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This is a great question! However, why should we draw a parallel between Trump’s America and 1930’s Germany when we can draw an equally fascist parallel between Trump’s America and 1930’s America?Everyone associates the word fascism with Hitler, concentration camps and WWII. What isn’t popularly taught in American schools is the fact that fascism as an ideal form of government was widely popular in the early 20th century around the world. In fact, as fascism spread from Mussolini’s Italy to other parts of Europe in the 1920’s, it became the conduit for wealthy industrialists in America to gain a foothold internationally.Fascism is extremely pro-business and anti-union at its core. You can bet that 1930’s Corporate America was eager to supplant America’s progressively democratic administrative state with a fascist one.Like today, the fascist supporters of 1930’s America were very vocal about their cause. They used print and radio propaganda and became very involved in American politics and elections. With its pro-business agenda, the Republican Party was the perfect conduit to bring fascist proposals to life. Eighty years later, these ideas and propaganda methods are alive and well and popular within the GOP.As early as 1934, fascists became active in many state and national Republican party organizations. These organizations were also collaborating with pro-fascist groups such as America First Organization, the Silver Shirts and the Order of ‘76. Corporate members of the Republican party even used their wealth to sponsor anti-Semitic radio broadcasts to win German votes. That the Republican party is sympathetic to alt-right hate groups such as the KKK and is willing to promote and incite civil unrest is another parallel between 1930’s America and Trump’s America.Normalizing fascism was not that difficult to do in 1930’s America. It was promoted as a “remedy” to Russian Bolshevism and as such, made sense to many Americans who felt it reassuring to learn that Italy was not also going in that direction. On the surface, it seemed like a middle-class revolution that rose up to defeat socialism in any form. The possibility that fascism was a weapon that could be used for good made it easier for the general populace of 1930’s America to look the other way.Trump’s Republican party uses similar tactics to normalize fascism, promoting it as a weapon that can be used for good. The main agenda of the fascist state is to dismantle regulatory laws as quickly as possible and reduce the corporate tax burden. Trump’s tax reform bill that heavily reduced corporate tax rates was touted as protecting American jobs by putting more money into the pockets of Big Business “Job Creators”. Their claim is that, awash with new money, corporations will hire more Americans (or avoid layoffs) and everyone will benefit. The idea that the general public might have to increase their own tax burden or suffer deep cuts to public services, but then be rewarded with less risk of losing their jobs, makes it easier for many Americans in 2018 to look the other way.However, studies have shown that for every $1,000,000 that big corporations receive in tax breaks, approximately 75¢ is re-invested into the American economy. Very few new jobs are actually created, and company layoffs continue as planned. The vast majority of the extra money is kept back for corporate shareholders, moved into off-shore accounts and invested in securities and other stock interests.In the 1930’s, intense hatred of minorities ran deep in America. Business interests were obsessed with preventing any type of unionizing, government work and social programs that would provide relief to the poverty-stricken Americans of the Great Depression. They saw every New Deal initiative as a way to empower African Americans and the immigrant community, thus depriving them of cheap labor. They feared that President Franklin D. Roosevelt would appoint liberal Supreme Court justices that would challenge Jim Crow laws. Like today’s political scene, the American fascists of 1930 found willing accomplices in the media and Congress that would help them unleash agitators to create domestic unrest and stir up ugly, racial hatred.There is incontrovertible evidence in the congressional record that some of the biggest monopolies entered into secret agreements with fascist parties, most notably the Business Plot of 1933. Wealthy businessmen plotted to use an army of WWI veterans to overthrow President Franklin D. Roosevelt and install a fascist regime. The Bonus Army was made of veterans who were out of work and disgruntled with the US Government at that time. If it were not for the patriotism of US Marine Corps Major General Smedley Butler, who reported the conspiracy to Congress, our country may have tipped the scales in favor of totalitarianism around the world.It is important to note that even though there was clear evidence that these organizers were plotting against the US Government, no one was ever held accountable for any crimes. Much of the final report was not declassified until the 1960’s, and only then did the rest of the country learn how close we came to disaster.As fascist ideals began to have a foothold in the 1930’s Republican Party, the congressmen and senators began a push to disrupt the business of government with obstructionist tactics and obfuscation.They hated President Roosevelt’s New Deal most of all. They accused the Roosevelt administration of communism and declared that he was trying to march America toward a totalitarian socialist state. To combat the Democratic president’s programs, Republicans began openly declaring fascist ideas outright. Republican Senator Thomas Schall falsely claimed that Russian newspapers were touting Roosevelt as “the first Communist president of the United States”. Senator David Reed even stood on the floor of the Senate and declared: “I do not often envy other countries and their governments, but I say that if this country ever needed a Mussolini, it needs one now.”Trump’s Republican party is similarly obsessed with repealing Democratic President Barack Obama’s legislation, particularly the Affordable Care Act (ACA), also known as Obamacare. It’s interesting to note that they label the ACA as a gateway to socialism. In 2012, Republican Louie Gohmert said of the ACA, “How much more socialist can you get than a government telling everybody what they can do, what they can’t do, how they can live. Individual liberty is gone as soon as this bill is held constitutional.” Newt Gingrich likened the ACA to “Soviet tyranny”. Democratic lawmakers who voted for the bill even received death threats.After the 2016 presidential election, White House Chief Strategist Steve Bannon told the Hollywood Reporter that the Trump administration “will be as exciting as the 1930s, greater than the Reagan revolution - conservatives, plus populists, in an economic nationalist movement.”When you compare 1930’s politics with today, you get an idea about how far the Republican party has come to installing an actual fascist regime in the White House. Only this time, instead of taking the White House by force, the Tea Party/GOP used the power of Citizens United, gerrymandering and voter suppression to take over all three branches of government, without a single shot being fired.The Business Plot of 1933 failed. The Business Plot of 2016 did not.You might ask: Is this a bad thing? Would it be ok to be just a teeny-weeny bit fascist, as author John T. Flynn put it in the 1930’s? You might also ask: Is it really true that the Republican party of today is a fascist party?One of the most important tenants of fascism is limited government. The Republican party has always promoted “smaller government” as a rule. They want to cut unpopular social programs such as welfare or food stamps and say the savings will be passed on to the hard-working taxpayer. When the average American hears this, they think, “Yeah! Less spending sounds great, that means less taxes for me to pay!” But strangely, even though government social programs are getting cut, these new policies never seem to trickle down in the form of less taxes to the American people. Why is that?The answer lies in the concentration of power. “Less government” translates to mean more power in the hands of less people. The less oversight and committees there are, the more power each member of congress will have to influence laws. The big business interests control the politicians with large donations that keep them in office. In exchange, the politicians create legislature in favor of the corporate interests, lowering their tax obligation, for instance, or removing expensive regulations that are imposed on corporations to ensure worker safety and cut down on pollution.The umbrella of “less government” also means less oversight of regulations. Federal agencies that protect us are dismantled and repealed. In other words, the regulatory laws can be in place, but without an official government agency to enforce them and see to it that the regulations are being applied, there is no incentive for any business entity to follow those laws.This is what separates fascism from communism. In a communist state, the control of the economy is in the hands of the central government. The government decides the allocation of resources and what products and services are provided. They take control of factories and industry. Privatization of utilities, mining operations and banks are not allowed. The government also decides what goods are produced, when they will be produced and at what price. In a communist state, the government taxes the poor and the wealthy alike to pay for the programs that they deem are in the “public interest”, whatever that may be. As a result, while the government is large and politicians wealthy, there is less of a gap between the richest and the poorest of the general populace.In a fascist state, the control of the economy is in private hands. The economy remains under control of the wealthy elite, and these same mega-billionaire corporations control the direction of the government. Massive monetary donations ensure that they keep that control. In return, the tax burden is shifted from the wealthy onto the middle class. Money is then pulled away from federal social programs such as public education, healthcare spending and food/housing assistance, leaving a need for some other way to provide them at the state or private level. Privatization of public services such as transportation, education, energy and utilities, research, law enforcement and even prisons and military occur as those services are contracted out to for-profit third-party corporate agencies. An enormous gap between the wealthiest and poorest of the general populace is painfully evident. Since they can’t compete with the massive amount of campaign money, the average American has no choice but to adjust to the new way of doing things.One of the most important key pieces in support of today’s American fascism was the passage of Citizens United in 2010. One hundred years earlier, in 1907, the great Republican President Theodore Roosevelt spoke against it in his address to Congress: “There is no enemy of free government more dangerous and more so insidious than the corruption of the electorate,” he said. “All contributions by corporations to any political committee or for any political purpose should be forbidden by law.”This is how far the Republican party has come in 100 years. Citizens United is exactly what TR warned us would happen: a corruption of the electorate. Its passage opened the door for a new era of nasty political advertising, much of it untrue and all of it designed to sway public opinion to the extreme fringe edges of bias. Citizens United spawned Super PAC’s, which are basically money-laundering entities that are allowed to spend unlimited amounts of money from a virtually unrestricted range of sources, including corporations and even foreign interests. With this kind of money, a billionaire can push his own agenda, buy a politician’s loyalty or even install his own hand-picked politicians in office, and therefore influence the very foundation of our Constitution.Combine billions of dollars with the popularity of Social Media and the biased slant of broadcast news and radio, and you discover that 2018 American fascism has a power that was not imaginable in 1930.Totalitarian regimes use propaganda, terror and technology to maintain control over all aspects of private life. We saw fascism tried again and again in Europe, and we know it only leads to despotism, disaster and oppression. It is unthinkable that it could happen here, in America 2018. Or is it?The key lesson of all this is that we must never become complacent about democracy. The United States of America is a Democratic Federal Republic, and as you can see, it should be our number one priority to ensure that it remains forever so.(Note: Everything in this article is easily researched online and via newspaper archive services that contain media from the 1930’s. Knowledge is power.)

The largest leveraged buyout in history was so bad, even Warren Buffett got nicked.This is a story about how private equity hubris, industry deregulation and “non-traditional” innovation all came together to eventually bring down what was once one of the largest power companies in the world.It starts off as several disparate, seemingly unrelated stories but I promise that it eventually comes together.If you follow along all the way to the end, you will see what happened when an eclectic group of wildcatters, power industry titans and (mostly) men from the world of high finance got together in the flatlands of North Texas and tried to do something that had never been done before.(1) The WildcattersIf you drive about fifty minutes northwest of downtown Dallas, you will see a landscape dotted with rectangular patches of yellow-gray gravel. These rectangular gravel fields are called “well pads” and are locations where a hole has been drilled into the ground to extract natural gas.With modern technology, this is even easier to view from above — click on this Google Maps link and you will notice a bunch of various-sized rectangles distributed quite evenly across the map.Now zoom all the way in; this is what you get to:Partially fenced-off gravel fields are not uncommon sites in the oil-rich basins of Texas but people are generally more familiar with the traditional oil pumpjack:Note: I took the above picture in June 2001 when I was on a post-college cross-country roadtrip with some buddies while driving through North Texas.Instead, these natural gas well pads look more like this from the ground:It was here in a geological formation called the Barnett Shale that Texas oilman George P. Mitchell found himself searching for natural gas on acreage that had long been drained of its “easy” oil — the type trapped in big underground pools where all you really had to do to recover it was stick a pipe in the ground. Geologists knew that there were still massive amounts of gas trapped in these large shale rock deposits but after a century of trying, still had no idea how to extract it economically and at scale.The son of an illiterate Greek immigrant named Savvas Paraskevopoulus, Mitchell stubbornly clung to the idea that he could tap into this rock and extract this gas. Throughout the 80s and 90s, he experimented over and over again with different drilling techniques.For example, instead of drilling straight down, he started drilling horizontally once he hit the shale formation. All sorts of weird materials were poured into the hole to see how they might coax the natural gas out of the shale. Tremendous pressure was exerted and explosives used to see if they could open up cracks in these formations to allow the gas to escape. All of these techniques had been used before in traditional oil and gas drilling but it was the creativity and sheer tenacity that Mitchell and his employees used to eventually figure it all out.One day in 1998 a Mitchell Energy petroleum engineer named Nick Steinsberger headed over to a well called the S.H. Griffin #4. He had been experimenting with a novel idea. Instead of using a gel-like chemical substance to keep tiny fissures in the shale formation open to allow gas to escape, he had been experimenting with water. The gel-like substance had proven to be effective at allowing gas to escape for a short period of time before tailing off rapidly. The theory was that while the gel (and sand) would help keep the various rock fissures open long enough for the gas to escape, after a while the formation would just get gummed up and any remaining gas would be stuck. So you would have to drill and crack the formation again to extract more, and drilling cost time and money.At S.H. Griffin #4, Steinsberger noticed that the well had continued to produce gas well beyond the typical gel frac. Total gas output had exceeded previously fractured formations by several times. On top of this, a water-based frac was significantly less expensive than a gel frac. The hydraulic fracturing code had been cracked and it would change the industry forever [Note i].As an aside, the zoomed-into well in the Google Maps link above is the S.H. Griffin #4 wellpad.(2) The Power UtilityOn November 4, 1879, Thomas Alva Edison filed a patent for “an electric lamp using a carbon filament or strip coiled and connected to platina contact wires”[1]. Three years later, electricity arrived in North Texas when the Dallas Electric Lighting Company began providing service to the city of Dallas, at that point a city of a little over 10,000. In the following years, cities throughout Texas lit up one-by-one.For more than a century, these utilities powered their respective cities and by the 1980s, they had merged together into the consolidated Texas Utilities Electric Company. At this point, the company was the largest provider of electricity in the state of Texas, the second-largest state economy in the United States.Its power generation relied heavily on coal which at the time was by far the least expensive form of electricity generation. It was a vertically integrated utility, meaning that it also provided transmission and distribution of electricity as well as marketing for end customers.Traditional power utilities are very stable, boring businesses. They are natural monopolies (no need for redundant, multiple power lines into a home or business) and are regulated businesses that are allowed by the regulator (PUHCA) to generate a specific, typically modest rate of return.Industry deregulation in the 1990s started to add a bit of excitement into these heretofore boring businesses. Suddenly, they were allowed to diversify outside of their geographic zones and also into other sectors. Power companies diversified into new areas (e.g. oil and gas pipelines), acquired other utilities, built trading operations and invested in greenfield speculative projects. In the late 1990s, Texas Utilities bought a large number of international assets, re-branded itself as TXU and by 2000 was the fifth-largest power company in the world[2].With the collapse of the most aggressive of the Texan energy companies, Enron Corporation, industry deregulation ground to a halt in the early 2000s. Eventually, TXU divested itself of its international properties and pretty much went back to being a “boring” power utility. But one deregulation measure that stayed in place was the fact that retail marketing was opened up to competition. This comes into play later in this story.(3) Base loads, Mid-Merits, Peakers and the SpreadIt was the summer of 2001 and I was starting my first real job as an investment banking analyst.For a few months before I was to ship out to Hong Kong for my permanent posting, I did my analyst training in New York and was attached to the power industry group. It was here that I learned a few interesting things about the way the power industry worked. As it relates to this story, the most relevant piece was about how electricity was priced in the United States.There are different ways to generate electricity — each with their own unique characteristics:Massive nuclear plants that produce electricity at a very low marginal cost and take a long time to power up and shut down. The construction cost of these plants (measured on a $/megawatt basis) is very high and the shutdown and rehabilitation costs even higher.Large coal-fired plants that also produce electricity very inexpensively — because coal is cheap and plentiful — and also take a long time to power up (although not nearly as long as a nuclear plant). Capital costs are high albeit not nearly as high as nuclear.Hydroelectric plants that are expensive to build up-front but then cost very little to operate. They are great if you have them but unfortunately for the relatively flat Texas there aren’t a lot of places where the water flows fast enough to build them.Then there are natural gas-fired power plants which are less expensive to build and easy to turn on and off. But they depend heavily on cost and access (via pipes) to a steady supply of natural gas.There is also, of course, wind and solar, but for the purposes of this story we can ignore them as they made up a minuscule percentage of overall generation until only recently.I also learned that electricity demand is not flat. It varies depending on time of day and also throughout the year (e.g. air conditioning drives electricity usage to be highest in warm states like Texas). Here is what the electricity usage curve might look like on a typical hot summer day in Texas:Since electricity cannot be stored at this level of scale without tons of battery storage (which is still expensive) — one of the main jobs of the power utility is to manage power generation throughout the day and throughout the year. The way that power companies do this is by splitting up their generation assets into different types:Base load — these run all of the time and typically feature the lowest variable cost (e.g. coal, nuclear and hydro). Dependable, consistent and low-cost electricity that is run at maximum output.Mid-merit or “load following” — these are ramped up during the day and typically feature more expensive fuels. Natural gas is particularly suited for this role but coal (certain types that are easier to ramp up), hydro (you can stop and open the floodgates pretty quickly) and diesel can also be used.Peakers or “peaking power plant” — generally run when there is high demand, like at 3pm on a hot summer weekday. Again, natural gas is great at this because it can ramp up very quickly (gas turbines are like big versions of the combustion engines in a gasoline-powered car; think about how little time it takes to start your car).You end up with an operational plan that looks something like this:The price of electricity is typically based on the total operating cost of the system. Besides the up-front capital cost, the main cost items are fuel costs, operating and maintenance, and the distribution network. Pricing the distribution aspect of electricity is a relatively straightforward return on capital (required to build out and maintain the transmission and distribution network) calculation. Pricing the generation aspect is a little more complicated because you are dealing with different types of fuel at different times of the day.In general, power companies are allowed to price electricity generation at the marginal cost of electricity. This means that during low demand times, when most of the electricity being generated is base load, the marginal cost is quite low. At times of high peak demand, when your most expensive mid-merits and peakers are all firing, the marginal cost of electricity can be quite high.One of most important implications of this is that for baseload generation, you are earning a lot more profit during peak demand periods than you are during low demand periods. Just how much more depends on the spread between the fuel cost of your peakers and the fuel cost of your base loads.For the state of Texas, the spread was the difference between the price of coal (used for base load) and natural gas (used for peakers). And this is where the paths of the staid power guys and well-heeled buyout masters began to converge.(4) The Masters of the UniverseMany people point to the year 2007 as the cyclical peak of the buyout industry. The post-9/11 economic downturn and subsequent Fed response (lower interest rates) had combined to create many attractive opportunities to buy attractive businesses with low-cost leverage. The economy was now firing on all cylinders, driven in part by the housing boom, and things had never looked rosier for the buyout kings, also referred by some at the time[3] as “Masters of the Universe” [Note ii].At this point in time, I was also an aspiring Master myself, working for the technology investing group of a mid-sized private equity firm. It was from this perch that I had watched the industry expand rapidly in the post-9/11 years.Deal sizes expanded, exit IRRs/multiples impressed and we saw the first mega-funds (i.e. over $10 billion) emerge. For a time it seemed like every month there was another record-setting buyout deal. 2007 was one of the largest payout years for carried interest checks. Blackstone went public in a $4 billion IPO[4]. The large buyout firms expanded from funds measured in the billions to funds measured in the tens of billions in short order.But deploying tens of billions of dollars of equity is not easy when you are looking for “traditional” private equity deals. To soak up that much capital — and get to the next fund — you had to start looking at larger companies which meant trawling in the public markets. You also had to start thinking a bit more creatively and expand your comfort zone.It was around this time that private equity firms turned their eyes to the power industry. Historically, they had stayed away from power companies because the industry was highly regulated and the capital requirements were high. Also, the traditional utilities already ranked amongst the most highly leveraged industry sectors due to the stable cashflow these types of businesses generated.But now, armed with enormous funds, the private equity firms were ready to dip their toes in the water. It helped that less than two years earlier, some of these funds had made more than five times return on their investment in a merchant power generation company in Texas[5] in the span of 18 months in what was one of the most lucrative private equity deals that year. Some of the firms that participated in that deal decided to see if lightning could strike once again.(5) The Largest Buyout in HistoryOn February 26, 2007, TXU Corp. agreed to be acquired[6] by a consortium of private equity investors led by legendary buyout firms Kohlberg Kravis Roberts and Texas Pacific Group. At a $45 billion valuation it was the largest buyout in history[7]. The company was renamed Energy Future Holdings.The transaction was funded with over $35 billion of debt and required significant regulatory concessions. After the transaction was completed, the business was separated into three distinct businesses: a regulated transmission business (Oncor), a retail electric provider (TXU Energy) and a power generator (Luminant).As I alluded to earlier, the regulated transmission business is a cost of capital business. This means that the amount of money you are allowed to make by the regulators is relatively fixed. It is a very stable business where it is hard to make or lose that much money.However, the other two businesses were more volatile, especially after deregulation of retail pricing from earlier in the decade:You generate revenue by selling electricity at prices that are set according to a formula based on the marginal price of electricity. Remember that daily electricity demand curve from above? During peak hours (9am to around 7pm), peakers set the marginal price of electricity — and most of these peakers used natural gas.On the cost side, the main variable expense was fuel. For Energy Holdings, this was coal.Putting two and two together, the profitability of the company — and ultimate investor returns — depended largely on the spread between natural gas and coal prices.Coal is inexpensive and prices are fairly stable — power companies try to lock in very long-term supply agreements. Natural gas prices were more volatile, although they can be hedged.At the time of the deal, natural gas prices were around $7 to $8 per million BTUs[8]. This was up from $2 to $3 a decade earlier as demand for natural gas, a cleaner alternative to coal, had increased significantly.By mid-2008, prices had spiked to $13 per mmbtu. Energy Future Holdings and its investors were excited about the prospect of a massive payday on the horizon.(6) Boom and BustAs you probably guessed from the question, that turned out to be a very short-lived peak. Natural gas prices plunged shortly thereafter.What happened?First, the economy collapsed — triggered by the now infamous real estate bubble. Plummeting economic activity led to reduced electricity demand and demand for natural gas. By 2009, natural gas had plummeted back to $3 per mmbtu.But prolonged economic downturn on its own — even one as harsh as the Global Financial Crisis — should not have been enough to cause the downfall of Energy Future Holdings. Private equity folks are keenly aware of the risk of economic recessions and the Energy Future investors had planned accordingly.If there is one thing that private equity folks know well, it is financial engineering. Sensitive to the risk of a decline in natural gas prices, the investors used financial instruments to hedge the natural gas prices such that they would still be able to maintain the spread and remain profitable for a period of time. The idea was that the economy would eventually recover and natural gas prices along with it.The problem is that even though the economy eventually did recover, natural gas prices did not:Source: U.S. Energy Information AdministrationNatural gas prices cannot be hedged forever. Eventually its derivatives expired and Energy Future began bearing the full financial brunt of depressed natural gas prices. Operating margins plummeted. Interest expenses had risen more than fivefold as private equity investors had loaded the company with debt. The company began to generate massive losses. Equityholders were wiped out. Soon, bondholders were at risk as well. Even secured lenders did not escape unscathed.Warren Buffett had invested $2 billion in Energy Future bonds as part of the buyout. In his 2011 Letter[9], he admitted that this was a “big mistake” and a major “unforced error”[10]. Those bonds were eventually sold at an $873 million loss[11].(7) ConclusionSo what happened here? Why did natural gas prices never recover?This is a good time to check back in on those oil wildcatters from the beginning of the story.After the discovery of how to use water to frac a shale formation at S.H. Griffin #4, it became economical to recover natural gas from shale formations. In the ensuing years, the technique was refined and improved. Eventually the wildcatters even figured out how to get oil out of these shale formations.And as it turns out, these shale formations are massive and widely distributed throughout the country[12]. God truly did shed His grace on America, for beneath the “amber waves of grain”, “fruited plains” and majestic “purple mountains”[13] lay some of the largest reserves of unconventional oil and gas on the planet.Unlike conventional oil and gas exploration, the risk of drilling a dry hole was much lower. This made it easy for capital to enter the space and the result was steadily increasing supply of economical gas (not to mention shale oil as well). All of this accessible supply meant that it was highly likely that low gas prices were here to stay.In other words, this was a permanent and not a cyclical trend that could be hedged out. And it was ultimately the result of good ol’ American ingenuity and innovation.Yes, “innovation”. Some may balk at the use of this word when applied to the oil and gas industry and George Mitchell may not look like your typical entrepreneur. But in my view, Mitchell should be celebrated alongside Bill Gates and Steve Jobs in the pantheon of great American entrepreneurs. Figuring out how to extract oil and natural gas out of shale rock was one of the most significant American innovations of the last two decades:Lower, less volatile energy prices for all.Natural gas is a lot cleaner than other fossil fuels, and replacing dirtier sources has a net positive environmental benefit.Even more significantly, it has reduced our economic dependence on others. We are even starting to export it[14].It is easier to avoid geopolitically volatile regions like the Middle East and hopefully leads to fewer pointless conflicts.Energy independence was a big topic of discussion around election time 15–20 years ago. Now, nobody really brings it up anymore because we are nearly there and it is no longer such a big source of anxiety.The private equity investors and bondholders had not properly factored in the potential for innovation to completely change the rules of the game. One thing I noticed working in the industry was that traditional private equity guys tended to be value-oriented and while they are great at thinking about and pricing in all sorts of risk, innovation and disruption are two things that they often miss[15]. As Mr. Buffett himself wrote in that 2011 letter: “I totally miscalculated the gain/loss probabilities [of natural gas prices] when I purchased the bonds.”There are other lessons here (e.g. the heightened risks of too much debt, mistaking secular trends for cyclical ones, second-order effects, sticking within your “circle of competence” etc.) but I think a key, under-appreciated lesson is that innovation can be hard to predict. Lightning can strike anywhere, with little warning. But just because it is hard to predict doesn’t mean it can be ignored. As an investor, it is very important to recognize true innovation/disruption when it does happen and react/adjust accordingly.In particular, American ingenuity has proven time and time again its ability to surprise and throughout history it has been a far more profitable wager to bet on it rather than against it.Explanatory Notes:[i] The George Mitchell and Mitchell Energy story is detailed in the excellent book about the pioneers of fracking The Boom by Russell Gold. The Nick Steinsberger story is also mentioned in the book as well as a 2013 feature story in The Atlantic.[ii] Original reference to famous phrase used in Tom Wolfe’s novel The Bonfire of the Vanities.Footnotes[1] US223898A - Electric lamp - Google Patents[2] Energy Future Holdings - Wikipedia[3] The Ultimate Bubble?[4] Blackstone Group goes public[5] Texas Genco - Wikipedia[6] Private equity buys TXU in record deal[7] Here are the top 10 largest leveraged buyouts in history[8] Natural gas prices in 2016 were the lowest in nearly 20 years[9] http://www.berkshirehathaway.com/letters/2011ltr.pdf[10] Warren Buffett’s Texas-sized Mistake[11] Berkshire Hathaway Makes a $9 Billion Bid for Energy Future Holdings[12] Shale formations in the United States[13] America the Beautiful[14] Subscribe to read | Financial Times[15] Glenn Luk's answer to Is value investing outdated today?

Technically yes. I wrote about this elsewhere. The scene was, December 1970, Soviet proxies in Poland, machine gunned on the streets of the city of Gdańsk large demonstrations in which young Lech Wałęsa was one of active participants. About hundred dead bodies fell, and the secret police yanked many others, still alive, deemed to be those most active in the protest, into police stations.There they were taken, one by one, into an interrogation room with walls splattered with blood, and offered to sign an agreement to be a police informer and go free, or else.It has to be noted here that the “blood on the walls” decoration was, most likely, simply a theater played by the police, to frighten the arrested. At that time police torture in Soviet proxy Poland was mostly a thing of the past. But it used to be a real thing in a very recent memory, and anyway, the same government just killed their friends and colleagues, standing next to them, on the streets. So the trick worked, AFAIK young Lech Wałesa signed that paper.This way, Soviet proxies had on file signed agreements to be police informers, from people who were most likely to be the opposition activists, hopefully leaders, in the future. That was brilliant, one has to really appreciate the long-term skills of the services involved, hats off.The benefit, for the Soviet proxies, was immense, in four possible ways:First, the simplest and most trivial case, the person who signed that agreement could be made to keep this agreement for real, and stay, likely for life, a Soviet proxy mole in anything that person got involved in. So Soviet proxies had an X-ray insight into everything what was going on.In late 1970s, when I came of age, it was simply assumed as a fact that everything we talked in groups of friends, night conversations over a bottle in somebody’s kitchen, will be dutifully reported. I never engaged in a guessing game “who of people I knew was an informer”, this would really screw up a normal life we all tried to have. But I was never involved in anything serious. Still, AFAIK, the strength of the Polish opposition movement starting the end of 1970s was in the “screw it!” attitude - people who did real stuff did it fairly openly, within reason of course, which dulled one of the edges the Soviet proxies had - reporting moles all over the place.Note, by the way, that there were serious incentives to cooperate with the authorities. In a Soviet/Soviet proxy society, much of your life depended on inscrutable decisions of authorities. Did you get your apartment assignment at the age of 24, or 54? Did you get accepted into the university? Were you promoted at work? Were you allowed to have a passport for a month, to go somewhere, or not at all? How about your children, the above issues? We all were faced with not-that-transparent “acts of god” as above, much of this was noise, how to distinguish whether somebody was simply lucky, simply good and liked by superiors, simply did old fashioned networking/bribing, or had some help in return for providing some services to the authorities?Second, if the acquired informer was somewhat capable, and could be kept as an agent, he (or she) could be maneuvered into leadership positions in various opposition movements. Such a person would have an edge over fellow movement members. Competitors could face some problems. Some gossips could be spread. The agent would have, at the start, a whole professional organization behind him/her and other supporting moles. Clean competitors would be more often alone, and green. Most importantly, the agent would probably receive a solid regular training, from the Soviet proxy services, on how to run successfully an opposition movement. He/she would be likely the most competent person around, so would, within movement, advance naturally. I would guess that it was not unlikely that such an agent would receive a professional counseling support, so would be quite dependable in “opposition work duties”. Clean amateurs would get their doubts, crises etc, to deal with, without professional help.That second class of agents would make sure that opposition movements would smolder on a manageable setting. Many possible scenarios, another topic.But above scenarios are I think mundane. Interesting are the next ones.Third way. A young frightened man, after signing, under duress, an agreement to become an informer, would try to wiggle his way out of this. I bet this part was fun for his handlers. The young fool would try to deliver worthless information, would resist meetings with his handler etc. The young fool would think he is smart, brave, and resisting the oppressors, at a significant risk to himself. His handler would quietly note all the stuff being said, note the meetings etc. Building a file. Probably nothing untrue would be put in, most cases.The important part, the young fool himself knew he was, for a while, wiggling on that hook. And there was a file somewhere, true documents, to prove it.And now the beauty part. Young fool breaks his contacts with Soviet proxy services. Or, in reality, Soviet proxy services let him to break them. Young fool think himself clean, strong, passed through fire. Young fool follows what had led him to the streets, against machine gun fire, originally. Engages in the opposition movement.In case of Lech Wałęsa, he became the leader (1980) of a probably strongest opposition movement in the history of the totalitarian states, Solidarity, 10M duty paying members in a 36M society. And later, after some volumes of world history, a truly democratically and competitively elected President of Poland (1991), country he led out of the Soviet embrace into a free world, NATO and EU membership, all nine yards. Plus a Nobel Peace Prize on the way and such.But he is still (my opinion), “the third way” case. There is a speculation that the Soviet proxy services actually, likely without his knowledge, helped him to get to the top of the Solidarity movement. I am a big fan of Lech Wałęsa, all his “bull in a china shop” grace notwithstanding, but I think those speculations could be true. Maybe, maybe not, but possible.Because once Wałęsa was the leader of the Solidarity movement, he could be reminded that those old files were still somewhere. This is, I think, the essence of the “third way” procedure.The beauty of this is that it uses the hatred of the Polish society against the Soviet proxy services. Think about it - you, the external oppressor, induce a hatred against you in, in some society, and then you use that very hatred to control that society. Beautiful.The label of an informer means a civil death in the Polish society. So the Soviet proxy services could legitimately assume that Lech Wałesa, threatened with revealing his past wiggling on the hook, will do what he is told to, to avoid that. A classical blackmail.And the truth is, so far we do not have a way to, for sure, decide whether Lech Wałęsa was really blackmailed by Soviet proxy services, and whether he did, or did not, made some accommodations with them. We know that Soviet proxy services did not go public with his files during Solidarity years, other than showing them, back-channels, to the Nobel Prize committee, hoping to prevent him getting that prize.My guess is that it was a poker game. Wałesa called their bluff in 1980, Soviet proxy services decided that, given how things snowballed, people in Poland could buy his version of things, back then. In 1980 people knew what secret services could do, people knew what fear is, and knew the reasons of fear.I make my judgements using the “by their fruits you will know them”. Long story short, Wałesa did a good job against Soviets and their proxies. But note, we are in the “judgement call” area. No objective proofs, tons of chaff flying around.And here we enter the “fourth way” area. By not publishing Wałesa files in 1980, Soviet proxy services kept that card in hand. Wałesa himself made it possible, by not going all clear. He is clearly scared of all this. Cornered, he seems to refuse to yield, but he is clearly scared of the story. We know he used his powers in the past to remove part of his file, the Polish copy, that is (illegally).Why is he so scared? Because about half of the Polish society today, knowing for a fact that he was on file as an informer 1970–76, think him a traitor. That Wałęsa file card was finally put down on the table in 2010+. It is not even clear who had put it down, some people think they are rightful pursuers of truth, this is another beauty of this. All that info was available since late 1970s by people around Wałesa (he admitted to some friends back then). But it came up, loudly, 2010+. Wałesa is a private citizen since 1995. Who? Why now?But, “by their fruits you will know them”. Today the Polish society is riven in half, half of Poles denounce one of few worldwide recognizable Polish people as a traitor and deny him any worth, meaning, credit. Somebody managed to have half of all Poles, their own choice, renounce a significant part of their heritage. Beautiful. “Fourth way”.And it all started with some rank-and-file Soviet proxy services handler, 1970+, start and follow a standard boring protocol of dealing with some bigmouth uneducated youth with an oversized ego. And such beautiful results, half a century later. Soviet proxy services should have a monument somewhere, to those trudging rank-and-file workers, filing boring forms, repeating same boring procedures, all their lives.