot serve the customer faster than the future already promises. Judgement needs an unknown to work on, and this town has abolished the unknown. Strip out the surprise, and you strip out the reward for handling it, in the same motion.

So where did the profit go? The honest answer is that it was never there to begin with. Profit is not paid for running a business well. It is paid for being right about a future that other people read wrong - and in a town with no future worth reading, there is nothing to be right about. The surplus we spend our lives chasing is not the reward of enterprise in general. It is the residue of a world that refused to sit still.

The one thing that survives

And yet - here is the subtle part, the part everything that follows rests on - the return on capital in the town at rest does not actually fall to zero. It falls to the floor, and the floor is not the ground.

Even here, where nothing ever changes, a loaf of bread today is worth more than the identical loaf a year from now. A present good outranks a future one; waiting is a cost, and someone has to be paid to bear it. A sack of flour in the storeroom this morning can be baking within the hour; the same sack promised for next spring cannot feed anyone tonight - and the distance between the two is not an opinion but a fact about time. Mises gave the payment for that distance a forbidding name, originary interest, but the older and plainer name is the price of time. It does not depend on risk, or cleverness, or surprise; it survives the removal of all three. It is what capital earns simply for existing across an interval, in a world where absolutely nothing goes wrong.

This is the number the whole series will orbit, so it is worth saying slowly. When we say that profit vanishes in the world at rest, we do not mean the return on capital vanishes. We mean it shrinks down to its floor - to interest, the compensation for time itself, the cost of capital. Everything sitting above that floor is the spread.

The floor is what you earn for waiting. The spread is what you earn for being right.

Letting the world move again

Now, let one thing change. A road is cut through the mountains, and a town that was three days from the city is suddenly half a day from it. The instant the future stops matching the present, profit flickers into existence - and so does loss. The merchant who guessed the road was coming, and quietly bought the cheap land beside its path, now sells into a market that did not exist last year; he earns a spread far above the floor. The merchant who guessed wrong and stocked the old route earns less than the floor, or nothing at all. Neither outcome was possible in the town at rest. Both became possible the moment the world moved.

Change the people’s taste instead of the map, and the same thing happens: whoever anticipated the new appetite is holding the right inventory, and whoever did not is holding the wrong one. The mechanism is indifferent to its cause. All that matters is that the future arrived in a shape someone had foreseen and others had not.

Every dollar of profit is a receipt for surprise.

A receipt is issued only when the future fails to arrive on schedule, and it is made out to whoever correctly reads the failure. This is why profit is rare, and perishable, and never quite where you expect to find it: it lives only in the gap between what people expected and what occurred, and that gap is forever closing. For the very change that opens the spread also rings a bell. It tells every other merchant that there is money beside the new road - and they begin, one by one, to arrive. But that is a later chapter. For now, it is enough to see that profit is not the steady state of business at all. It is the flicker that change leaves behind on its way past.

Stand once more in the town at rest, at the close of its unchanging day, and watch the baker shut a ledger that balances to nothing. He is not failing. He is simply living in a world that has run out of surprises, and a world without surprises has no profit to give - only the quiet, permanent interest that time charges on capital. That floor is the gravitational constant of everything to come: the level every return is forever falling toward, the number beneath which no business is truly earning anything at all. Profit is not the rule that the floor interrupts. The floor is the rule; profit is the exception - the abnormal residue of a world briefly out of balance.

Remember the town, and you will never again mistake a profit for permanence.

For the investor

The lesson here is deflating in exactly the way that tells you it is true. When you find a company earning well above its cost of capital, the instinct is to admire the business. The town at rest suggests a colder first question: what surprise is this profit the receipt for, and how long before the world catches up to it? A return above the floor is not, by itself, evidence of a good business - it is evidence of a gap not yet closed. Sometimes that gap is real and slow to shut, and there is genuine money in the difference; most of this series is the work of telling those gaps from the rest. But the default state of capital, the state the whole system is always sliding back toward, is the town at rest: return equal to its cost, and not one cent more. Begin from the floor, and every excess return stops being something you are owed and becomes something you must explain. A banker writing around 1730 built the first explanation - the entrepreneur who buys at a price he knows to sell at one he cannot - and we turn to him next.

Every great investment begins with the same suspicion: if these returns are real, why has gravity not already pulled them down?

Thanks for reading. Let me know your thoughts in the comments. — Attila

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Disclaimer

The views and opinions expressed on this website are for educational and informational purposes only, and should not be considered as investment advice. The author may hold positions in the stocks mentioned on this website. The author of this website is not a licensed stockbroker or financial advisor. Nothing contained herein should be construed as a recommendation to buy, hold, or sell any securities or financial products. Always seek the advice of a financial advisor and do your own independent research before making any trade or investment decisions.

We do not guarantee the accuracy or completeness of any information on this website. Such information is provided “as is” without warranty or condition of any kind, either express or implied. Past performance may not be indicative of future results. This website could include inaccuracies or typographical errors.

We are not liable or responsible for any damages incurred whatsoever from actions taken from information provided on this website, including financial losses. Since all readers who access any information on this website are doing so voluntarily and of their own accord, any outcome of such access is understood to be their sole responsibility. In no event shall we be liable to any person for any decision made or action taken in reliance upon the information provided herein.

This content is published by a private individual who is not a regulated investment firm, investment adviser, or financial intermediary under MiFID II or any applicable EU or Hungarian financial services legislation. This publication does not constitute a financial promotion, investment research, or a personal recommendation within the meaning of applicable law. References to specific financial instruments, funds, or companies are for illustrative and informational purposes only and do not constitute a solicitation or offer to buy or sell any security or financial product. European investors should be aware that certain financial products referenced in this content may not be available for direct purchase in their jurisdiction due to applicable regulations, including MiFID II PRIIPS requirements, and should consult a regulated financial adviser before acting on any information contained herein.

Ludwig von Mises finished Human Action in 1949 - nine hundred pages, a cathedral raised to house one conviction: that the whole of economics can be deduced from the bare fact that people act, choosing means to serve ends under scarcity and the pressure of time. And then, two years later, he did something a lesser thinker would never have risked. He decided the cathedral had not put the point plainly enough. Invited to address the Mont Pèlerin Society at Beauvallon in 1951, he took the single argument the treatise had built its foundations on - where profit comes from, and why in a settled world it disappears - and rebuilt it, standing alone, at a fraction of the length. The result is Profit and Loss: fifty-odd pages, no scaffolding, the one room this series needs with the cathedral cleared away from around it.

That origin is the first thing to say in the essay’s favour. Most short books are abridgements of nothing in particular; this one is a long book’s most important chapter, extracted and honed by the author himself because he was not satisfied he had made it land. Human Action remains the monument, and this series will return to it - a claim this load-bearing deserves to be seen at its full height. But for the argument Week 1 rests on, the treatise is where you go to see how deep the foundation runs, and Profit and Loss is where you go to understand what was poured. We start with what was poured.

The argument was built to prove a negative

The essay opens on a negative, and everything after it hangs from that opening. Mises asks you to imagine a market in which every person foresees the future correctly - the same goods, the same methods, the same prices, all of it anticipated to the penny and carried forward without surprise. Go looking, in that world, for entrepreneurial profit, and you will not find it. If everyone reads the future right, he argues, the entrepreneur buys his materials and his labour and his machines at prices that already reflect what the finished product will sell for. No gap is left between his costs and his revenue. The surplus we call profit falls, precisely, to zero.

This is not the modest claim that profit is thin in a crowded market. It is the stronger and stranger claim that profit is structurally impossible the moment surprise is removed - that the thing we treat as the ordinary reward of good management was never a property of management at all. The meticulous firm and the careless one both clear nothing, because in a world without surprise there is nothing left to be meticulous about. Profit, on this telling, was never the wage of enterprise. It was the wage of change.

What survives the fall

This is the result the whole series stands on, so it is worth being exact about what falls and what does not. Profit vanishes; the return on capital does not go with it. Even inside the frictionless world, Mises is careful to hold profit apart from the other things a business owner collects - the wage of his own labour, and above all the interest on his capital. Interest is not profit and never was. A sum available now is worth more than the same sum a year out; waiting carries a price, and someone is paid it, even in a world where absolutely nothing goes wrong.

Strip a market of all surprise, then, and the return on capital does not collapse to the ground. It shrinks to a floor. In the vocabulary this series (about corporate profit) will keep, that floor is the cost of capital - and Mises has just shown the thing the rest of the project leans on at every turn: the floor is the one return competition can never compete away, because it is not a reward for winning but the price of time itself. Everything above it, every last cent, is the prize that competition exists to erase.

Where profit actually comes from

The negative shows where profit isn’t. The stronger half of the essay is about where it is - and here Mises is at his most vivid and least hedged. Profit is not squeezed out of the worker, and the capital itself does not beget it: the machines and buildings, in his words, are “dead things” that accomplish nothing on their own. What creates profit is a correct guess about a future that other people read wrong - the work of a mind, the entrepreneur’s and no one else’s, paid out for anticipating the state of the market before his rivals could. The physician does not profit from the plague; he profits from relieving it. Profit is the consumer’s verdict, handed to whoever met a coming need before the rest of the market saw it arriving.

And because it is a verdict, profit and its twin, loss, are not prizes and forfeits the market hands out for their own sake. They are a steering mechanism. High profits, on Mises’s account, are not a scandal but a signal - proof that an entrepreneur has moved scarce resources to where consumers wanted them most, and wasted the least in the moving. Losses are the same signal inverted, draining capital away from those who read the public wrongly. The severity and the usefulness are one fact seen from two sides: be right about the future, and you are paid; be wrong, and you pay, with no third option and no way to collect the reward without standing under the risk of the penalty.

The parts that run hot

A fair review has to say what the other half of the essay is doing. Profit and Loss was written for a particular room - the Mont Pèlerin Society of 1951, a gathering of free-market allies Mises suspected were quietly losing their nerve - and much of its back half is less analysis than prosecution. Having established what profit is, he turns on those who would condemn it, and the temperature climbs fast. He argues that ’profiteering’ has no meaning beyond the envy of whoever wields the word; that to tax profit is to tax success at serving the public; that a society which sets out to abolish profit and loss destroys the only instrument it has for directing resources at all, and slides toward chaos. Some of this is bracing. Some of it reads as a man settling accounts, and the polemical heat now and then scorches the argument it means to defend.

The method underneath is genuinely contested, too, and the series need not pretend otherwise. Mises claims to deduce economic law from self-evident axioms about human action and, on principle, refuses to test his conclusions against evidence. Much of the modern profession regards that as a step too far. But the good news for our purposes is the same as it always is with Mises: you do not have to settle the quarrel to use the result. The world at rest is a useful fiction even to an economist who thinks the surrounding philosophy overreaches. Take the argument; you are free to leave the crusade.

What to actually read

The practical counsel is easy this time, because there is so little of it to get through. The whole essay runs about fifty pages and can be read in a single sitting. If even that is more than you want, its spine lives in the first part - on the economic nature of profit and loss - where the world of perfect foresight is built and then dismantled, and where profit is separated from interest and traced back to a single source. Read that, and you have everything Week 1 asks of you. And when you want to see how far down this one argument reaches - how it anchors an entire economics rebuilt from first principles - that is Human Action, nine hundred pages of it, and a book this series will come back to when it is ready to climb the whole structure rather than borrow a single room.

The verdict

Warm, this time, and without the split. Taken whole, Human Action is a monument you visit; Profit and Loss is the one wall of it you can carry home. Mises did the rare and difficult thing twice over - first he built an entire, internally complete world for the sole purpose of proving that profit could not exist inside it. Then he came back and proved it again in an afternoon’s reading, so that no one could say the point had been lost somewhere in the architecture. Both times, in the proving, he located the floor beneath every return an investor will ever measure. Pricing that return, scoring it, watching it revert, asking whether any barrier can hold it aloft: all of it, for the next seven weeks, happens above this floor. It is worth knowing exactly how the floor was poured - and this is the shortest, most honest way to learn how.

The upcoming Thursday essay walks into Mises’s frictionless world and lives there a while, to feel what it is like to run a business in a town that has stopped happening. And it ends where the next book begins. Mises shows that profit is the wage of a world in motion; he never quite explains who volunteers to bear that motion, or why bearing it should pay. For that we go back two centuries - to a banker who built the first real theory of profit out of one unglamorous act: buying at a price you know and selling at one you cannot know.

Thanks for reading. Let me know your thoughts in the comments. — Attila

If you enjoyed this, explore more articles and ideas on my blog here.

Book discussed in this article:
Profit and Loss
By Ludwig von Mises
Mises Institute, 2008

If this essay was worth your time, you can support the work here.

Disclaimer

The views and opinions expressed on this website are for educational and informational purposes only, and should not be considered as investment advice. The author may hold positions in the stocks mentioned on this website. The author of this website is not a licensed stockbroker or financial advisor. Nothing contained herein should be construed as a recommendation to buy, hold, or sell any securities or financial products. Always seek the advice of a financial advisor and do your own independent research before making any trade or investment decisions.

We do not guarantee the accuracy or completeness of any information on this website. Such information is provided “as is” without warranty or condition of any kind, either express or implied. Past performance may not be indicative of future results. This website could include inaccuracies or typographical errors.

We are not liable or responsible for any damages incurred whatsoever from actions taken from information provided on this website, including financial losses. Since all readers who access any information on this website are doing so voluntarily and of their own accord, any outcome of such access is understood to be their sole responsibility. In no event shall we be liable to any person for any decision made or action taken in reliance upon the information provided herein.

This content is published by a private individual who is not a regulated investment firm, investment adviser, or financial intermediary under MiFID II or any applicable EU or Hungarian financial services legislation. This publication does not constitute a financial promotion, investment research, or a personal recommendation within the meaning of applicable law. References to specific financial instruments, funds, or companies are for illustrative and informational purposes only and do not constitute a solicitation or offer to buy or sell any security or financial product. European investors should be aware that certain financial products referenced in this content may not be available for direct purchase in their jurisdiction due to applicable regulations, including MiFID II PRIIPS requirements, and should consult a regulated financial adviser before acting on any information contained herein.

Those of you who have read me for a while know that although this blog is mostly about markets, it has never been only about money. Every so often the writing turns to the things markets are ultimately in service of — time, attention, the people we are trying to provide for. This is one of those notes.

This week Comment magazine published an essay of mine called “Attention Is a Form of Love.” It is the most personal thing I have written: about a school ceremony I attended years ago while my mind was on the market open an ocean away, about my daughter on that small stage, and about the difference between being in the room and actually being there. It is, in a sense, the private cost of the professional attention this blog usually celebrates — and what I understood too late, and what I am trying to do with the lesson now.

If you have a slow Saturday moment, I would be honoured if you read it.

Attention Is a Form of Love

With thanks,

Attila

Anna Eisenmenger was a Viennese widow who kept a diary, and the received version of her story is that she never saw it coming.

She had done everything correctly. Her capital sat in government securities yielding around five thousand kronen a year before the war, the safest thing available in the language of her time and of ours. When a banker told her the state that guaranteed those securities no longer existed in any meaningful sense, she answered that they were government paper, and asked what could be safer.

Here is the part usually left out. In October 1918 her own bank manager told her, earnestly, to convert everything into Swiss francs. She declined. Not because she could not see, and not because nobody told her: private dealing in foreign currency was illegal; she was already breaking the law on hoarding food and fuel to keep four dependants alive, and she would not break another. By the time she was persuaded to move her securities into industrial shares, most of what she had was gone.

Elsewhere in the same economy, someone who had borrowed to buy land watched his debt disappear. Fergusson’s book is full of the type, and the type is the point rather than any individual: same country, same year, same newspapers, same government, same currency. One ruined, one enriched, and the difference between them was not intelligence, information, luck or virtue. It was what they were holding.

That is the subject of this essay, and it is the part of a debt crisis that almost every account leaves out.

The Menu, and What This Series Will Not Say About It

A word first about whose debt this is, because the answer governs everything that follows.

Two credit cycles run at any given moment. They pass through the same five acts in the same order, and the first post in this series set that order out. What differs is what brings them to an end. The cycle banks and companies run is ended by an agent: a central bank raises rates, a lender declines to renew, an asset stops throwing off the cash needed to service the debt raised against it, and somebody forecloses. The cycle a government runs has no such agent, because no collateral was pledged and the borrower chartered the institution that refinances the borrower. Next week’s essay is about what follows from that difference. This series is about the second cycle.

When a government faces a debt load it cannot service from tax revenues, the available options are not unlimited. Ray Dalio, working through forty-eight major debt crises of the last century, sorts the responses into austerity, debt restructuring, money printing, and transfers of wealth from those who have more to those who have less. Reinhart and Rogoff, across a much longer sample, show how routine outright default has been. Reinhart and Sbrancia, in their study of how the post-war debt was retired, document a fourth thing that is not quite any of these.

For this essay, I am going to group them differently from Dalio, into four: austerity, outright default, financial repression, and inflation. The grouping is mine, and it is chosen for one reason only: it sorts the responses by who ends up paying.

Austerity means cutting spending and raising taxes until the debt is manageable. Outright default means telling creditors the debt will not be honoured at face value, which is brutal and, on the long record, far more common than people believe. Financial repression means holding interest rates below the inflation rate for an extended period, eroding the real value of the debt while nominally paying every coupon. Inflation means printing to meet obligations, letting the currency absorb a loss that would otherwise fall on the budget.

Which of the four a given government selects, and why, is a serious question with a serious literature, and this series is not going to answer it. That question belongs to political incentives, constitutional constraints and the machinery of public choice, and it needs different books than these. Nor is the frequency with which one lever has been used evidence about when it will be used again; the record contains deliberate abandonment too, and the currencies that came through it.

What this series can say about the four levers is narrower and, for an investor, more immediately useful. It is this. Whichever lever is pulled, the loss does not evaporate. It moves. And across the documented cases it moves in the same direction, along the same axis, with the indifference of a mechanism.

The Axis

Everything a person can own falls on one side or the other of a single line.

On one side are monetary claims: bonds, bank deposits, pensions, insurance policies, annuities, receivables, cash. Every one of them is a promise, denominated in a unit of account, to be honoured by a counterparty at a future date. The promise may be perfectly sincere and the counterparty entirely solvent. It makes no difference, because the promise is written in a unit whose quantity is set by one of the parties to the contract.

On the other side are real assets: land, buildings, productive plant, commodities, metals. They make no promise. They are worth what they are worth, and nobody can dilute them by issuing more of the unit they are priced in.

Two different sortings are at work in these episodes, and it is worth keeping them apart. During the expansion, new money enters at a point, and Cantillon’s observation holds: whoever receives it first spends at yesterday’s prices, and whoever receives it last finds that prices moved before their turn came. That sorts people by position in a queue, and the first post in this series described it. Stinnes stood near the front, borrowing newly created marks and converting them into coal and ships before the conversion became expensive. The axis is a different cut. It operates at the resolution rather than during the expansion, and it sorts by what a person is holding when the unit is diluted. The two do not always agree. A bank discounting bills at the Reichsbank stood at the very head of the queue and held almost nothing but monetary claims. A farmer who never touched the new money at all still had his land afterwards.

No one in this essay discovered this distinction. It was set out most clearly by an economist who was sitting in Vienna, writing about the destruction of a currency, in the same years and the same city in which Eisenmenger was filling her diary. Neither of them appears to have known the other existed. We will come back to him.

Three of the four levers move wealth from the first side to the second. Default does it explicitly and visibly, and the holder of the claim knows exactly what has happened to him and on what day. Inflation and financial repression do it implicitly and gradually and without a single announcement, so that the holder of the claim experiences the loss as the world becoming expensive rather than as a transfer of his property to somebody else.

Only austerity attempts to place the loss elsewhere, on current consumption rather than on accumulated claims, which is why it produces a visible, dateable, attributable constituency of victims, and why the record reads as it does.

The Longest Successful Deferral

Financial repression is usually presented as the civilised option, a managed middle path in which debt burdens decline gradually without the trauma of cuts or the chaos of inflation. Carmen Reinhart and Belen Sbrancia documented it operating across the advanced economies between 1945 and 1980, with nominal rates held below inflation for three decades.

It is worth being precise about what working meant. Financial repression did not resolve the post-war debt. It transferred it, quietly, from those who held government paper to the government that had issued it, over a period long enough that no single year’s loss was large enough to provoke anyone. The saver was not consulted, could not opt out, and in most cases could not have told you it was happening.

Four conditions made that possible, and they are worth listing not to argue that they should return, but because they describe the machinery a transfer of that size requires. Capital controls under the Bretton Woods framework kept savers from escaping into other currencies. Private gold holding was illegal in the United States from 1933 until the last day of 1974, closing the oldest exit. A one-time surge in workforce participation, alongside the strongest birth rates since the Depression, supplied growth that flattered every ratio. And the dollar had emerged from the war with uncontested reserve status, supplying credibility that had taken generations to accumulate.

Note what that list is. It is not a set of policy choices. It is a set of doors that happened to be shut. The essential feature of financial repression is not the negative real rate. It is that the holder of the claim cannot leave.

What Eisenmenger’s Banker Knew

Set the two figures beside each other, because between them they define the problem this series is about.

Eisenmenger received the correct advice, from a competent man, four years before the worst of it, and did not act on it. Her reason was not stupidity. It was that acting would have meant breaking a law she had decided to keep.

Rudolf Havenstein, presiding over the Reichsbank while the mark died, had every instrument, every number and the whole of the bank’s statistical apparatus, and held publicly that the quantity of money the Reichsbank issued had nothing to do with the level of prices.

One of them was answered and could not take it. The other had everything needed to derive the answer and derived its opposite. Which failure is more troubling is a question this essay leaves standing, because next week’s is about the second one.

The Epilogue

The people who came through the Austrian and German inflations with their wealth intact had done something different, and the diaries and dispatches are consistent about what it was. Some had bought property before the acceleration. Some held foreign currency, having recognised early that the promise on the note was becoming worthless. Some held gold, and bore the social disapproval that attached to anyone visibly declining to trust the national currency.

The pattern repeats across cases as different as Weimar Germany, the post-war repression and the Latin American currency crises of the 1980s and 1990s. Claims denominated in the unit being debased did badly. Things that made no promise did not.

This is not a recommendation, and it is emphatically not a forecast. It is a distributional observation about episodes that have already happened, and its practical content is smaller than it first appears. It does not tell you when, whether, or how much. What it tells you is which question to ask about your own position: not whether it will do well, but which side of the line it sits on if the fifth act ever arrives.

For Readers Who Already Know This

If you have read Fergusson, you will have noticed what is missing here: the argument about why governments choose as they do. It is missing on purpose. That mechanism, concentrated benefits and diffuse costs and the horizon of an elected government, is public choice rather than monetary history, and it deserves better than a paragraph borrowed from a series about something else.

You may also object that the axis is too clean, and you would be partly right. Real assets are not a refuge in every episode. A farm is worth nothing if it is requisitioned, and property is a claim on a legal system, which is itself a promise of a kind. The axis describes where the loss travelled in the cases we have, not a law of nature, and the exceptions are instructive. What survives the objection is narrower and still worth having: in a monetary resolution, the instrument that is easiest for the issuer to dilute is the one that gets diluted.

One more omission, since this is the section for them. The cycle mechanism used across these four weeks is the collateral loop: rising prices raise collateral values, which justify larger loans, which raise prices further. That is Minsky by way of Kindleberger, and it is not the Austrian account of the cycle, which runs instead on credit expansion pushing the money rate of interest below the natural rate, distorting the structure of production, and producing malinvestment that the bust liquidates. The two are not the same theory, and I have not tried to blend them. This series is about where the loss lands and why the date is unavailable, and the collateral loop is sufficient for both. The interest-rate account is a larger argument about capital, and it deserves its own series rather than a paragraph here.

Before You Judge the Position
I hold monetary claims, and I hold them knowing exactly what this essay says about them.

On one side of the line I hold gold, silver, and shares in gold miners. On the other I hold cash, deposits, and some Hungarian government paper, which is to say obligations of a state, denominated in the currency I am paid in, which is precisely the instrument described above as the dilutable one. I have said as much publicly before. What I will not give is sizes, because the weights are the actual position and they change.

I hold it for the ordinary reasons. My liabilities are in the same unit. I need something I will not be forced to sell at a bad moment. And insurance against an event with no date carries a cost that has to be paid out of something.

The point is not that the axis can be escaped. It cannot, and anyone selling a position that sits entirely on one side of it is selling something else. The point is that most people have never once looked at their own holdings and sorted them into two columns, and the sorting takes twenty minutes and cannot be unseen.

Anna Eisenmenger did nothing wrong. She was prudent by every standard available to her; she trusted institutions that had earned that trust over a lifetime, and when the one man who told her otherwise turned out to be right, the thing that stopped her was a law she had decided to obey.

The mechanism did not select her. It selected what she was holding.

Next week: four men who had every number, every instrument, and every reason to see it coming.

Sort your own holdings into two columns - promises denominated in a unit somebody else issues, and things that make no promise. Which column is larger, and did you choose that, or did it happen to you?

Thanks for reading. Let me know your thoughts in the comments. — Attila

If this essay was worth your time, you can support the work here.

Leave a comment

Disclaimer

The views and opinions expressed on this website are for educational and informational purposes only, and should not be considered as investment advice. The author may hold positions in the stocks mentioned on this website. The author of this website is not a licensed stockbroker or financial advisor. Nothing contained herein should be construed as a recommendation to buy, hold, or sell any securities or financial products. Always seek the advice of a financial advisor and do your own independent research before making any trade or investment decisions.

We do not guarantee the accuracy or completeness of any information on this website. Such information is provided “as is” without warranty or condition of any kind, either express or implied. Past performance may not be indicative of future results. This website could include inaccuracies or typographical errors.

We are not liable or responsible for any damages incurred whatsoever from actions taken from information provided on this website, including financial losses. Since all readers who access any information on this website are doing so voluntarily and of their own accord, any outcome of such access is understood to be their sole responsibility. In no event shall we be liable to any person for any decision made or action taken in reliance upon the information provided herein.

This content is published by a private individual who is not a regulated investment firm, investment adviser, or financial intermediary under MiFID II or any applicable EU or Hungarian financial services legislation. This publication does not constitute a financial promotion, investment research, or a personal recommendation within the meaning of applicable law. References to specific financial instruments, funds, or companies are for illustrative and informational purposes only and do not constitute a solicitation or offer to buy or sell any security or financial product. European investors should be aware that certain financial products referenced in this content may not be available for direct purchase in their jurisdiction due to applicable regulations, including MiFID II PRIIPS requirements, and should consult a regulated financial adviser before acting on any information contained herein.

The first essay in this series argued that the acts of a debt crisis occur in a fixed order, and it ended on the fifth act, where governments have to choose. This is the book about what one of those choices did to the people who were standing underneath it.

Fergusson was a journalist rather than an economist. He had covered politics for The Times, and he would later spend a term in the European Parliament, but in the early 1970s he held no particular standing in monetary theory and had no academic position to defend. He has said that when he began researching the Weimar inflation in 1973, British inflation was running at about 10 per cent; by the time the book appeared in 1975 it was close to 25. So he was not writing about a historical curiosity. He could feel the thing happening in the shops around him, and that proximity is on every page.

He skipped the economics textbooks. At the Public Records Office the staff brought him more than a hundred heavy files to work through: diplomatic cables, Foreign Office reports, contemporary correspondence. In them he found Anna Eisenmenger, a middle-class Viennese widow whose diary records a family sliding out of the comfortable classes one transaction at a time. He found Lord D’Abernon, Britain’s ambassador in Berlin, reporting to London with mounting disbelief on Rudolf Havenstein, President of the Reichsbank, who printed ever larger quantities of money while insisting that the money supply had nothing to do with prices. And he found the young Ernest Hemingway, then filing for the Toronto Daily Star, who crossed from Strasbourg to Kehl in 1922 and watched French teenagers strip a German pastry shop bare in half an hour.

The book went out of print and stayed there for three decades. PublicAffairs reissued it in 2010, and it is often said that a recommendation from Warren Buffett is what revived it. Either way, the timing was not accidental. The world had just spent two years printing money on an unprecedented scale to contain a financial crisis, and serious investors had begun asking what the historical record said about where that path leads.

The answer the book gives is not a comfortable one. It is, however, precise.

What the Economists Had Missed

Fergusson says in the prologue that the economic literature on Weimar had “ignored the human element”, while the historical literature had underestimated the inflation itself. His book sits in the gap between them. It is not a treatise and not a political history, but a month-by-month account of what the destruction of a currency did to the people living inside it.

What it did was this. It ruined the prudent and rewarded the leveraged. Eisenmenger had investments yielding around five thousand kronen a year in 1914, roughly two hundred pounds, held in government securities. When a banker told her that the state which had guaranteed those securities was dead, her reply was that they were government paper, and surely nothing was safer than that. The industrialist who had borrowed to buy real things, factories and land and coal, watched the debt evaporate while the assets stayed exactly where they were. Hugo Stinnes, whom Fergusson calls the richest and most powerful industrialist in Germany, built an empire covering something like a sixth of German industry on that foundation. He was not merely holding the right things. He was borrowing newly created marks near the front of the queue and converting them into coal and ships and newspapers before the prices of those things had caught up, and he defended the inflation in public as the only way a benevolent government could keep people employed.

The redistribution was never announced. No parliament debated it and no policy stated it as an aim. It was the mechanical result of choosing, at each decision point, whichever option hurt least that week: printing rather than taxing, expanding credit rather than cutting expenditure, deferring the reckoning rather than accepting it. Fergusson’s phrase for this is the most precise description of the process anyone has written.

Why a government chooses as it does is a question of political incentives, and it belongs to a different literature than this one. What the book supplies is the consequence. Eisenmenger held monetary claims, promises denominated in a currency the government could dilute at will. Stinnes held real assets, things with physical existence that no printing press could reach. The inflation did not sort the two of them by accident. It sorted them by mechanism, and that mechanism is the subject this series examines.

The Detail Most Readers Miss

The received version of Eisenmenger is that she was blind to what was coming. The diary says something more uncomfortable.

In October 1918, when she went to cash twenty thousand kronen for immediate use, her own bank manager advised her earnestly to convert everything she had into Swiss francs. He was right, and he was four years early, and she did not do it. Private dealing in foreign currency was illegal. She was already breaking the law on hoarding fuel and food to keep a war-blinded son, a tubercular daughter, a son-in-law with amputated legs and a hungry grandson alive, and she declined to break this one as well.

Her son had converted thirty-five thousand kronen of compensation money into War Loan, meaning to hold it safely until the krone recovered. It became unsaleable. She was afterwards persuaded to swap her own government securities for industrial shares, which is to say she crossed the line eventually, late, and on somebody else’s prompting rather than her own reading.

That sequence is worth more than the version in which she simply failed to see. She was told, by name, by a man whose job it was to know, and the reason she declined was lawful and, on its own terms, honourable. Fergusson does not moralise about it, which is one of the reasons the book has lasted.

Havenstein and the Logic of Catastrophe

The book’s most arresting figure is Rudolf Havenstein, President of the Reichsbank from 1908 until his death on 20 November 1923. Fergusson draws attention to the coincidence: Havenstein died on the very day of stabilisation, having never resigned. Hjalmar Schacht had been appointed Commissioner for National Currency a week earlier, on 13 November, to a post created outside the Reichsbank precisely because Havenstein’s own tenure was for life and he could not be dislodged from it. Schacht took over the Reichsbank presidency itself only in December, after the funeral.

Havenstein was not corrupt, and he was not stupid. He was a trained lawyer and a capable administrator who had run the bank respectably for years before the inflation swallowed him. His contribution was intellectual rather than moral. He sincerely believed, as the overwhelming majority of German financial opinion believed, that the money supply had nothing to do with prices or the exchange rate. The mark was falling, he maintained, because of reparations, because of speculators, because of foreign hostility, and not because the Reichsbank was printing hundreds of millions of new notes every day.

On 17 August 1923 he told a Council of State, with evident pride, that the Reichsbank was issuing 20,000 milliard marks of new money daily and would shortly raise that figure to 46,000 milliards. Before he spoke, the mark stood at 3 million to the dollar. Within 48 hours it stood at 5.2 million. The speech was reproduced widely in the German press and provoked, Fergusson records, neither outcry nor astonishment.

Fergusson’s achievement is to present this as the story of a system in which foolishness was structurally required, rather than the story of one foolish man. Every German institution had an interest in the inflation continuing, or at least in not being the one to stop it. The industrialists had borrowed to build and needed cheap money to service the debt. The government needed to spend without taxing. The unions needed wages that kept pace with prices. Each constituency pulled in the same direction, and Havenstein was less an aberration than the instrument through which all of them operated at once.

The Limits of the Analogy

One caution, and it is mine rather than Fergusson’s.

Germany in 1919 was a defeated country carrying reparations it could not pay, its productive capacity damaged by war, its institutions untested, its politics violent. None of that describes a major Western economy today. The Weimar hyperinflation was the most extreme monetary collapse any industrialised nation has undergone, and to treat it as a precise template for present circumstances would be dishonest.

Fergusson raises this objection himself in the prologue and then dismisses it. It matters little, he argues, that the causes were in many ways unrepeatable; the question worth asking is how an inflation of any origin affects a nation, its government, its officials and its society. I think he moves past the objection rather too quickly. But he is right that the mechanism travels even when the circumstances do not, and the record contains the counter-cases as well: expansions that were abandoned deliberately and currencies that survived, Germany in 1948 and the United States after 1979 among them. The sequence is not a fate. It is a shape.

Why It Was Republished in 2010

Hemingway’s pastry shop is the image that stays longest. The mark was at 800 to the dollar. A five-course meal at Kehl’s best hotel cost 150 marks, about 15 cents; cake in the shop went at 5 marks a slice; and the youth of Strasbourg crossed the bridge to eat themselves sick on it. The glass cases were swept clear inside half an hour. The proprietor and his helper did not look pleased about it, because the marks in the till were worth less by the time a sale closed than when the order had been placed. Selling was not winning. It was losing more slowly than holding.

Fergusson found that scene in a young man’s journalism, written in real time by someone who had no idea what was coming. The human record of what an inflation feels like outlasts any analysis of why it happened.

A reader who finishes When Money Dies will draw their own conclusions, which was presumably the point of reissuing it without commentary. Thursday’s essay takes up those conclusions directly: the menu of resolutions available to a government facing a debt it cannot pay, and what the record shows about who paid for each.

Read it before you need it. By the time you need it, the lesson will be harder to apply.

If you were living in Germany in 1921 - two years before the peak, when inflation was severe but the outcome still uncertain - what would you have done differently from Anna Eisenmenger, and what would have stopped you?

Thanks for reading. Let me know your thoughts in the comments. — Attila

Book discussed in this article:
When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany
By Adam Fergusson
PublicAffairs, 2010

If this essay was worth your time, you can support the work here.

Leave a comment

Disclaimer

The views and opinions expressed on this website are for educational and informational purposes only, and should not be considered as investment advice. The author may hold positions in the stocks mentioned on this website. The author of this website is not a licensed stockbroker or financial advisor. Nothing contained herein should be construed as a recommendation to buy, hold, or sell any securities or financial products. Always seek the advice of a financial advisor and do your own independent research before making any trade or investment decisions.

We do not guarantee the accuracy or completeness of any information on this website. Such information is provided “as is” without warranty or condition of any kind, either express or implied. Past performance may not be indicative of future results. This website could include inaccuracies or typographical errors.

We are not liable or responsible for any damages incurred whatsoever from actions taken from information provided on this website, including financial losses. Since all readers who access any information on this website are doing so voluntarily and of their own accord, any outcome of such access is understood to be their sole responsibility. In no event shall we be liable to any person for any decision made or action taken in reliance upon the information provided herein.

This content is published by a private individual who is not a regulated investment firm, investment adviser, or financial intermediary under MiFID II or any applicable EU or Hungarian financial services legislation. This publication does not constitute a financial promotion, investment research, or a personal recommendation within the meaning of applicable law. References to specific financial instruments, funds, or companies are for illustrative and informational purposes only and do not constitute a solicitation or offer to buy or sell any security or financial product. European investors should be aware that certain financial products referenced in this content may not be available for direct purchase in their jurisdiction due to applicable regulations, including MiFID II PRIIPS requirements, and should consult a regulated financial adviser before acting on any information contained herein.

Almost twenty years ago, a colleague and I were given something that neither of us had previously possessed and that we were not entirely sure we wanted: total freedom.

We had been employees. We understood how to operate within a structure that someone else had built - how to read its incentives, navigate its hierarchies, perform well within its expectations. What we did not yet understand was how to build a structure ourselves. The firm we were asked to create was a wealth management business, which was, in itself, a field new to both of us. We had the professional knowledge. We had the institutional backing. What we did not have was any guarantee that we were equal to the task at hand, which was not merely being competent within a known framework but constructing the framework in the first place.

I remember the feeling with some precision. It was not one feeling but two, running simultaneously and in tension with each other. The excitement was real: here was a field that nobody had yet mapped for us, a space in which it was genuinely possible to discover things rather than merely execute things. The fear was equally real: what if we were not good enough? What if the efficiency required to be profitable turned out to exceed what we could achieve? These two feelings - the excitement of an open field and the fear of being exposed in it - coexisted without resolving into each other. I stepped into the work sustained by neither certainty nor calculation, but by something more primary: the alertness to what might be possible if I was willing to attend carefully enough to find out.

What made the feeling more complex, and more historically weighted, was the context in which it arrived. I had grown up surrounded by employees. My parents, like almost everyone of their generation in socialist Hungary, had worked within large state structures that did not require, and did not reward, the kind of initiative I was now being asked to exercise. When socialism collapsed and those structures dissolved, many of the people I knew most closely - my parents among them - found themselves required to operate in a market economy without having developed the faculty that markets require. They were not unintelligent or incapable. The incentive structures they had inhabited for decades had never called for this particular quality of attention, and so, quite reasonably, it had not been cultivated. Watching my parents navigate that transition - with difficulty, with courage, with results more mixed than their abilities deserved - was the first education I received in how profoundly institutions shape what their members come to see.

The Gap That Standard Theory Left

To understand what Israel Kirzner is doing in Discovery and the Capitalist Process, it helps to understand what he is pushing against. Standard neoclassical economics is, at its core, a theory of equilibrium. It describes the conditions under which supply and demand are balanced, resources are optimally allocated, and no actor has an incentive to change their behaviour. It is an enormously powerful analytical framework for many purposes. What it is not, Kirzner argues, is a theory of the market process - of how markets actually move toward the states that equilibrium theory describes.

That movement requires something equilibrium theory abstracts away: the figure of the entrepreneur, whose function is not to optimise within a known opportunity set but to discover that the opportunity set is different from what participants have so far perceived it to be.

For most of the half-century between 1920 and 1970, mainstream economic theory treated the entrepreneur as, at best, an awkward residual. What displaced her was the image of the firm as a black box converting inputs into outputs according to a known production function, and of the market as a mechanism that cleared instantaneously once the right prices were announced. In such a model, there is simply nothing for an entrepreneur to do.

Kirzner is precise about what kind of discovery he means to restore to the centre of economic theory. He is not talking about the discovery that results from a deliberate, costly search. Kirzner is interested in something categorically different: the discovery that occurs without prior search, without prior awareness that anything was to be found. The discovery that surprises even the discoverer. His central concept is entrepreneurial alertness. It is not a resource in the economist’s standard sense. You cannot decide to be alert in the way you can decide to spend money on research. Alertness is primordial to the decision rather than an input into it: it is the faculty by which a person comes to see that a decision worth making exists at all.

Two Extremes and a Middle Way

Kirzner positions his account of entrepreneurship between two alternatives that he finds equally unsatisfactory. The first is the neoclassical view: the entrepreneur as a superior calculator, someone who is better than others at dealing with the disequilibria that the market throws up. Kirzner objects that this account misses the moment of discovery itself. Before the entrepreneur can deploy her superior skills, she must have noticed the disequilibrium. And the noticing - the moment at which a set of facts already present in the world reorganises itself in someone’s perception into an opportunity for gain - is not the exercise of a scarce resource. It is the exercise of alertness.

The second alternative, associated with G.L.S. Shackle, treats entrepreneurial choice as irreducibly creative: it entails imagining possibilities that do not yet exist. This is in many ways an attractive account, but it leads, Kirzner argues, to a position that makes systematic economic theory impossible. If entrepreneurial decisions introduce genuinely new elements rather than discovering elements already latent in the market structure, there can be no tendency toward equilibrium, no systematic market process.

Kirzner’s middle way takes from Shackle the genuine novelty of entrepreneurial discovery. Still, it locates the novelty in discovering opportunities that were already present, in the sense that the underlying conditions for mutual gain were already in place. The arbitrageur who buys apples cheaply in one market and sells them dearly in another is noticing a discrepancy that was already there, maintained only by the mutual ignorance of participants on each side. This is what allows the market process to be both open-ended and systematic.

What the Employee Cannot See

There is a specific quality of attention that organisational structures produce - and a corresponding quality they do not. The employee operates within a framework that someone else has constructed. Her tasks are defined, her metrics are set, and her horizon of relevant attention is bounded by the role she occupies. This is not a personal limitation. It is the rational response to an incentive structure that rewards performance within defined parameters, rather than to the discovery of parameters that might differ from those defined.

My parents’ generation had experienced the most extreme version of this. In a socialist economy, the suppression of entrepreneurial alertness is not merely a byproduct of organisational structure. It is a design feature. The plan determines what is to be produced. The discovery that different things might be produced, or that what participants actually want is not what the plan has decided they should want - these are not merely unrewarded. They are penalised. The result, over decades, is not that people become incapable of alertness. It is the environment that makes noticing consequential that is systematically absent.

In my work as a wealth management adviser, I have come to understand this in greater detail. At its best, a significant portion of what the work requires is not the execution of defined tasks but the perception of what is missing from the client’s picture of their situation. The pension is structured in a way that imposes a large implicit cost nobody has explicitly priced. The tax liability is accumulating because legislation changed in a way specific to this client’s circumstances. The asset allocation that made sense when the client’s circumstances were different has become subtly misaligned. These are not calculation errors. They are failures of alertness - situations in which the relevant question was never asked, because the framework within which the work was being done had not made it visible.

The Market Process and Its Enemies

The most politically consequential chapters in Discovery and the Capitalist Process are those in which Kirzner applies his framework to taxation and to regulation. The standard critique of high taxation focuses on incentives in the conventional sense: if you tax income from effort, you discourage effort. But Kirzner identifies a disincentive that operates at a more fundamental level. Taxation of pure entrepreneurial profit does not merely reduce the reward for an activity that would otherwise have been undertaken. It does something categorically worse: it reduces the incentive to have an opportunity noticed at all.

The analysis of regulation follows the same logic. When regulation creates barriers to entrepreneurial entry - through licensing requirements, price controls, or restrictions on the scope of permissible activity - it does not merely prevent specific activities. It prevents specific opportunities from being noticed. Bastiat, in The Law, showed that legal plunder corrupts the moral imagination. Kirzner adds the complementary mechanism: intervention that suppresses the entrepreneurial profit signal degrades the discovery process itself. The people who bear the cost are, most often, not the entrepreneurs whose perception has been narrowed, but the participants who never received the benefit of discoveries that were never made.

The Unknowable Discovery

Entrepreneurial discovery, by its nature, cannot be planned. Not because the future is inherently chaotic, but because what will be discovered is, by definition, not yet known. If it were already known, it would not be a discovery. The entrepreneur who is about to notice a profitable discrepancy does not know that she is about to notice it.

Kirzner’s final chapter draws out an implication that he regards as both liberating and sobering. Precisely because the market process is driven by entrepreneurial discovery, its future course cannot be forecast. This is not a weakness of the process. It is an expression of its greatest strength. An economy whose future can be accurately forecast from current conditions is one whose entrepreneurial process has been suppressed - whose future is determined by what is already known, rather than by what will be discovered.

Looking back now at the parents who struggled when the structure was removed, and at the friends who remained employees, and at the colleague and me stepping into our open field with more fear than confidence - what I see is a generation encountering, all at once and without preparation, the question that Kirzner’s work is really about. Not the question of how to optimise within a given framework, but the question of how to attend to a world that is offering more than you have yet noticed it to offer. The socialist system had suppressed that question for decades, not by making people unintelligent but by making alertness unnecessary. When the system ended, the question returned. It always does. The market does not ask whether you are ready.

Thanks for reading! Let me know your thoughts in the comments. — Attila

If you enjoyed this, explore more articles and ideas on my blog here.

Book discussed in this article:
Discovery and the Capitalist Process
By Israel M. Kirzner
University of Chicago Press , 1985

If this essay was worth your time, you can support the work here.

Disclaimer

The views and opinions expressed on this website are for educational and informational purposes only, and should not be considered as investment advice. The author may hold positions in the stocks mentioned on this website. The author of this website is not a licensed stockbroker or financial advisor. Nothing contained herein should be construed as a recommendation to buy, hold, or sell any securities or financial products. Always seek the advice of a financial advisor and do your own independent research before making any trade or investment decisions.

We do not guarantee the accuracy or completeness of any information on this website. Such information is provided “as is” without warranty or condition of any kind, either express or implied. Past performance may not be indicative of future results. This website could include inaccuracies or typographical errors.

We are not liable or responsible for any damages incurred whatsoever from actions taken from information provided on this website, including financial losses. Since all readers who access any information on this website are doing so voluntarily and of their own accord, any outcome of such access is understood to be their sole responsibility. In no event shall we be liable to any person for any decision made or action taken in reliance upon the information provided herein.

This content is published by a private individual who is not a regulated investment firm, investment adviser, or financial intermediary under MiFID II or any applicable EU or Hungarian financial services legislation. This publication does not constitute a financial promotion, investment research, or a personal recommendation within the meaning of applicable law. References to specific financial instruments, funds, or companies are for illustrative and informational purposes only and do not constitute a solicitation or offer to buy or sell any security or financial product. European investors should be aware that certain financial products referenced in this content may not be available for direct purchase in their jurisdiction due to applicable regulations, including MiFID II PRIIPS requirements, and should consult a regulated financial adviser before acting on any information contained herein.

He has one leg. The other was taken below the knee by a whale - not a metaphorical whale, an actual sperm whale doing the wholly ordinary thing a harpooned animal does, which is thrash. The ivory leg that replaced it taps against the deck at night because Ahab does not sleep much. He commands one of the finest crews afloat, aboard an owner’s ship he is meant to fill with oil and bring home at a profit. He will instead spend all of it - ship, crew, voyage, his own life - for the chance to put a single iron into one animal that does not know he is alive.

Early in the voyage, he gathers the men, nails a gold doubloon to the mast, and promises it to whoever first raises a particular whale: white-headed, wrinkled, with a crooked jaw, known by name across every whaling ground on earth. The crew roars its assent; he has made his private wound their common purpose. This is not greed - there is no money in it. It is not hunger, and it is barely even grief. It is something stranger and more total: a man who has decided the universe owes him a reckoning, and has worked out precisely where to sail and collect it.

Strike Through the Mask

Ahab is not, to his own mind, chasing a whale. He explains himself to his first mate in the most quoted passage in the book, and it pays to hear what he actually claims. Visible things, he says, are only masks. Behind the animal sits something - some reasoning, malign intelligence that arranged his maiming on purpose. “If man will strike, strike through the mask.” The whale is merely the part he can reach. “To me,” he says, “the white whale is that wall, shoved near to me.”

That is the entire disease in a sentence, and notice it is not really about the whale. Ahab does not even require the malice to be real. He will hunt the thing, whether it is an enemy with intent or only a dumb mountain of muscle - “be the white whale agent, or be the white whale principal, I will wreak that hate upon him.” The grievance comes first; the reasons are assembled afterwards, in its service. “I’d strike the sun if it insulted me,” he says - and he is not exaggerating. He would.

You Have Met This Man

You have met this man. Not on a whaling ship - on a screen, at some bad hour, in front of a position that has gone against you and stayed there. You did not close it. You told yourself the thesis was intact, and perhaps it was. But underneath the thesis sat something you admitted less freely: that closing now would mean the market had been right and you had been wrong, and that had become intolerable. So you held. And somewhere in the holding, the position quietly stopped being a claim about a company and became a wall, shoved near to you, behind which you had begun to detect an enemy - the shorts, the algos, the Fed, the herd, the maddening refusal of other people to see what you so plainly see.

You, too, struck through the mask. And you have known, for longer than you would like to admit, exactly which position this is.

All His Means Were Sane

Here is the part everyone misremembers. Ahab is no fool. His seamanship is flawless, his navigation brilliant, his command total; on every subject but one, he is the sharpest mind aboard. The madness is surgical. Melville hands us the diagnosis in Ahab’s own thought: “All my means are sane; my motive and my object mad.”

That sentence belongs over every trading desk. It does not describe incompetence. It describes a wholly competent man, in full command of his instruments, pointed at the wrong target. And - this is the line that should cost you a little sleep - Melville tells us Ahab knew. “In his heart, Ahab had some glimpse of this.” He was not fooled. He saw the madness plainly and sailed into it anyway, “without power to kill, or change, or shun the fact.”

Knowing was never the missing piece. The investor who detonates on a single conviction is rarely the one who never learned about position sizing; far more often, he is the one who could teach the seminar, who has every bias filed and labelled, and who adds to the loser at three in the morning regardless. There is an old word for choosing the worse path with your eyes fully open - the Greeks set it down long before anyone opened an exchange - and the whole force of the word is that it has nothing to do with ignorance. Ahab knew. You know. It has never once been enough.

The Tell Is the Grievance

So if the great investor and the doomed one both hold through pain, both add as the price falls, both refuse to be shaken out by the crowd - and they do - how do you tell conviction from compulsion while you are inside it, where they feel identical?

Not by the strength of the belief. Ahab had the strongest belief in the book; that strength killed him. The tell is quieter, and more embarrassing: it is a grievance. Conviction is a claim about the world - this is mispriced, and here is why. Compulsion is a claim about you - I cannot be the wrong one. The instant your private monologue stops being about the asset and becomes about the injustice of the market disagreeing with you, the conversion is already complete.

Conviction holds the position; compulsion is held by it.

I have watched the line get crossed at scale. Through the long, cold winter at the end of the last decade, I sat in a good many conversations with serious, capable investors who had quietly stopped asking whether their thesis might be wrong and started asking why the market refused to acknowledge it. The question had inverted - from is my map wrong to why won’t the territory cooperate - and that inversion is the exact moment a thesis becomes a grudge. Almost none of them could hear themselves making it. A thesis does not resent the market for disagreeing. A vendetta does nothing else.

But Conviction Is the Whole Game

If you have spent real time in markets, you have been bristling for several paragraphs, and you are right to. Conviction is the edge. The whole discipline of value investing is the willingness to hold when others fold and to buy more when the thesis is intact and the price is wrong. The crowd’s disagreement is not a defect; it is frequently the entire source of the return. Every investor you admire is a monument to conviction, and doubt is precisely how you get talked out of the position at the bottom. None of that is false. If this essay told you to stop believing in your own work, you should burn it.

It doesn’t. Here is the finer cut. The great investors are not separated from Ahab by having more conviction - Ahab had more than any of them; he had the most in all of literature. The one faculty that separates them he lacked completely: the capacity to be wrong without being diminished. To hold a thesis as something they own, rather than something they are. That difference is invisible on the way in, when both men look identically brave, and it surfaces only at the single instant that decides everything - when the thesis breaks and the line must be cut. The great investor cuts the line. Ahab cannot. He is roped to the whale by his own iron, and goes down with it - same conviction; opposite end. The whole of the gap is whether the rope is in your hand or around your neck.

On the third day, Ahab makes his throw. The line leaps and snaps around his neck, and he is gone before he can make a sound - dragged under, still grappling, “from hell’s heart I stab at thee; for hate’s sake I spit my last breath at thee,” spending his final living instant on an animal that swims on, untroubled, having never once known his name. The market, like the whale, was never your adversary. It is the weather. It carries the great fish, and it sends the squall, and it cannot be insulted, because there is no one inside it to do the insulting. The whale was just a whale.

So before you add to a loser or refuse an exit, run the cheap question first - has the thesis changed, or only my comfort? - and then the harder one underneath it: am I aggrieved? If you want the position back, not because your analysis says it is coming, but because being wrong has become a wound to be avenged, you are not holding the position any longer. It is holding you. Find the rope, and make sure it is your hand, and not your neck, that it runs through.

Which position in your book stopped being a thesis a long time ago and quietly became a grudge - and if you cannot bring yourself to sell it tomorrow morning, then what, exactly, do you think you are doing?

Thanks for reading. Let me know your thoughts in the comments. — Attila

If you enjoyed this, explore more articles and ideas on my blog here.

If this essay was worth your time, you can support the work here.

Disclaimer

The views and opinions expressed on this website are for educational and informational purposes only, and should not be considered as investment advice. The author may hold positions in the stocks mentioned on this website. The author of this website is not a licensed stockbroker or financial advisor. Nothing contained herein should be construed as a recommendation to buy, hold, or sell any securities or financial products. Always seek the advice of a financial advisor and do your own independent research before making any trade or investment decisions.

We do not guarantee the accuracy or completeness of any information on this website. Such information is provided “as is” without warranty or condition of any kind, either express or implied. Past performance may not be indicative of future results. This website could include inaccuracies or typographical errors.

We are not liable or responsible for any damages incurred whatsoever from actions taken from information provided on this website, including financial losses. Since all readers who access any information on this website are doing so voluntarily and of their own accord, any outcome of such access is understood to be their sole responsibility. In no event shall we be liable to any person for any decision made or action taken in reliance upon the information provided herein.

This content is published by a private individual who is not a regulated investment firm, investment adviser, or financial intermediary under MiFID II or any applicable EU or Hungarian financial services legislation. This publication does not constitute a financial promotion, investment research, or a personal recommendation within the meaning of applicable law. References to specific financial instruments, funds, or companies are for illustrative and informational purposes only and do not constitute a solicitation or offer to buy or sell any security or financial product. European investors should be aware that certain financial products referenced in this content may not be available for direct purchase in their jurisdiction due to applicable regulations, including MiFID II PRIIPS requirements, and should consult a regulated financial adviser before acting on any information contained herein.

I had been avoiding it for years, and for the usual reasons. It is six hundred pages. A great deal of it is, apparently, about the anatomy and classification of whales. And everyone already knows how it ends. All three things are true, and none of them prepared me for the book.

What I expected was a long adventure story with a famous last act. What I found was something far stranger: a book that opens as a wry, companionable memoir, wanders for hundreds of pages through rope and blubber and cetology, and then - almost without your noticing the moment it happens - tightens into one of the most frightening accounts of obsession ever written.

It begins gently, even charmingly. The narrator introduces himself with what may be the most famous opening in the language, and then, immediately, admits to something like depression:

This is the voice you spend the first stretch of the book with - self-aware, ironic, generous, good company. Ishmael signs aboard a Nantucket whaler called the Pequod, befriends a tattooed harpooneer named Queequeg, and settles in to tell you, at enormous and frequently digressive length, everything he knows and imagines about whales and whaling. You could be forgiven, two hundred pages in, for forgetting there is a plot coming at all.

Moby-Dick was published in 1851 and, by the standards of Melville’s career, was a failure. It sold poorly, baffled reviewers, and helped end his life as a commercially viable author; he died in obscurity, and the book was not widely recognised as a masterpiece until the 1920s, thirty years after his death. It is easy, now, to see why it confused people. It does not behave like a novel. It is part sea-adventure, part encyclopaedia, part sermon, part stage tragedy, and it switches between these registers without apology.

That structure should not work, and for long stretches, you suspect it does not. But the digressions are not padding. They are ballast. The chapters on the whiteness of whales, the mechanics of the hunt, the history of the trade - they build the solid, salt-soaked, ordinary world that makes the madness, when it finally surfaces, weigh what it weighs. Melville spends three hundred pages making the sea real so that one man’s refusal to accept it can break against something.

Because there is a man, and the whole book has been circling him.

Captain Ahab keeps to his cabin at first; we hear of him before we see him, and what we hear is unsettling. He lost a leg to a particular whale - a great white sperm whale, known to whalers across every ocean - and he has come back to sea not to fill the ship with oil, which is his job and his owners’ expectation, but to find that one animal and kill it. Early in the voyage, he assembles the crew, nails a gold doubloon to the mast as a prize, and binds the men to his purpose with an oath that reads like a black sacrament - “Death to Moby Dick! God hunt us all, if we do not hunt Moby Dick to his death!” The crew roars its assent. Only the first mate, Starbuck, pales and turns away.

What makes Ahab one of the great creations in fiction is that he is not simply enraged. He has a philosophy, and he states it, and it is more disturbing than mere fury would be:

Read that carefully, because it is the whole book. Ahab is not really hunting a whale. He is hunting whatever he has decided stands behind the whale - some malign intelligence that arranged his maiming on purpose - and the animal is merely the part of it he can reach. The wall is in front of him, and he will not, as ordinary men do, turn and walk along it. He will throw himself at it until it kills him. And note the most chilling line: he does not even require the malice to be real. Agent or principal - conscious enemy or dumb brute, it makes no difference to him. The hatred came first. The reasons are assembled afterwards, in its service. “I’d strike the sun if it insulted me,” he says, and he means it exactly.

The most unbearable thing Melville does is refuse to let Ahab be a madman who doesn’t know better. He knows. In a quiet, devastating aside, we are told:

His seamanship is flawless. His command is total. On every subject but one, he is the sharpest mind on the ship. The madness is surgical, confined to a single object - and he can see it, name it, and do nothing about it. He is not deceived. He is something worse: lucid and unable to turn.

Against him stands Starbuck, and the quiet tragedy of the book is that the one sane voice aboard is also the one that cannot prevail. Starbuck is brave, competent, and entirely clear about the lunacy of the errand. He says so, plainly, to Ahab’s face:

It is the sanest sentence in the novel, and it lands on Ahab like rain on iron. Later, Starbuck stands outside the captain’s cabin in the dark with a loaded musket, knowing that one shot would save thirty lives, and cannot bring himself to fire. The man who sees clearly is, in the end, as paralysed in his way as Ahab is driven in his. Clear sight is not the same as the power to act on it - a theme this series will keep returning to.

And behind all of it sits the whale itself, which is the book’s deepest stroke. In a famous chapter on the colour white, Melville asks why the whale’s whiteness, of all things, is so terrible, and arrives at an answer that turns the whole hunt inside out:

The whale is white because white is blank - a screen onto which a man may project anything, malice included. Moby Dick is not evil. Moby Dick is not anything. He is an animal of enormous size doing what such animals do, and his horror is precisely his indifference, the great meaningless blankness of a thing that cannot be reasoned with, bargained with, or insulted. Ahab’s tragedy is that he cannot bear a blank. He needs the whale to mean something, to be for him or against him, and so he paints malice onto the void and gives the rest of his life to avenging it.

I have been trying to work out why a book this long, this digressive, this aggressively uninterested in being liked, takes such a hold.

Part of it is the sheer ambition - the way Melville reaches for everything at once and, astonishingly, mostly catches it. But the deeper part is recognition, and it is not flattering. Most of us have, at some point, met a wall - an impersonal fact that would not yield, a loss that owed us no explanation - and decided, against all sense, that it was personal. That it had singled us out. That it could be made to answer. We rarely take it as far as Ahab; we have jobs, and other people, and the good luck of smaller oceans. But the structure of his error is one we know from the inside, and Melville renders it with such force that you finish the three-day chase - Ahab dragged under, still grappling, “from hell’s heart I stab at thee; for hate’s sake I spit my last breath at thee” - not as a spectator but as someone who has been quietly implicated. The ship goes down. The whale swims on, untroubled, having never known the captain’s name. And one man floats free on a coffin to tell it: “And I only am escaped alone to tell thee.”

A note on how to read it.

This one is not, like some of the books in this series, an afternoon. It is a commitment - six hundred pages, a hundred and thirty-five chapters, and long passages where the plot stops while Melville tells you about whale skeletons or the price of ambergris. My advice is not to fight that. Do not read it as an adventure novel impatient for its ending; read it as an ocean you are crossing, with the storm somewhere ahead. Let the digressions be the calm water. If you must, you can drift through the more technical chapters, but the strange ones - the whiteness of the whale, the quarter-deck, the doubloon, the three-day chase - are not digressions at all. They are the spine. Give it the afternoons. It gives them back.

When did you last decide that something impersonal - a setback, a loss, a piece of plain bad luck - had singled you out, and set yourself against it as though it could be made to answer for what it had done?

This week’s Thursday post takes the same idea into a different room.

Thanks for reading. Let me know your thoughts in the comments. — Attila

If you enjoyed this, explore more articles and ideas on my blog here.

Book discussed in this article:
Moby-Dick or, The Whale
By Herman Melville 1851
Available free at Standard Ebooks and Project Gutenberg

If this essay was worth your time, you can support the work here.

Disclaimer

The views and opinions expressed on this website are for educational and informational purposes only, and should not be considered as investment advice. The author may hold positions in the stocks mentioned on this website. The author of this website is not a licensed stockbroker or financial advisor. Nothing contained herein should be construed as a recommendation to buy, hold, or sell any securities or financial products. Always seek the advice of a financial advisor and do your own independent research before making any trade or investment decisions.

We do not guarantee the accuracy or completeness of any information on this website. Such information is provided “as is” without warranty or condition of any kind, either express or implied. Past performance may not be indicative of future results. This website could include inaccuracies or typographical errors.

We are not liable or responsible for any damages incurred whatsoever from actions taken from information provided on this website, including financial losses. Since all readers who access any information on this website are doing so voluntarily and of their own accord, any outcome of such access is understood to be their sole responsibility. In no event shall we be liable to any person for any decision made or action taken in reliance upon the information provided herein.

This content is published by a private individual who is not a regulated investment firm, investment adviser, or financial intermediary under MiFID II or any applicable EU or Hungarian financial services legislation. This publication does not constitute a financial promotion, investment research, or a personal recommendation within the meaning of applicable law. References to specific financial instruments, funds, or companies are for illustrative and informational purposes only and do not constitute a solicitation or offer to buy or sell any security or financial product. European investors should be aware that certain financial products referenced in this content may not be available for direct purchase in their jurisdiction due to applicable regulations, including MiFID II PRIIPS requirements, and should consult a regulated financial adviser before acting on any information contained herein.

In February 2012, Marathon Asset Management - one of the most disciplined long-cycle investors in the world - published an internal note explaining why they were significantly underweight the energy sector. Oil was approaching its all-time high. The five oil majors had spent nearly a decade watching their return on equity climb to 27 per cent as Brent crude surged. Capital expenditure rose sharply, from 1.2 times depreciation during 2003–2007 to 1.7 times by 2012. Every signal that the industry itself was sending pointed toward confidence and expansion. Marathon was selling. It is worth pausing on what that required: to sit in a meeting with a client whose peers were all adding energy exposure, to explain that the very strength of the investment case was the reason to reduce it, and to be prepared to be wrong - visibly, expensively wrong - for as long as the cycle took to turn.

Their reasoning was not a bet on the oil price falling. It was something quieter and more structural: when an industry’s return on equity is high, and its capital expenditure is rising fast, the cycle has already turned against the investor, even if the price has not yet moved. By 2014, the oil majors’ return on equity had fallen from 27 per cent to 17 per cent - despite oil prices rising a further 20 per cent in the interim.1 The capital had been deployed. The returns had not arrived. The mechanism was already in motion.

The Mechanism Nobody Teaches

There is a pattern that repeats across commodity sectors with enough consistency to deserve a name. High prices attract capital. Capital funds a new supply. New supply overwhelms demand. Prices fall. Investors exit. Capital dries up. Supply stagnates. And the conditions that ended the last cycle quietly rebuild. The pattern is not mysterious. It is the straightforward consequence of human incentives operating on industrial time horizons - the gap between the decision to invest and the moment the new supply actually arrives, which in oil and gas is measured in years and in mining in decades.

What Marathon documented across two hundred internal letters spanning 2002 to 2015 was not that this pattern exists - every commodity analyst knows it exists - but that investors systematically fail to act on it. The reason is structural. By the time a capital cycle has turned negative, the story driving the investment has become so compelling, so well supported by recent evidence, so thoroughly endorsed by the consensus that selling feels like eccentricity. And by the time the cycle has turned positive - when the industry is cutting budgets, writing off assets, and shedding workers - the story has become so discredited that buying feels like recklessness. The mechanism exploits precisely the moment when acting on it is hardest.

The other thing Marathon observed - and this is the detail that makes the framework genuinely useful rather than merely descriptive - is that the exit of capital from an industry is not a signal of permanent impairment. It is a signal of temporary discreditation. The difference matters enormously. An industry discredited by a decade of poor returns has, in the process, stopped building the supply needed to meet demand, which continues to grow. The supply deficit does not announce itself. It accumulates silently, one deferred project at a time, until the moment it can no longer be deferred.

What a Decade of Restraint Produces

Since 2014, the global energy industry has been living the exit phase of the capital cycle. Upstream oil and gas capital expenditure peaked at roughly $780 billion that year and has not recovered. The companies that spent the 2010s defending their licences to operate - responding to ESG pressure, shareholder demands for capital discipline, and the genuine trauma of the 2015 and 2020 price collapses - have deployed their cash flow into buybacks and debt reduction rather than into the ground. This was rational behaviour at the level of individual companies. Aggregated across an entire sector, it produces a specific and historically familiar consequence: the supply base stops growing.

Against this constrained supply picture, demand has continued along its own trajectory. The BP Statistical Review of World Energy 2025 records global energy demand at a record 592 exajoules, with oil demand breaching 101 million barrels per day for the first time.2 Fossil fuels supply 87 per cent of that total. Wind and solar grew nine times faster than total energy demand over the measurement period. Yet, fossil fuel consumption also rose-the energy transition, whatever its ultimate destination, is proceeding as addition rather than substitution. The world is consuming more of new energy sources while continuing to consume more of old ones.

The maturation of shale has further complicated the supply response to this demand picture - the technology that broke the previous cycle’s supply constraints. US oil production reached 20 million barrels per day in 2024, a record.3 But the productivity gains that made the Permian Basin the most prolific field in history were concentrated in tier-one acreage that has now been substantially drilled. The remaining inventory costs more to develop, declines faster once in production, and requires continuous and growing capital investment to sustain output. Shale’s elasticity - its ability to respond quickly to price signals and add supply within months rather than years - was always a function of the quality of the rock being drilled. That quality is not what it used to be. A company drilling its fifth-best acreage today because its first four have been consumed is not the same story as a company drilling its best acreage for the first time. The machine looks identical from the outside. The economics are not.

The Objection That Deserves a Precise Answer

The informed reader will reach for an objection at this point, and it is the right one. The capital cycle argument was made about the energy sector after the 2015 price collapse, and it failed - or at least, it failed on the timeline most investors were implicitly assuming. What prevented it from playing out was shale’s speed of response. When oil recovered toward $60, the Permian came back faster than the long-cycle thesis had anticipated, and the supply deficit that was supposed to tighten the market was met by a technology whose production timeline was months, not years. If shale could do it once, why not again?

The answer lies in the distinction between the elasticity of a young technology and the elasticity of a maturing one. In 2016, the shale industry was still climbing the steepest part of its productivity curve. Drilling efficiency was improving rapidly, well costs were falling, and the best acreage - the core of the core, where returns were highest and breakevens lowest - was largely untouched. That inventory has now been substantially consumed. The wells being drilled at the margin of the Permian today are not the ones being drilled in 2016. They cost more, they produce less per foot of lateral, and they decline faster. The technology is not broken. It has simply done what all maturing technologies do: it has exhausted its easiest gains.

There is a second structural difference that was not present in 2015. The ESG capital constraints that have accumulated since then are institutionally embedded in a way that a single price cycle is unlikely to dislodge. European pension funds, sovereign wealth funds, and major banks have made policy commitments to reduce energy exposure, tied to regulatory frameworks, stakeholder agreements, and reputational considerations, that outlast any particular oil price level. Capital does not flow freely back into a sector designated at the institutional level as incompatible with long-term portfolio strategy. The capital cycle’s positive phase requires not just improving returns but also a readiness to invest - and that readiness has been systematically reduced across the world’s largest pools of investable capital.4

What the Arithmetic Describes

Marathon was energy-underweight in 2012, when oil was near its high, and the capital cycle had turned negative. What would a capital cycle analyst make of the sector today, when the cycle has been running in the opposite direction for a decade? The valuation arithmetic offers one objective data point. The energy sector currently trades at a forward price-to-earnings multiple of 13.8 times - the lowest of any sector in the S&P 500 - compared with a broad market multiple of 21.0 times, while the technology sector trades at a substantial premium to both.5 The free cash flow yield on the energy sector remains substantially above the broad market average. These are not forecasts. They are a description of what is currently priced in: the market’s collective judgement that the energy sector will generate substantially less value per dollar of earnings than almost any other business category available to investors today.

Whether that judgment is correct is precisely the question the capital cycle framework was built to examine. In 2012, the market’s collective judgment was that oil majors earning 27 per cent returns on equity, spending 1.7 times depreciation on new capacity, and trading at a premium to the broad market on cash flow were worth owning. Marathon disagreed, and they were right. The framework does not guarantee the opposite conclusion today. It does suggest that the question is worth asking with more rigour than the current valuation spread implies.

The Note That Marathon Left

The February 2012 Marathon note on the oil sector ended with an observation that reads differently now than it did then. Having documented the rising capex, the falling returns, and the consensus optimism that surrounded the energy sector at its peak, the authors noted that they were comfortable being underweight - and that the same analysis, applied at a different point in the cycle, would eventually lead them in the other direction. They were, in other words, describing a process rather than a verdict. The sector was not permanently impaired. It was temporarily mispriced in one direction. When the capital cycle had run its course - when the investment had been cut, the supply had stagnated, and the institutional memory of the boom had faded far enough - the same analytical framework would look at the same sector and read a very different signal.

That note was written fourteen years ago. The capital has been cut. The supply has stagnated. And the institutional memory of the boom has been replaced, in most portfolio allocation frameworks, by a structural mandate to stay away.

The mechanism is not dramatic. It does not announce itself. It simply works.

If the most reliable signal of future commodity returns is the direction of capital flows - and Marathon was right to read that signal as negative in 2012, when every other signal pointed to confidence - what should an investor make of a sector where every signal now points the other way, and the valuation reflects a decade of institutional avoidance rather than a decade of earnings disappointment?

Thanks for reading. Let me know your thoughts in the comments. — Attila

If you enjoyed this, explore more articles and ideas on my blog here.

If this essay was worth your time, you can support the work here.

Disclaimer

The views and opinions expressed on this website are for educational and informational purposes only, and should not be considered as investment advice. The author may hold positions in the stocks mentioned on this website. The author of this website is not a licensed stockbroker or financial advisor. Nothing contained herein should be construed as a recommendation to buy, hold, or sell any securities or financial products. Always seek the advice of a financial advisor and do your own independent research before making any trade or investment decisions.

We do not guarantee the accuracy or completeness of any information on this website. Such information is provided “as is” without warranty or condition of any kind, either express or implied. Past performance may not be indicative of future results. This website could include inaccuracies or typographical errors.

We are not liable or responsible for any damages incurred whatsoever from actions taken from information provided on this website, including financial losses. Since all readers who access any information on this website are doing so voluntarily and of their own accord, any outcome of such access is understood to be their sole responsibility. In no event shall we be liable to any person for any decision made or action taken in reliance upon the information provided herein.

This content is published by a private individual who is not a regulated investment firm, investment adviser, or financial intermediary under MiFID II or any applicable EU or Hungarian financial services legislation. This publication does not constitute a financial promotion, investment research, or a personal recommendation within the meaning of applicable law. References to specific financial instruments, funds, or companies are for illustrative and informational purposes only and do not constitute a solicitation or offer to buy or sell any security or financial product. European investors should be aware that certain financial products referenced in this content may not be available for direct purchase in their jurisdiction due to applicable regulations, including MiFID II PRIIPS requirements, and should consult a regulated financial adviser before acting on any information contained herein

My third piece at The Daily Economy (AIER) published this week: Reality Sends the Bill: How Ignoring Price Signals Ends in Disaster. It follows Sri Lanka’s fertiliser ban, Argentina’s rent controls, and Europe’s nuclear reversal through a single argument: governments can suppress a price signal, but they cannot suppress what the signal was pointing at. The scarcity remains. The bill arrives later — and larger.

Looking at the three pieces together, I notice they share more than a publication. Each one starts with a specific moment — a tanker captain who cannot sail, a working-class fan who cannot afford a ticket, a Sri Lankan farmer watching his harvest fail — and each follows the same thread: a decision that felt rational at the time displaced a cost onto people who had no voice in making it, and the cost arrived long after the decision was forgotten.

That is, I think, the real subject. In each case a government believed it could override what prices were communicating — and in each case the consequences it could not control arrived exactly where Austrian economists would have predicted they would.

Thanks for reading. Let me know your thoughts in the comments. — Attila

If you enjoyed this, explore more articles and ideas on my blog here.

If this essay was worth your time, you can support the work here.

Disclaimer

The views and opinions expressed on this website are for educational and informational purposes only, and should not be considered as investment advice. The author may hold positions in the stocks mentioned on this website. The author of this website is not a licensed stockbroker or financial advisor. Nothing contained herein should be construed as a recommendation to buy, hold, or sell any securities or financial products. Always seek the advice of a financial advisor and do your own independent research before making any trade or investment decisions.

We do not guarantee the accuracy or completeness of any information on this website. Such information is provided “as is” without warranty or condition of any kind, either express or implied. Past performance may not be indicative of future results. This website could include inaccuracies or typographical errors.

We are not liable or responsible for any damages incurred whatsoever from actions taken from information provided on this website, including financial losses. Since all readers who access any information on this website are doing so voluntarily and of their own accord, any outcome of such access is understood to be their sole responsibility. In no event shall we be liable to any person for any decision made or action taken in reliance upon the information provided herein.

This content is published by a private individual who is not a regulated investment firm, investment adviser, or financial intermediary under MiFID II or any applicable EU or Hungarian financial services legislation. This publication does not constitute a financial promotion, investment research, or a personal recommendation within the meaning of applicable law. References to specific financial instruments, funds, or companies are for illustrative and informational purposes only and do not constitute a solicitation or offer to buy or sell any security or financial product. European investors should be aware that certain financial products referenced in this content may not be available for direct purchase in their jurisdiction due to applicable regulations, including MiFID II PRIIPS requirements, and should consult a regulated financial adviser before acting on any information contained herein.

The book opens with a parable. A widget manufacturer called Macro Industries is doing well - so well that its CEO has recently appeared on the cover of Fortune magazine, his stock options are in the money, and seven of the nine analysts who cover the stock have buy recommendations. The company announces a 50 per cent expansion in capacity. The share price rises. Growth investors pile in. Five years later, Bloomberg reports that the CEO has resigned under pressure from activist shareholders. Profits have collapsed. The new plant in North Carolina was delayed and over budget. The widget market is suffering from excess supply. Two of the three remaining analysts covering the stock have sell recommendations.

Edward Chancellor, who edited and introduced this collection of investment letters from Marathon Asset Management, uses the fictional Macro Industries not as satire but as a teaching device. The story is not about one company or one cycle. It is the story of every industry that has ever attracted too much capital at the wrong moment - which is to say, most of them, eventually. What makes the parable useful is that it compresses a process that typically takes five to ten years into three paragraphs, and that most investors, living through it in real time, fail to recognise until it is too late.

What Marathon Built

Marathon Asset Management is a London-based investment firm founded in 1986. Over three decades, it developed what it calls the capital cycle approach: a method of analysing industries not primarily through the lens of demand - what will people buy, and how much - but through the lens of supply. Where is capital flowing? Is it flowing in or out? Is the industry building new capacity or letting old capacity age? These questions, Marathon argues, are both more answerable than demand forecasts and more consistently ignored by the market.

Capital Returns collects fifty-eight internal investment letters written between 2002 and 2015, selected and edited by Chancellor from a pool of over six hundred. The selection is intentionally unrepresentative: Chancellor is explicit in the preface that he has jettisoned the essays which turned out to be wrong, while the better calls have largely avoided the cull. He names the problem himself - survivorship bias - and concedes that the resulting volume makes Marathon appear more clairvoyant than the full record would support. This honesty is worth noting. It means Capital Returns should be read as a framework document rather than a performance record - an illustration of how the capital cycle approach works when it works, not a claim that it always works.

The framework itself is built on a single observation that sounds obvious once stated but is surprisingly underused in practice: high returns attract capital, and capital competes returns away - unless something prevents it. When an industry is profitable, competitors expand, new entrants arrive, and investment banks arrange financing for it all. Supply grows. Eventually, it grows faster than demand. Margins compress. Returns fall below the cost of capital. Capital exits. Supply contracts. And the conditions for the next upcycle quietly assemble themselves in the absence of anyone paying attention.1 Marathon is equally careful about the conditions under which the mechanism fails: where barriers to entry are strong enough to suspend mean reversion, where new technology destroys the incumbent business model, where policymakers protect an industry from clearing, and under the state capitalism of the kind found in China. The capital cycle is a tendency, not a law.

The Inversion That Changes Everything

The framework’s most important practical implication is an inversion of the usual analytical sequence. Most investment analysis begins with demand: how much will the world need of this thing, and will the companies that produce it benefit from that need? Marathon begins with supply: how much capacity is being built, by whom, and at what cost? The answer to the supply question, they argue, is both more knowable and more predictive of future returns than any demand forecast. An aviation analyst estimating the number of long-haul flights in 2030 is making a guess. An analyst tracking new aircraft orders and delivery schedules is reading an existing document.

This supply-side focus has a further implication that Marathon draws out carefully: the value-versus-growth distinction that structures most equity analysis is, in the capital-cycle view, largely false. A company in an industry with a supportive supply side - where capacity is contracting and new entrants are absent - can justify a high valuation even if its current earnings look modest. A company in an industry where capital is flooding in can look cheap on every conventional metric and still destroy value for years. The relevant question is not how the stock looks relative to its earnings today, but what the industry’s supply dynamics are likely to do to those earnings over the next three to five years.2

Chancellor documents the academic evidence behind this view. Research published in the Journal of Finance finds that firm asset growth is a stronger predictor of subsequent returns than traditional value metrics such as price-to-book, market capitalisation, and momentum. Companies with the fastest asset growth - expansion of the balance sheet, typically funded by share issuance, borrowing, or acquisition, rather than growth in revenue or earnings - consistently underperform. Companies with the slowest - or those actively shrinking their asset base through buybacks, debt repayment, and spin-offs - consistently outperform. The capital cycle, in other words, is not merely a qualitative observation about industry dynamics. It has a measurable, persistent, and largely unexploited signature in returns data.3

Why the Market Does Not Simply Arbitrage It Away

The informed reader will ask the obvious question: if the capital cycle anomaly is documented, persistent, and academically validated, why does it persist? Why does the market not simply price it away? Chancellor addresses this with more rigour than most investment books extend to the question of their own limitations.

The first answer is behavioural. Investors extrapolate. When an industry is expanding, and returns are high, both managers and analysts extrapolate current conditions. They take what Kahneman calls the inside view - focused on the specific circumstances in front of them - rather than the outside view, which would require asking how similar situations have historically resolved. The inside view is not irrational in any simple sense. It is the natural cognitive response after spending years developing expertise in a sector. The more you know about an industry, the more convinced you become that this time the dynamics are different. The more convinced you are, the less you look at the base rate.

The second answer is structural. Even investors who understand the capital cycle face what Chancellor calls limits to arbitrage. High-growth sectors - the ones the capital cycle framework identifies as dangerous - tend to have large market capitalisations, volatile share prices, and strong recent momentum. Shorting them is expensive. Avoiding them means accepting long periods of benchmark underperformance precisely when the consensus story is most compelling. For a professional fund manager whose career depends on short-term relative performance, acting on the capital cycle when it is most clearly negative is the most professionally dangerous thing they can do. Marathon’s private ownership structure and longstanding client relationships, Chancellor notes, gave it an unusual degree of tolerance for exactly this kind of patient underperformance.4

What the Book Is, and What It Is Not

Capital Returns is not a how-to manual. It does not contain a checklist, a scoring system, or a set of rules that can be applied mechanically to a portfolio. What it contains is fifty-eight examples of a particular way of thinking about industries - a mode of analysis that Marathon’s analysts applied consistently across sectors as different as shipping, semiconductors, brewing, real estate, and oil over thirteen years. Reading the letters sequentially produces something that no summary of the framework can replicate: an intuition for the texture of a capital cycle, for the specific language that accompanies each phase, for the signs that are easy to miss precisely because they are so familiar.

The book’s most practically valuable essays are the ones where Marathon got the direction right but the timing wrong - where they identified a turning cycle early and had to hold the position through years of being visibly incorrect before the thesis resolved. Those letters are more instructive than the ones where the call was clean because they describe, in real time, what it feels like to apply a long-cycle framework in a short-cycle market. The intellectual discipline required to maintain a position the market is marking against you, based on a structural argument the market has not yet chosen to price, is not a skill that can be taught abstractly. Capital Returns is as close as the literature comes to teaching it by example.

One honest limitation: the book’s coverage ends in 2015. The decade since has added new chapters to the capital cycle story in energy and mining that Chancellor could not have anticipated - the shale maturation, the ESG capital exile, and the simultaneous record demand documented in the BP Statistical Review. Readers who find the framework compelling will need to apply it to current conditions themselves. The book provides the instrument. The reading is up to you.

Back to Macro Industries

Return to the fictional widget manufacturer at the end of the book’s parable. Macro Industries’ CEO has resigned. The share price is down 46 per cent. Analysts who still cover the stock have sell recommendations. The widget market is suffering from excess supply. And somewhere in the industry, a smaller competitor that never expanded, that spent the boom years paying down debt and returning cash to shareholders, is about to find that its remaining capacity - boring, old, unglamorous capacity that nobody wanted to write about in Fortune - is suddenly the only capacity that works at current prices.

That company does not appear in the parable. It does not need to. Anyone who has read the book knows it is there.

The mechanism is the same in every cycle, only the widget changes.

If the capital cycle anomaly is persistent, academically documented, and intuitively legible - and if the main reason it persists is that acting on it requires tolerating extended periods of being visibly wrong - what does that tell us about the real source of long-term investment returns, and whether it is analytical or psychological?

Thanks for reading. Let me know your thoughts in the comments. — Attila

If you enjoyed this, explore more articles and ideas on my blog here.

Book discussed in this article:
Capital Returns: Investing Through the Capital Cycle
By Marathon Asset Management, edited by Edward Chancellor
Palgrave Macmillan, 2016

If this essay was worth your time, you can support the work here.

Disclaimer

The views and opinions expressed on this website are for educational and informational purposes only, and should not be considered as investment advice. The author may hold positions in the stocks mentioned on this website. The author of this website is not a licensed stockbroker or financial advisor. Nothing contained herein should be construed as a recommendation to buy, hold, or sell any securities or financial products. Always seek the advice of a financial advisor and do your own independent research before making any trade or investment decisions.

We do not guarantee the accuracy or completeness of any information on this website. Such information is provided “as is” without warranty or condition of any kind, either express or implied. Past performance may not be indicative of future results. This website could include inaccuracies or typographical errors.

We are not liable or responsible for any damages incurred whatsoever from actions taken from information provided on this website, including financial losses. Since all readers who access any information on this website are doing so voluntarily and of their own accord, any outcome of such access is understood to be their sole responsibility. In no event shall we be liable to any person for any decision made or action taken in reliance upon the information provided herein.

This content is published by a private individual who is not a regulated investment firm, investment adviser, or financial intermediary under MiFID II or any applicable EU or Hungarian financial services legislation. This publication does not constitute a financial promotion, investment research, or a personal recommendation within the meaning of applicable law. References to specific financial instruments, funds, or companies are for illustrative and informational purposes only and do not constitute a solicitation or offer to buy or sell any security or financial product. European investors should be aware that certain financial products referenced in this content may not be available for direct purchase in their jurisdiction due to applicable regulations, including MiFID II PRIIPS requirements, and should consult a regulated financial adviser before acting on any information contained herein.

The opening essay in this series argued that luck governs short-term investment outcomes far more than the industry cares to admit - and that the only reliable response is to redirect attention from results, which cannot be controlled, to process, which can. That argument was philosophical. It told you what to focus on but not what to build. This essay is the operational answer to the question the first one left open: if process is the only edge that compounds reliably, what does a sound process actually look like - and how do you maintain it when the market is insisting, loudly and for months at a time, that you are wrong?

In May 2019, Liverpool beat Barcelona 4–0 at Anfield to complete one of the most improbable comebacks in football history. The manager was celebrated as a genius. The tactics were called revolutionary. Books were written about the mentality. What almost nobody mentioned was the number Ian Graham had quietly calculated at Liverpool’s data department that same week: given the quality of chances created by both sides, a result like this should happen roughly one time in twenty. Liverpool had won. They had also been lucky.

Graham, Liverpool’s former Director of Research, tells this story in How to Win the Premier League, not to diminish the achievement but to make a harder point: outcomes mislead. The scoreline was real. The narrative built around it was mostly noise. And if you manage a football club - or a portfolio - by chasing the narrative rather than the underlying signal, you will eventually pay for it.

Most beginner investors are, without knowing it, in the business of reading scoreboards. They judge decisions by whether prices went up. They refine strategies based on last quarter’s results. They hire and fire fund managers the way football clubs hire and fire coaches: on outcomes that were substantially determined by chance. This is not stupidity. It is a deeply human error. And there is a precise name for it.

Outcome Bias Is the Only Opponent That Matters

Outcome bias is the tendency to judge the quality of a decision by its result rather than by the process that produced it. In football, it means firing a manager after a bad run that the data show was mostly luck. In investing, it means abandoning a disciplined strategy because it underperformed for eighteen months - or doubling down on a reckless one because it happened to win.

The bias is pernicious precisely because it is self-reinforcing. A lucky gain builds false confidence. A disciplined loss triggers strategy abandonment. Each reaction degrades future decision-making. Over time, the investor who judges by outcomes alone drifts toward whatever worked recently - which is almost always the thing that is about to stop working.

Graham’s solution at Liverpool was to measure something other than results: the quality of chances created, translated into Expected Goals. A team could lose while playing excellently. A team could win while playing terribly. The model separated what the team controlled - shot quality, pressing intensity, defensive shape - from what it could not: whether the ball struck the post or crossed the line. That separation is the entire project.

For investors, the equivalent separation is between process and outcome. Did you buy at a sensible valuation, with a clear thesis, within a business you understood? That is the process. Did the price rise this quarter? That is outcome - and in the short run, it tells you almost nothing about whether your decision was correct.

What Valuation Actually Does

Consider two houses, identical in every respect - same street, same size, same condition. One sells for £200,000, the other for £400,000. No sophisticated analysis is required to identify the better starting position. The logic is obvious when applied to property. Applied to equities, most people forget it entirely - because the far more exciting question is whether a company’s story is compelling. Stories move prices in the short run. Valuations constrain returns over decades.

Valuation is the discipline of asking what you are getting for what you are paying. It sounds elementary. In practice, it is the step most beginner investors skip. The most accessible entry points are three ratios that each approach the same question from a different angle. The Price-to-Earnings ratio compares the market price to annual earnings: a P/E of 10 means you are paying £10 for every £1 of annual profit. The Price-to-Book ratio compares the market price to net asset value, and is most useful for banks and asset-heavy manufacturers where tangible assets dominate. Enterprise Value to Operating Profit (EV/EBIT) captures the total cost of acquiring the entire business, including debt, relative to what the operating business earns before financial engineering.

Used honestly, these ratios are screens, not verdicts. A low P/E is a reason to look more carefully, not a guarantee of value. A business trading cheaply relative to earnings may be cheap for good reason - deteriorating competitive position, cyclical peak earnings, or management you cannot trust. What valuation metrics do is force you to ask the right question before you fall in love with the story: Am I paying a price that gives this investment a reasonable chance of rewarding me, even if things go only moderately well?

Over the course of a year, sentiment can drive prices in either direction. Over twenty years, returns converge toward what you paid relative to underlying earnings power. This is the referee you cannot bribe.

Building Rules You Can Actually Follow

A process only works if it is specific enough to constrain behaviour when emotions are running high. Vague commitments dissolve under pressure. The investor who tells themselves they will ‘buy quality at reasonable prices’ will discover, in the middle of a bull market, that they have a remarkably flexible definition of reasonable.

Start with exclusions. Define what you will not buy before you define what you will. Avoid businesses whose economics you cannot explain plainly. Avoid companies carrying debt more than three or four times their annual operating profit. Avoid businesses that have not shown they can make money on what they sell. Avoid buying anything purely because the price has already risen. These exclusions will not prevent every mistake. They will prevent most of the serious ones.

That third exclusion needs a caveat, because it is the one most easily misread. It is a test of unit economics, not of net income. A company can post losses for years while making money on every transaction and choosing to spend the difference on growth; the cash flow statement will tell you which is happening. The blunt version of this rule — avoid anything unprofitable — will keep you out of every disaster in the category and out of a small number of extraordinary businesses as well. That is a trade worth making until you can reliably read the difference, and worth revisiting once you can.

Then choose one or two valuation metrics that fit the types of businesses you want to own and apply them without exception. A focus on dividend-paying industrials calls for a different toolkit than a focus on asset-heavy financials. What matters is not which metrics you choose, but that you choose them in advance - especially before the market suggests they are irrelevant.

Graham is candid about something most investment writing glosses over: even excellent processes produce failures. Liverpool’s data-driven recruitment failed on a significant proportion of signings. What distinguished the organisation was not a perfect model but a structured response to error - each failure triggered refinement rather than abandonment. That learning loop is what a process is actually for.

When the Process Feels Most Wrong Is When It Matters Most

The opening essay in this series described what it felt like when Buffett underperformed for five consecutive years in the late 1990s while doing everything correctly. The point was about the tyranny of short-term outcomes. This essay takes that point one step further: underperformance is not just an inconvenience to be endured - it is a near-certainty that a valuation-based process will periodically produce, and one that should be budgeted for in advance rather than encountered as a surprise.

When momentum stocks are returning two hundred per cent, and your carefully valued holdings are flat, the process will feel not merely uncomfortable but definitively wrong. The investor who abandons it at that point is making the same error as the analyst who sacks the manager because a fortunate opponent won three consecutive games. Both are reading the scoreboard instead of the model. Both are optimising for the feeling of being right rather than the logic of being correct.

The correct question during a period of underperformance is not whether your holdings are rising. It is whether you followed your rules and acquired assets at prices that give the long-run odds a reasonable tilt in your favour. There is a further question the first essay did not reach: what should you do with the discomfort itself? The answer is that it is data. Sustained discomfort with a process is worth examining - not to justify abandoning the process, but to distinguish between two very different situations: the process is sound, and the environment is temporarily hostile, or the process has a genuine flaw that poor results are now revealing - the former calls for patience. The latter calls for refinement. Confusing them is the most expensive mistake a process-driven investor can make.

Brentford and Brighton did not build their competitive edges through one inspired transfer window. They built them by applying probabilistic frameworks across hundreds of decisions, absorbing individual failures as the price of systemic advantage, and - critically - treating each failure as a question rather than a verdict. The edge was in the repetition and the honesty, not the revelation.

The Scoreline Is Not the Performance

Liverpool beat Barcelona 4–0. In nineteen of twenty similar situations, they would not have. The night was real, and it was magnificent. The generalisable lesson was not the result but the system that put them in a position to win - and that made losing in other situations instructive rather than catastrophic.

Your portfolio will have its own Barcelona nights: investments that win for the wrong reasons, and others that lose despite every decision being correct. The scoreline will mislead you if you let it. A valuation-anchored process does not eliminate that uncertainty. It does something more important: it ensures that over enough decisions, the odds tilt toward you - and that when things go wrong, you have a structure for learning rather than merely suffering.

You cannot control whether a given investment wins. You cannot control whether the market rewards patience this quarter or punishes it for another year. You can control whether you bought at a sensible valuation, within a business you understood, according to rules you defined before the emotions arrived.

That is the only referee in this game. And unlike every other one, it cannot be bribed.

When your process last told you one thing and the market was screaming another, which one did you follow?

Amended 2026.07.23.: the exclusion on businesses without demonstrated earnings originally read in a way that conflated reported profit with unit economics. Corrected after a reader pointed out that the earlier wording would have excluded businesses that were making money on every sale and reinvesting the proceeds. The distinction is the subject of a later essay in this series.

Thanks for reading. Let me know your thoughts in the comments. — Attila

If you enjoyed this, explore more articles and ideas on my blog here.

If this essay was worth your time, you can support the work here.

Disclaimer

The views and opinions expressed on this website are for educational and informational purposes only, and should not be considered as investment advice. The author may hold positions in the stocks mentioned on this website. The author of this website is not a licensed stockbroker or financial advisor. Nothing contained herein should be construed as a recommendation to buy, hold, or sell any securities or financial products. Always seek the advice of a financial advisor and do your own independent research before making any trade or investment decisions.

We do not guarantee the accuracy or completeness of any information on this website. Such information is provided “as is” without warranty or condition of any kind, either express or implied. Past performance may not be indicative of future results. This website could include inaccuracies or typographical errors.

We are not liable or responsible for any damages incurred whatsoever from actions taken from information provided on this website, including financial losses. Since all readers who access any information on this website are doing so voluntarily and of their own accord, any outcome of such access is understood to be their sole responsibility. In no event shall we be liable to any person for any decision made or action taken in reliance upon the information provided herein.

This content is published by a private individual who is not a regulated investment firm, investment adviser, or financial intermediary under MiFID II or any applicable EU or Hungarian financial services legislation. This publication does not constitute a financial promotion, investment research, or a personal recommendation within the meaning of applicable law. References to specific financial instruments, funds, or companies are for illustrative and informational purposes only and do not constitute a solicitation or offer to buy or sell any security or financial product. European investors should be aware that certain financial products referenced in this content may not be available for direct purchase in their jurisdiction due to applicable regulations, including MiFID II PRIIPS requirements, and should consult a regulated financial adviser before acting on any information contained herein.

In March 2015, Ian Graham stood at the end of a very long table in Frankfurt and told a roomful of Bundesliga analysts something they found nearly impossible to believe. Borussia Dortmund, then 17th out of 18 teams in the German top flight and widely described in the press as ‘absolute garbage’ (‘Echter Schrott’, to be precise), were still, by his calculations, the second-best team in Germany. They had not collapsed. They had not been exposed. They had been catastrophically unlucky - losing games they should have won by margins his Expected Goals model could measure with uncomfortable precision. The room did not believe him.

Graham was right. Dortmund finished seventh that season, exactly as he had predicted, averaging 2 points per game over their final eight matches. The following season, with broadly the same squad and a new manager, they finished second with their highest points total in years. The narrative said Jürgen Klopp had ruined the club and his replacement had saved it. The data said something far more boring and far more true: a great team had suffered one of the unluckiest seasons in nine years of Bundesliga data, and then reverted to form.

Graham took this analysis to Liverpool, where he had worked since 2012 as Director of Research - a role so obscure that when Klopp arrived as manager and was given a tour of Melwood, nobody is quite sure whether the tour made it as far as the Research department’s remote office at the end of a corridor, past the multi-faith room and a storage cupboard. He used the Dortmund data to help make the case that hiring Klopp was the right decision despite that disastrous final season. Liverpool hired Klopp. The rest is history.

This story - the hidden analyst, the unlucky season, the counterintuitive hire - is the beating heart of How to Win the Premier League, Graham’s account of the data revolution that quietly reshaped English football. It is also, in ways Graham does not make explicit but that this review will, one of the most instructive books about investment decision-making published in recent years.

Football Is a Laboratory for Human Error

Graham’s central argument begins with a statistical fact that fans find deeply uncomfortable: football’s low-scoring nature makes it an almost perfect laboratory for studying how human beings systematically misread randomness. A typical Premier League game produces fewer than three goals. Because goals are so rare, the gap between a team’s underlying performance - how well they are actually playing - and their results can stay wide for weeks, months, even an entire season. The scoreline is almost always a distorted reflection of what actually happened on the pitch.

Graham quantifies this with Expected Goals: a model that assigns a conversion probability to every shot based on its location, angle, phase of play, and trajectory. A penalty is worth roughly 0.75 Expected Goals. A shot from thirty yards is worth roughly 0.01. Sum these up across a match, and you get a ‘fair score’ that reflects what both teams deserved based on the quality of chances they created, not the accidents of finishing and goalkeeping that determined the actual result.

When Graham applied this model to the famous 2019 Champions League comeback - Liverpool beating Barcelona 4–0 at Anfield after losing the first leg 3–0 - the fair score was 2.0 to Liverpool, 0.9 to Barcelona. His simulation, run thousands of times, produced a result of 4–0 or better for Liverpool in roughly 5% of cases. The night happened. In 19 out of 20 similar situations, it would not have. The narrative of tactical genius and indomitable spirit was real and moving. As an explanation of the result, it was mostly noise.

Investors will recognise this structure immediately. Equity markets are also low-signal environments in the short run. Quarterly earnings, twelve-month returns, fund manager league tables - all of these are scoreboards that mix genuine performance with the random variation that any probabilistic system generates. Reading them as if they were clean signals of underlying quality is the same error as concluding that Klopp had lost his mind in Dortmund. The error is not stupidity. It is the predictable consequence of asking a human brain to process randomness, which it was not designed to do well.

The Anna Karenina Problem

One of the book’s most arresting chapters concerns why transfers fail - and why they fail at a rate that should astonish anyone who has not thought carefully about compounding probabilities. Graham cites research suggesting that roughly half of all significant transfers result in the incoming player starting fewer than half of their new club’s league games in the following two seasons. Half. At fees that routinely exceed £50 million.

His explanation draws on Jared Diamond’s ‘Anna Karenina principle’, named for Tolstoy’s observation that all happy families are alike while each unhappy family is unhappy in its own way. Diamond applied this to animal domestication: of 148 large mammal species that could theoretically have been domesticated, only 14 ever were - because successful domestication requires an animal to be suitable across six independent dimensions simultaneously. The absence of anyone is fatal. The zebra is magnificent on five of the six. It also bites, kicks, and kills farmers.

A footballer must succeed across roughly eight independent dimensions to justify his transfer fee: fitness, personality, tactical fit, positional suitability, quality relative to existing squad members, adaptation to playing style, relationship with the manager, and age trajectory. Imagine each has a 92% chance of success - a generous assessment reflecting genuinely careful recruitment. The probability that all eight align: 92% to the power of eight, which is approximately 51%. Even under optimistic assumptions, transfers are essentially coin flips.

This is not a counsel of despair. It is a precise description of why process matters more than any individual decision - and why the right measure of a recruitment strategy is not whether each transfer succeeded, but whether the decision framework was sound.

What the Book Gets Right, and Where It Stops Short

Graham is at his best when he is most specific. The Dortmund analysis, the Barcelona simulation, the transfer failure taxonomy - these are chapters that give the reader genuinely new ways of seeing familiar problems. His account of Liverpool’s recruitment of Robertson, Matip, and Firmino - all players the rest of the market had mispriced because of aesthetic biases and small sample sizes - reads like a case study in exploiting systematic error, which is also a reasonable description of value investing.

He is also admirably honest about failure. Liverpool’s transfer success rate under Brendan Rodgers, measured as fee-weighted starts in the following two seasons, was 41% - the worst among the Premier League’s big six clubs in that period. The model was right. The process around it was broken because the manager refused to use the recommended players’ data. Graham’s lesson is not that data wins. It is that data embedded in a dysfunctional decision-making structure loses, and that the quality of the framework matters as much as the quality of the analysis within it.

The book’s limitations are worth naming. Its later chapters - on home advantage, state club spending, and the future of tracking data - are less integrated into the central argument and read more like intelligent essays than extensions of the main thesis. Readers who come for the investment-relevant insights will find most of them in the first two-thirds. And Graham, understandably, is more comfortable with the technical than the human: the cultural battles he fought to make data legitimate at Liverpool are described with affection but less analytical precision than his shot models.

None of this diminishes the book’s core contribution. The question it answers - how do you make better decisions in a noisy, low-signal environment where outcomes are frequently determined by luck - is exactly the question every serious investor should be asking.

The Bias That Costs the Most

The thread connecting all of Graham’s best material is a single cognitive error he calls outcome bias: the tendency to judge the quality of a decision by its result rather than by the soundness of the process that produced it. The Dortmund example is the purest illustration. Every football analyst in Germany, every journalist, every board member was reading the scoreboard and concluding that Klopp had failed. Graham was reading the Expected Goals and concluding that the team was performing well and the results would revert. Both groups were looking at the same football club. Only one was looking at the right data.

Outcome bias has a precise mechanism in investment markets. Fund managers are hired and fired on three-year track records that are almost entirely explained by luck at that time horizon. Individual stocks are bought. They have risen and sold because they have fallen, with the price movement mistaken for information about underlying value. Strategies are abandoned after 18 months of underperformance that any probabilistic model would predict is within normal variance. Each of these decisions feels rational - it is responding to evidence, after all - but the evidence is the scoreboard, not the model.

Graham’s solution at Liverpool was to institutionalise a different question. Not ‘did we win?’ but ‘did we create better chances than the opponent?’ Not ‘did this transfer work out?’ but ‘was our assessment of the player’s underlying ability correct?’ The shift sounds simple. In practice, it requires enormous discipline, because the scoreboard is always visible and the model is always abstract. Living by the model when the scoreboard disagrees is the hardest thing in both football analytics and long-term investing.

The Office at the End of the Corridor

Graham left Liverpool in 2023 after eleven years. In that time, the club won the Champions League, the Premier League title, the FA Cup, the League Cup, and the Club World Cup. The research department he built - tucked away past the multi-faith room, past the storage cupboard, at the end of a corridor nobody visited - contributed to arguably the most successful decade in the club’s history.

His book does not claim credit for any of it immodestly. What it claims, and what it earns, is the more durable point: that systematic, probabilistic thinking - applied consistently, embedded in a sound decision-making structure, and maintained through the periods when the scoreboard contradicts it - generates a sustainable edge in environments dominated by noise. Football is one such environment. Capital markets are another.

The Dortmund room did not believe Graham in March 2015. By the end of that season, Dortmund had finished exactly where he said they would. It is not a story about being right. It is a story about measuring the right thing, trusting the measurement when it was uncomfortable, and refusing to let the scoreboard overwrite the signal.

That is also, in three sentences, a complete theory of the investment process.

The last time your portfolio underperformed, did you examine the scoreboard - or the model?

Thanks for reading. Let me know your thoughts in the comments. — Attila

If you enjoyed this, explore more articles and ideas on my blog here.

Book discussed in this article:
How to Win the Premier League: The Inside Story of Football’s Data Revolution
By Ian Graham
Penguin Press, 2024

If this essay was worth your time, you can support the work here.

Disclaimer

The views and opinions expressed on this website are for educational and informational purposes only, and should not be considered as investment advice. The author may hold positions in the stocks mentioned on this website. The author of this website is not a licensed stockbroker or financial advisor. Nothing contained herein should be construed as a recommendation to buy, hold, or sell any securities or financial products. Always seek the advice of a financial advisor and do your own independent research before making any trade or investment decisions.

We do not guarantee the accuracy or completeness of any information on this website. Such information is provided “as is” without warranty or condition of any kind, either express or implied. Past performance may not be indicative of future results. This website could include inaccuracies or typographical errors.

We are not liable or responsible for any damages incurred whatsoever from actions taken from information provided on this website, including financial losses. Since all readers who access any information on this website are doing so voluntarily and of their own accord, any outcome of such access is understood to be their sole responsibility. In no event shall we be liable to any person for any decision made or action taken in reliance upon the information provided herein.

This content is published by a private individual who is not a regulated investment firm, investment adviser, or financial intermediary under MiFID II or any applicable EU or Hungarian financial services legislation. This publication does not constitute a financial promotion, investment research, or a personal recommendation within the meaning of applicable law. References to specific financial instruments, funds, or companies are for illustrative and informational purposes only and do not constitute a solicitation or offer to buy or sell any security or financial product. European investors should be aware that certain financial products referenced in this content may not be available for direct purchase in their jurisdiction due to applicable regulations, including MiFID II PRIIPS requirements, and should consult a regulated financial adviser before acting on any information contained herein.

“It is perfect… They are all perfect.”

- Katsumoto

He states his terms plainly. He will go to Japan. He will train the Imperial Army for the money. It is the only criterion he offers, and he offers it without shame and almost without affect - he can kill anyone, he says, regardless of the colour of their skin, as long as the price is right.

Captain Nathan Algren says this in a restaurant, in front of witnesses, at the beginning of The Last Samurai. He is not performing cynicism or auditioning for sympathy. He is telling the truth about himself as he understands it. He has examined what drives him, found the worst possible answer, and concluded that it is the whole truth. That conclusion - not his violence, not his drinking, not the massacres he has participated in and cannot undo - is the real condition the film is about.

He is a leader who knows exactly why he does what he does. And the knowing is destroying him.

Most leaders never arrive at this point. They operate inside a story - duty, service, ambition, vocation, the good of the organisation - that protects them from the question of what actually drives them. The story may be partially true. It is rarely the whole truth. Algren has stripped every story away and reached the bottom. He is not without self-knowledge. He has too much of the wrong kind. He has confused the honest answer with the final one.

In Japan, he discovers that the answer he has reached is not the whole truth. That there is something beneath the soldier who kills for money - something older, more serious, and more worthy - that has never been exercised because it has never found a worthy object. The Last Samurai is the story of that discovery. And it is the piece this leadership series has needed from the beginning - not because the previous pieces were incomplete, but because they all assumed what this one shows being earned.

The Honest Answer That Was Not the Whole Truth

Algren drinks because he can see himself clearly. That is worth stating precisely, because the temptation is to read his drinking as the behaviour of a man in flight from self-knowledge. It is the opposite. He has looked at himself with unusual honesty, found a verdict, and cannot live inside it. The verdict is: I am a man who has done terrible things in the service of causes I did not believe in, and I continue to do terrible things in the service of money, because I have concluded that nothing better is available to me.

That verdict is honest. It is also incomplete. But Algren does not know it is incomplete because he has stopped the inquiry at the point where it became most painful. He has reached the worst about himself and mistaken it for the whole. This is the specific condition the film diagnoses - not the absence of self-examination, but its arrest. The man who has looked honestly at himself and, finding what he found, put down the mirror.

It is a more sophisticated failure than simple self-deception, and a more dangerous one. The self-deceived leader can be confronted with evidence. The leader who has arrested his own self-examination at the worst possible moment carries the evidence with him everywhere - it is the source of his drinking, his nihilism, his willingness to sell his capacity for violence to whoever will pay for it. He is not hiding from the truth. He is living inside a partial truth and calling it the whole.

What he does not yet know is that the question of why has not been fully answered. He knows what he does and for whom and for what price. He does not yet know what he is actually capable of being for - what cause, if any exists, would make the capacity for commitment that has always been present in him finally find its object. That is the question Japan will force him to answer. Not by confronting him with it directly, but by showing him, for the first time, what a complete answer looks like.

What the Village Actually Shows Him

The winter Algren spends in the samurai village is not an education in the conventional sense. No one sits him down and explains the philosophy. No one assigns him a framework or delivers the argument in a digestible form. What happens is quieter and more radical than instruction.

He is surrounded, for the first time in years, by people whose inner lives and outer roles are entirely aligned. A man repairs armour with the attention of someone for whom this is the only thing happening in the world. A woman prepares tea as though the preparation itself is the point, not the drinking. Ujio practices the sword alone on a hilltop before dawn, not to improve his technique but because the practice is inseparable from who he is. Nothing is performed. Nothing is managed. The gap between what a person is inside and what they present outside - the gap that Algren lives in entirely - does not exist here.

This is not what Algren expects to find, and the film does not make his recognition of it dramatic. It accumulates. The contrast between the village’s coherence and his own fragmentation becomes impossible to ignore, not because anyone points it out, but because he is watching people who have answered the question he cannot answer, and that watching changes him.

The sparring scene is where it first becomes visible. Nobutada - Katsumoto’s son - watches Algren lose repeatedly and approaches to offer a correction. Too many minds, he says. Mind the sword, mind the face, mind the people watching - too many minds. No mind. The diagnosis is not technical. Algren is losing not because he lacks skill but because he is fighting in three places simultaneously - against his opponent, against his own self-consciousness, against the judgment of the people watching. He is not present because he has nothing to be present for. The noise is not psychological static. It is the sound of a man whose commitment is divided because he has not yet found the cause that deserves it all.

Later, when he fights again and something has shifted, it is not his technique that has improved. It is his attention. He has begun, slowly and without ceremony, to feel the difference between performing and being. The village has not given him an answer. It has given him the evidence that a different answer exists - that the life Katsumoto and his people are living is real, and that something in Algren, long dormant and almost forgotten, recognises it.

Katsumoto’s Vocation

Katsumoto keeps a journal. He has spent years searching for the perfect cherry blossom - a blossom so complete in its beauty that it resolves the question of what perfection is. He tells Algren early in the film, “ A perfect blossom is a rare thing. You could spend your life looking for one. And it would not be a wasted life.

The journal, the meditation, the patient observation of everything around him - including Algren, whom he watches with the same unhurried curiosity he brings to the blossoms - is not the behaviour of a man cultivating serenity. It is the behaviour of a man who has spent a lifetime examining his own motivation and continues to do so. Katsumoto is not at peace because he has stopped asking. He is at peace because the asking has, over many years and through sustained practice, produced an answer he trusts.

He knows why he does what he does. He is responsible for his soldiers in the immediate sense - their lives, their honour, their deaths - and for his people in the broader one: the preservation of what they represent against forces that would erase it. He would give his life for both. He does give his life for both. There is no gap between the man and the role. They have become, through the long work of self-examination, the same thing.

This is what draws Algren to him from the beginning, and what he cannot yet name. He is not attracted to Katsumoto’s philosophy, his military skill, or the aesthetic beauty of the samurai way. He is attracted to the coherence - the quality of a man whose answer to the question of why is so deep and so examined that it has become indistinguishable from his identity. Algren has the honest answer. Katsumoto has the true one. The honest answer is what you find when you stop deceiving yourself. The true answer is what remains when you keep examining.

A leader who stops at the honest answer has confused honesty with conclusion. Self-knowledge is not the verdict. It is what you discover when you refuse to let the verdict be final.

In his final moments, carried from the battlefield by Algren and helped to sit beneath the cherry trees, Katsumoto looks up at the blossoms. He has spent a lifetime searching for the perfect one. What he finds at the end is not the answer to the question but the dissolution of it. It is perfect, he whispers. They are all perfect. The search was not wrong. But the search assumed that perfection was somewhere other than here, in this, in what already is. That release - from the verdict he has been holding about what perfection requires, into the acceptance of what is actually present - is the final movement of a life spent in honest self-examination. He does not find the perfect blossom. He finds that he was asking the wrong question. That, too, is what sustained self-knowledge produces: not answers, but the wisdom to release the questions that were never quite right.

The Cause Worth Dying For

The final battle is not heroic in the conventional sense. There is no rousing speech, no declaration of principle, no performed courage. Algren rides out with the samurai, fully aware that they will not survive, and does not attempt to reframe that knowledge as anything other than what it is.

What has changed is not his assessment of the odds. It is his answer to the question he arrived in Japan unable to answer. He no longer fights for money. He no longer fights because he has been given orders or because the alternative is worse. He fights because he has found, in the village, in Katsumoto’s example, and in the long accumulation of a winter spent watching people who knew what they were for, a cause that reflects what he actually is. Not what he was paid to be. Not what he was ordered to be. What he is.

Afterwards, Algren stands before the Emperor. He holds out Katsumoto’s sword. He speaks, without ornament, without calculation: Katsumoto was a man of honour who hoped the Emperor might remember his own. Then he waits. He does not know what will follow - execution, imprisonment, dismissal - and the not-knowing does not move him from where he stands. He has accepted whatever comes. That is all. That is everything.

Return, for a moment, to the restaurant where Algren states his terms. He will go to Japan. For the money. He can kill anyone. That is the honest answer, and it is devastating, and he believes it is the final one.

Every leader I've examined in this Character Studies series had already done the work that Algren does in Japan before their story began. The series showed the quality in operation. This is the only piece that shows the work that produced it. Not the arrival but the journey. Not the answer demonstrated under pressure, but the search that made the answer possible.

Katsumoto spent a lifetime asking why he did what he did. Algren spent a winter finding out that the answer he had reached was not the whole truth. Both of them arrived, by different roads, at the same place: a life whose inner motivation and outer responsibility had become, through sustained and honest examination, the same thing. One short final sentence is all that remains to be said.

You cannot lead others toward something you have not found in yourself.

Why do you actually lead - and have you examined that answer honestly enough, and for long enough, to trust what you find?

Thanks for reading. Let me know your thoughts in the comments. — Attila

If you enjoyed this, explore more articles and ideas on my blog here.

Film discussed in this essay

The Last Samurai (2003)
Directed by Edward Zwick
Starring Tom Cruise, Ken Watanabe, Timothy Spall
IMDb: The Last Samurai (2003)

If this essay was worth your time, you can support the work here.

Disclaimer

The views and opinions expressed on this website are for educational and informational purposes only, and should not be considered as investment advice. The author may hold positions in the stocks mentioned on this website. The author of this website is not a licensed stockbroker or financial advisor. Nothing contained herein should be construed as a recommendation to buy, hold, or sell any securities or financial products. Always seek the advice of a financial advisor and do your own independent research before making any trade or investment decisions.

We do not guarantee the accuracy or completeness of any information on this website. Such information is provided “as is” without warranty or condition of any kind, either express or implied. Past performance may not be indicative of future results. This website could include inaccuracies or typographical errors.

We are not liable or responsible for any damages incurred whatsoever from actions taken from information provided on this website, including financial losses. Since all readers who access any information on this website are doing so voluntarily and of their own accord, any outcome of such access is understood to be their sole responsibility. In no event shall we be liable to any person for any decision made or action taken in reliance upon the information provided herein.

This content is published by a private individual who is not a regulated investment firm, investment adviser, or financial intermediary under MiFID II or any applicable EU or Hungarian financial services legislation. This publication does not constitute a financial promotion, investment research, or a personal recommendation within the meaning of applicable law. References to specific financial instruments, funds, or companies are for illustrative and informational purposes only and do not constitute a solicitation or offer to buy or sell any security or financial product. European investors should be aware that certain financial products referenced in this content may not be available for direct purchase in their jurisdiction due to applicable regulations, including MiFID II PRIIPS requirements, and should consult a regulated financial adviser before acting on any information contained herein.