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We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general.

Here are the articles for the week ending 15 November 2020:

1. The Big Lessons From History – Morgan Housel

Harry Houdini used to invite the strongest man in the audience on stage. Then he’d ask the man to punch him in the stomach as hard as he could.

Houdini was an amateur boxer, and told crowds he could withstand any man’s punch with barely a flinch. The stunt matched what people loved about his famous escapes: the idea that his body could conquer physics.

After a show in 1926 Houdini invited a group of students backstage to meet him. One, a guy named Gordon Whitehead, walked up and started punching Houdini in the stomach without warning.

Whitehead didn’t mean any harm. He thought he was just performing the same trick he saw Houdini pull off on stage.

But Houdni wasn’t prepared to be punched like he would be on stage. He wasn’t flexing his solar plexus, steadying his stance, and holding his breath like he normally would before the trick. Whitehead caught him off guard. Houdini waved him off, clearly in pain.

The next day Houdini woke up doubled over in pain.

His appendix was ruptured, almost certainly from Whitehead’s punches.

And then Harry Houdini died.

The riskiest stuff is always what you don’t see coming.

2. The Overton Window & Understanding What Is Possible – Sean Stannard-Stockton, CFA

The Overton Window is a concept named for Joseph Overton, a political theorist. Overton argued that the range of political policy possibilities was not directly related to any politician’s individual preferences, but rather by the range of options that are politically acceptable to mainstream voters. This range of politically acceptable outcomes changes over time, but at any given moment, only policy options that fall within the Overton Window have any hope of becoming reality…

…What is amazing about the Overton Window is that most of the time you aren’t even aware it exists. The possibilities that are Unthinkable are not thought of as not possible due to current social norms, rather they are viewed as actually impossible. But when the window shifts, it is hard to even remember how things used to be…

…A few years ago, the concept of Modern Monetary Theory (MMT) started to enter the public consciousness. While this theory is not new, it was previously considered Unthinkable. Starting a couple of years ago, the Overton Window began to shift with MMT sliding from Unthinkable to Radical. When Congress approved a simply massive level of spending back in March, market participants began to realize that one way to view this action was as a real-time experiment in MMT informed policy. Not that either the Democrats or Republicans who voted on a bipartisan basis did so because of MMT, but rather because MMT adherents argue that this massive level of government spending will not result in increased inflation nor will the large associated deficit, or the increase in government debt, prove to be problematic.

A full description of MMT is beyond the scope of this post. But in June, prominent MMT economist Stephanie Kelton published The Deficit Myth, which offers an incredibly accessible explanation of MMT that is easily understandable (and frankly enjoyable) for non-economists. In fact, the book is a major, mainstream best seller which is a rare feat for any economics book…

…The key point is not that MMT is correct. Rather that the MMT view of the world is now entering the Overton Window and is probably best described today as Acceptable. It is not yet considered Sensible or Popular, but in a strange way it may actually already be Policy in that the massive deficit spending engaged in this year is widely agreed as having been one of the most effective fiscal interventions in history.

While some may argue that the Democrats’ likely (unless they win both Georgia runoff races) failure to win the Senate means large government spending is off the table, the Overton Window is not about which party holds a slight majority in Congress. Rather the Overton Window describes the range of policies that society deems acceptable and both political parties are required to operate within this window.

You can see this already playing out with the Republican controlled Senate authorizing a shocking $2 trillion stimulus bill in March, twice as large as all of the stimulus spending done during the Financial Crisis. And today, Republican Senators are calling for “just” $500 billion in additional spending, while the bipartisan Problems Solvers Caucus, made up of moderates on both sides of the aisle, are calling for “just” $1.5-$2.0 trillion in new spending. Either one of these bills, on top of the over $2 trillion in spending already approved, would have been completely unacceptable prior to COVID. The size of this spending dwarfs anything that voters or a majority of Congress would have considered possible.

The Unthinkable is now Policy.

3. Chipotle to Unleash Digital-Only Restaurants – Danny Klein

While the surge was undoubtedly a pandemic byproduct of quarantine behavior and heightened adoption for things like delivery and mobile ordering, the alluring point for Chipotle was it held 80–85 percent of digital sales gains in Q3 even as it recovered 50–55 percent of in-store business. This past quarter, about half of Chipotle’s digital business came via delivery (the rest through order ahead and pickup). As of October, Chipotle’s digital mix remained in the “high 40s,” Niccol said…

…With this all stirring at break-neck pace, it’s not surprising to see Chipotle enter another surging trend. The chain Wednesday unveiled its first digital-only restaurant.

Called the “Chipotle Digital Kitchen,” it will be located just outside the gate of the military academy in Highland Falls, New York. It’s opening Saturday for pickup and delivery only, and will allow Chipotle to enter more urban areas that typically wouldn’t support a full-size restaurant, the company said. Additionally, it will allow for flexibility with future locations.

Chipotle’s Digital Kitchen concept is focused on accelerating digital business in non-traditional venues. The company said the build is unique “because it does not include a dining room or front service line.” Guests must order in advance via the fast casual’s website, app, or through third-party delivery partners. Orders are picked up from a lobby designed to include all of the sounds, smells, and kitchen views of a traditional Chipotle, the company added.

It will also service large catering orders available for pickup in a separate lobby with its own dedicated entry.

4. Cancer Screening Leaps Forward – Andy Kessler

So Illumina spun out a new company named Grail in Menlo Park, Calif., to do what’s known as Circulating Cell-free Genome Atlas studies. Running DNA sequencing on regular blood samples, Grail generates hundreds of gigabytes of data per person—the well-known A-T-G-C nucleotides, but also the “methylation status,” or whether a particular DNA site’s function is turned on or off (technically, whether or not it represses gene transcription).

Most popular DNA screenings for cancer risk test only a single gene site, like BRCA1. But Grail’s chief medical officer Josh Ofman tells me, “cancer may show up as thousands of methylation changes, a much richer signal to teach machine learning algorithms to find cancer” vs. a single site. “There are 30 million methylation sites in the entire human genome on 100,000 DNA fragments. Grail looks at a million of them.” It takes industrial-grade artificial intelligence to find patterns in all this data, something a human eye would never see.

Mind you, this is not a consumer 23andMe test of your genome that says you might have, say, a 68% chance of getting cancer. Grail is detecting the signature of actual cancer cells in your blood. According to validation data published in the Annals of Oncology, the test can find 50 different types, more than half of all known cancers.

5. Lessons in Growth Investing with Anu Hariharan – Patrick O’Shaughnessy and Anu Hariharan

I actually think there’s way more opportunity ahead of us. Let me compare it with a little few numbers. Pre-COVID I had looked at this. The total global market cap was $85 trillion. Internet economy enabled businesses was less than 10%, so roughly 8 trillion. Even if you assume a 10% CAGR and play this out. Let’s say in 2045, I think I had seen estimates that if you assume the global market cap is going to be around 450 trillion, Internet economy should surely be at least 15% of that, even if less like $60 trillion economy. Guess what? From 8 trillion to 60 trillion. I’m willing to bet all day long that we are still very, very nascent. Even in the most developed markets.

Let me make it further specific and real for people. Let’s look at the US economy. Pre-COVID, our Internet penetration was up 20% in 2019 and I think April reports 27%. A lot has been written about consumer eCommerce penetration. Not much has been said about B2B wholesale eCommerce penetration. B2B wholesale in the US is a $16 trillion market. Less than 8% of it is online. Less than 8%. 49% of B2B wholesale eCommerce transactions happen via phone and fax. And Faire which is one of the marketplaces that’s working on it is still just attacking a small sliver of retail. The retail market that they serve is a $670 billion market. You have so many more verticals here.

Think of aerospace, chemicals, industrials. You’re just going to see an explosion of vertical players in B2B wholesale eCommerce. B2C consumer eCommerce itself is still sub 30%. So therefore, just the Internet economy we’re just still scratching the surface. We just have years to compound, and I think we’re still in the early stages of the Internet economy…

…Well, there are a lot of people that have really helped me, but I think the kindest thing that comes to mind is Dr. Jeffrey Reed. He was my research advisor at Virginia Tech. I was doing my Master’s in wireless communications. This was in 2002, right after 9/11. And the funding that most state universities got from the government was completely slashed. Even private funding was at an all-time low. So I had come with the hope of getting a research fellowship. The university and the research group had no money to be able to fund me.

I come from a Tier-3 town in India. My parents were very middle class, and my dad had pretty much taken an entire loan against all his assets and could pay only for a year of my tuition. Come summer, and I was working enough in Virginia Tech to cover all my living expenses. But as an international student, you can work only 20 hours and you have to work in campus. You can’t work outside. So there’s only so much I could do. And I remember very vividly, this was July, and my dad basically said, “Look, this is it. This is the last straw. Finish whatever credits you can, you’re going to come back in August.” And I was like, “Yeah, I get it.”

And so I went to my advisor and said, “Look, I really can’t continue, and I need to find a way to graduate. So I should finish whatever credits I can in the summer, and maybe I could do it remotely. Would you be open to doing remotely?” He asked me, “How much money do you need?” And I said, “Well, I haven’t paid tuition this month. I need to pay $1,200.” He took a checkbook, wrote a check, and gave it to me without any questions. And I think if I look back in life, if he hadn’t done that, my life would have turned out very different.

6. Intel’s Disruption is Now Complete – James Allworth

So begins the story that Clay Christensen would love to tell about how Andy Grove of Intel famously came to be a convert to the theory of disruption. Christensen shared with Grove his research on how steel minimills, starting at the low end of the market, had gained a foothold and used that to expand the addressable market, continued to move upmarket, and finally disrupted the giant incumbents like US Steel.

Grove immediately grokked it…

…Yesterday, Apple announced the first Macs that will run on silicon that they themselves designed. No longer will Intel be inside. It’s the first change in the architecture of the CPU that the Mac runs on since… well, 2005, when they switched to Intel.

There’s a lot of great coverage of the new chips, but one piece of analysis in particular stood out to me — this chart over at Anandtech:

What about this chart is interesting? Well, it turns out, it bears a striking resemblance to one drawn before — actually, 25 years ago. Take a look at this chart drawn by Clayton Christensen, back in 1995 — in his very first article on disruptive innovation:

He might not have realized it at the time, but when Grove was reading Christensen’s work, he wasn’t just reading about how Intel would go on to conquer the personal computer market. He was also reading about what would eventually befall the company he co-founded, 25 years before it happened.

7. Twitter Thread On How To Interpret Pfizer’s COVID-19 vaccine news – Natalie E. Dean, PhD

Big news from Pfizer, with apparent high efficacy (>90%) based on 94 confirmed COVID-19 cases at their interim analysis.

A thread on how I interpret this news. Briefly:
“Celebrate, but let the process play out over time as intended.”
1/8

Vaccine trials are “event-driven.” They continue until enough endpoints have accrued (here, lab-confirmed *symptomatic* infections). Statisticians can take planned “early looks” at the data, and so allow us to tell if a product is working exceptionally well (or not at all). 2/8

When the vaccine is highly effective, we need less data to see it. While trials are planned for 150+ total events, this is what we need for a 60% efficacy vaccine. I say this because 94 events is a lot of data for a vaccine trial, and even more so when efficacy exceeds 90%. ⅜

Pfizer’s first analysis was planned for 32 events, which they pushed back after discussions with FDA. But by the time they analyzed the data, 94 had accrued. This shows how quickly trials can generate results when placed in hotspots (and how much transmission is ongoing!). 4/8

While the results are exciting, of course we will want to independently evaluate them. Unlike treatments, promising data from vaccines do not immediately change standard of care. The vaccines will undergo a rigorous review process first which will play out over time. 5/8

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have a vested interest in Apple, Chipotle Mexican Grill, and Illumina. Holdings are subject to change at any time.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general.

Here are the articles for the week ending 08 November 2020:

1. A Twitter thread on Jon Boorman’s final words – Jon Boorman

1) I’ve become very stoical in recent years which has made this much easier to process. I’ve had an absolutely glorious life. I sometimes feel I’ve had two or three

6)It’s a deep privilege to be able to say goodbye to people.

Deep privilege.

Constant family.

Countless friends…

7) Knowing that you will die is fairly innocuous, of course we all will. But when you know you face death within weeks/months, your perspective changes. There’s elements of that we should have in our daily lives…

9) I know I will die. I just know what will kill me. And roughly when.

So buy that coffee.

Have that ice cream.

And be nice.

2. How Discord (somewhat accidentally) invented the future of the internet – David Pierce

Citron learned to code because he wanted to make games, and after graduating set out to do just that. His first company started as a video game studio and even launched a game on the iPhone App Store’s first day in 2008. That petered out and eventually pivoted into a social network for gamers called OpenFeint, which Citron described as “essentially like Xbox Live for iPhones.” He sold that to the Japanese gaming giant Gree, then started another company, Hammer & Chisel, in 2012 “with the idea of building a new kind of gaming company, more around tablets and core multiplayer games.” It built a game called Fates Forever, an online multiplayer game that feels a lot like League of Legends. It also built voice and text chat into the game, so players could talk to each other while they played.

And then that extremely Silicon Valley thing happened: Citron and his team realized that the best thing about their game was the chat feature. (Not a great sign for the game, but you get the point.) This was circa 2014, when everyone was still using TeamSpeak or Skype and everyone still hated TeamSpeak or Skype. Citron and the Hammer & Chisel team knew they could do better and decided they wanted to try.

It was a painful transition. Hammer & Chisel shut down its game development team, laid off a third of the company, shifted a lot of people to new roles and spent about six months reorienting the company and its culture. It wasn’t obvious its new idea was going to work, either. “When we decided to go all in on Discord, we had maybe 10 users,” Citron said. There was one group playing League of Legends, one WoW guild and not much else. “We would show it to our friends, and they’d be like, ‘This is cool!’ and then they’d never use it.”

After talking to users and seeing the data, the team realized its problem: Discord was better than Skype, certainly, but it still wasn’t very good. Calls would fail; quality would waver. Why would people drop a tool they hated for another tool they’d learn to hate? The Discord team ended up completely rebuilding its voice technology three times in the first few months of the app’s life. Around the same time, it also launched a feature that let users moderate, ban and give roles and permissions to others in their server. That was when people who tested Discord started to immediately notice it was better. And tell their friends about it.

Discord now claims May 13, 2015, as its launch day, because that was the day strangers started really using the service. Someone posted about Discord in the Final Fantasy XIV subreddit, with a link to a Discord server where they could talk about a new expansion pack. Citron and his Discord co-founder, Stan Vishnevskiy, immediately jumped into the server, hopped into voice chat and started talking to anyone who showed up. The Redditors would go back, say “I just talked to the developers there, they’re pretty cool,” and send even more people to Discord. “That day,” Citron said, “we got a couple hundred registration[s]. That kind of kicked the snowball off the top of the mountain.”

3. I Have A Few Questions – Morgan Housel

Who has the right answers but I ignore because they’re not articulate?…

…Which of my current views would I disagree with if I were born in a different country or generation?

What do I desperately want to be true, so much that I think it’s true when it’s clearly not?…

…What looks unsustainable but is actually a new trend we haven’t accepted yet?

What has been true for decades that will stop working, but will drag along stubborn adherents because it had such a long track record of success?

Who do I think is smart but is actually full of it?

What do I ignore because it’s too painful to accept?

4. My Biggest Post-Election Market Questions – Ben Carlson

Does the stock market care about anything anymore? We are still in the midst of a global pandemic that is only getting worse, oil prices went negative in the spring and we just went through a contested presidential election.

And yet the S&P 500 is just 2% below all-time highs.

Yes, the stock market plunged nearly 35% during those tumultuous days of February and March but it still boggles the mind how much we’ve gone through this year and the stock market has given a collective shrug based on where we stand.

5. A Twitter thread on 100 lessons on investing – Anand Chokkavelu

1. Most of this list is dedicated to insight on stock picking, but know this: It’s darn hard to beat the market. 99% of people are best served steadily buying and holding low-cost index funds at the core of their portfolios — and I may be understating that 99% figure.

3. Being contrarian doesn’t mean just doing the opposite. The “contrarian” street-crosser gets run over by a truck.

12. Example No. 3: leveraged ETFs. Bastardized ETFs like the Direxion Daily Financial Bull 3X ($FAS) are another great way to lose money. Even if you guess right on direction, the mathematics of the daily reckoning mean these instruments are long-term losers.

30. Adding money to winners > Adding money to losers. This one’s hard. One way I try to remind myself: Every 10-bagger has to double first; Every total loss has to drop 50% first.

38. While price matters, it’s hard to overpay for a truly great growth company. Like in a marriage, the trick is to correctly identify one, build conviction by learning more quarter after quarter, and try to hold on through the inevitable tough times. (cont.)

57. Long-tail events (aka black swans), as explained in @nntaleb’s Incerto series, are by definition unpredictable. And brutal. Since life isn’t a Monte Carlo simulation, we should think hard about our true personal risk tolerances.

85. If you can learn quickly from your own mistakes, you’re ahead of the game. If you can learn quickly from others’ mistakes, you’ve won the game.

91. Downer alert: We like control, but we can’t control everything. Life and luck can (and will) trump investment plans. You can do everything right and still die penniless. All we can do is give ourselves a better chance to succeed.

100. Despite my best efforts to improve each day, I will repeatedly and thoroughly fail to heed these lessons. Let’s hope you’re better at No. 85 than I am.

6. Traffic fatality rates spiked during the pandemic – Joann Muller

There were fewer cars on the road last spring during the height of the pandemic, but traffic fatality rates increased 30% in the second quarter as evidence suggests drivers engaged in more risky behavior, federal officials say…

…Risky behavior, along with a potential reduction in law enforcement and safety messaging during the pandemic, could have contributed to increased fatality rates, NHTSA concluded.

7. The Wizard Of Apps: How Jeff Lawson Built Twilio Into The Mightiest Unicorn – Miguel Helft

About a year after Lawson and two friends founded Twilio in 2008, Lawson was invited to introduce it at a popular networking mixer called the SF New Tech Meetup. Rather than talk about an inherently difficult-to-explain technology, Lawson decided to let the Twilio software speak for itself. In front of a thousand people Lawson began telling his story while simultaneously coding a Twilio app—a simple conference line. In just a few minutes he opened an account and secured a phone number, and after writing a handful of lines of code that everyone in the room could understand, his conference line was up and running. Lawson then asked everyone to phone in, and just like that a mob of developers was on a giant conference call. Lawson then added some more code, and his app called everyone back to thank them for participating. As phones throughout the room began buzzing, the crowd went wild with enthusiasm. “He is the let-me-show-you-what-we-can-do type of exec,” says Byron Deeter, of Bessemer Venture Partners, an early backer who has become Twilio’s largest shareholder. “There’s no bravado and no ego, and that gives him a special charisma and authenticity.”

Lawson’s parlor trick did more than generate industry buzz. It epitomized a developer-centric business strategy that has fueled its growth. Twilio is exceedingly simple to use and charges no upfront fees, so programmers often use it to test an idea or product. Pretty soon that product scales and turns into a six- or seven-figure account that required no traditional sales process. “We onboard developers like consumers and let them spend like enterprises,” Lawson says. Like others that have embraced developer-driven marketing—Amazon for computing services, Stripe for payments, New Relic for analytics—Twilio benefits as companies increasingly turn to software for differentiation. “As that happens, and companies hire more developers, they come in with Twilio in their tool belt,” Lawson adds.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have a vested interest in Amazon.com and Twilio. Holdings are subject to change at any time.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general.

Here are the articles for the week ending 01 November 2020:

1. The Fine Line Between Persistence and Insanity in the Markets – Ben Carlson

So people’s ears perked up when Einhorn said this week in a letter to his investors, “we are now in the midst of an enormous tech bubble.”

The problem with this statement is Einhorn has been saying the same thing for more than 6 years now. This is from a CNBC story in April of 2014:

“Now there is a clear consensus that we are witnessing our second tech bubble in 15 years,” Greenlight Capital said in an investor letter Tuesday. “What is uncertain is how much further the bubble can expand, and what might pop it.”

The firm said there were several indications of the over-exuberance, including the rejection of conventional valuation methods; short sellers forced to cover their positions because of losses; and “huge” first-day stock appreciations after their initial public offerings.

“The current bubble is an echo of the previous tech bubble, but with fewer large capitalization stocks and much less public enthusiasm,” the letter said. The firm said it was shorting a group of undisclosed “high-flying momentum stocks.”…

…Am I being disciplined in my long-term approach or blind to the fact that the world has changed is the single most difficult question to answer as an investor because no one is right all the time. The truth is the answer to this question is always unknown.

Sometimes you have to look like an idiot for a while before your investment thesis pans out. On the other hand, there’s the old saying that insanity is doing the same thing over and over again but expecting a different result.

What if continuously betting against tech stocks in a big way proves to be the definition of insanity? These stocks would have to see a spectacular crash to fall back to levels last seen in 2016 or 2014. Stranger things have happened, I guess, but I wonder what would cause Einhorn to change his mind.

The problem with bubble-spotting is no matter what happens you assume you’re right. If prices fall then you nailed it and if prices rise it simply makes you think the bubble is still inflating. I don’t know if this is a bubble or not but the answer will likely look obvious with the benefit of hindsight either way.

2. Lots of Overnight Tragedies, No Overnight Miracles – Morgan Housel

Dwight Eisenhower ate a hamburger for dinner on September 24th, 1955. Later that evening he told his wife the onions gave him heartburn. Then he began to panic. The president had a massive heart attack. It easily could have killed him. If it had, Eisenhower would have joined more than 700,000 Americans who died of heart disease that year.

What’s happened since has been extraordinary. But few paid attention.

The age-adjusted death rate per capita from heart disease has declined more than 70% since the 1950s, according to the National Institute of Health.

So many Americans die of heart disease that cutting the fatality rate by 70% leads to a number of lives saved that is hard to comprehend.

Had the rate had not declined over the last 65 years – if we hadn’t become better at treating heart disease and the mortality rate plateaued since the 1950s – 25 million more Americans would have died from heart disease over the last 65 years than actually did.

25 million!

Even in a single year the improvement is incredible: more than half a million fewer Americans now die of heart disease each year than would have if we hadn’t made any improvements since the 1950s. Picture the population of Atlanta saved every year. Or a full football stadium saved every month

How is this not a bigger story?

Why are we not shouting in the streets about how incredible this is and building statues for cardiologists?

I’ll tell you why: because the improvement happened too slowly for anyone to notice.

3. A Columnist Makes Sense of Wall Street Like None Other (See Footnote) – Emily Flitter

Each weekday, Mr. Levine, 42, wakes up at 5 in the morning. He looks at what’s going on in the markets, scrolls through emails from readers and plugs into the chatter of early-to-work traders. Then he starts to write. Roughly 5,000 words later on a long-winded day, he files Money Stuff to his editor, and it’s sent to subscribers around noon. (His column is currently on a parental leave hiatus, and will return this winter.)

Mr. Levine’s favorite subjects include insider trading statutes, bond-market liquidity and the ubiquity of securities fraud, but his columns are never boring. They may be the only entertaining words a financial markets professional reads all day.

Often, a significant chunk of the newsletter is devoted to a legal battle between sophisticated counterparties, or a complex financial product. Mr. Levine deconstructs the topics in a way that is less like a conventional business column and more like he is providing an introductory course on the subject.

If Mr. Levine’s column requires the use of a technical term, it is typically accompanied by not just a definition but a full-throated explanation, with practical examples, of how it works. There are footnotes — lots of footnotes. The tone, though, is anything but pedantic. Mr. Levine writes about Wall Street in a way that makes its denizens feel as if he is writing for them. Yet he gives the same impression of personalization to readers who know little about finance. He once took a term that appeared in a lawsuit — a “cash-settled forward purchase agreement for Citigroup shares with downside protection in the form of a put option at the same price as the forward” — and gave it the acronym CSFPAFCSWDPITFOAPOATSPATF. He makes readers feel in on the savage joke that is late capitalism.

4. Look Who’s Really Chasing Hot Stocks Like Zoom – Jason Zweig

Among this year’s hottest stocks, few are favorites of individual investors, and index funds aren’t their main buyers. Who’s driving them up? Professional stock pickers—the very people pointing the finger at everyone else.

Let’s look at Zoom Video Communications Inc., ZM -5.88% the teleconferencing company whose stock is up more than 660% so far this year. Given the popularity of its service and the stock’s scorching performance, you might expect Zoom is a darling among individual investors and traders.

Yet, on the Robinhood app used by millions of individual traders, Zoom was only the 49th widest-owned stock this week, according to the online broker’s tally of most-popular holdings.

In fact, of the 25 stocks with market values above $10 billion that have the hottest returns so far this year, only two— Moderna Inc. and Peloton Interactive Inc. —are among the 25 most-popular stocks on Robinhood. They are up 278% and 362%, respectively, in 2020.

The biggest performance chasers? Big institutions, whose ownership of scalding-hot stocks has boomed this year, even as these shares become wildly expensive by traditional yardsticks.

Some of that is natural; as a company’s market value grows, it becomes eligible for ownership at funds that can’t hold small stocks. Then again, professional investors, just like many amateurs, can’t resist a hot stock.

5. A Corporate Sleuth Claims Squarepoint Capital Took Her Content. The Hedge Fund Is Threatening Action. What Actually Happened? – Richard Teitelbaum

The news was potentially lethal. It was an inkling that Elbaze, a researcher at quantitative hedge fund Squarepoint Capital, might have been seeking improper access to Footnoted.com, the financial website Leder had started 14 years before and had turned into a thriving news and research service.

Elbaze had asked Leder a year earlier for, first, a trial subscription, and then a flat rate for full historical access to reports.

She had refused. Experience had shown her that Footnoted data is fiendishly difficult for quants to format. Firms like Two Sigma Investments, Point72 Asset Management’s Cubist Systematic Strategies, and AQR Capital Management had queried her about subscribing. Leder had even held informal talks with two funds to buy Footnoted outright so they could do the job themselves.

Reluctantly, however, just weeks before the email, she had agreed to provide London-based Squarepoint a trial. Then Elbaze seemed to have ramped up his activity.

“I was just, ‘Holy shit, what’s going on here?’” Leder recalls asking herself at the time. She emailed her developer. “He seems to have downloaded my entire database,” she wrote. “If he did do this, it’s a big BIG problem.” 

In fact, Leder estimated that Elbaze had viewed more than 17,000 pages — some of which even paid subscribers couldn’t get a hold of. A forensic investigation commissioned by Leder backed up her assessment.

6. Failing to Plan: How Ayn Rand Destroyed Sears – Michal Rozworski and Leigh Phillips

Lampert, libertarian and fan of the laissez-faire egotism of Russian American novelist Ayn Rand, had made his way from working in warehouses as a teenager, via a spell with Goldman Sachs, to managing a $15 billion hedge fund by the age of 41. The wunderkind was hailed as the Steve Jobs of the investment world. In 2003, the fund he managed, ESL Investments, took over the bankrupt discount retail chain Kmart (launched the same year as Walmart). A year later, he parlayed this into a $12 billion buyout of a stagnating (but by no means troubled) Sears.

At first, the familiar strategy of merciless, life-destroying post-acquisition cost cutting and layoffs did manage to turn around the fortunes of the merged Kmart-Sears, now operating as Sears Holdings. But Lampert’s big wheeze went well beyond the usual corporate raider tales of asset stripping, consolidation and chopping-block use of operations as a vehicle to generate cash for investments elsewhere. Lampert intended to use Sears as a grand free market experiment to show that the invisible hand would outperform the central planning typical of any firm.

He radically restructured operations, splitting the company into thirty, and later forty, different units that were to compete against each other. Instead of cooperating, as in a normal firm, divisions such as apparel, tools, appliances, human resources, IT and branding were now in essence to operate as autonomous businesses, each with their own president, board of directors, chief marketing officer and statement of profit or loss. An eye-popping 2013 series of interviews by Bloomberg Businessweek investigative journalist Mina Kimes with some forty former executives described Lampert’s Randian calculus: “If the company’s leaders were told to act selfishly, he argued, they would run their divisions in a rational manner, boosting overall performance.”…

…And so if the apparel division wanted to use the services of IT or human resources, they had to sign contracts with them, or alternately to use outside contractors if it would improve the financial performance of the unit—regardless of whether it would improve the performance of the company as a whole. Kimes tells the story of how Sears’s widely trusted appliance brand, Kenmore, was divided between the appliance division and the branding division. The former had to pay fees to the latter for any transaction. But selling non-Sears-branded appliances was more profitable to the appliances division, so they began to offer more prominent in-store placement to rivals of Kenmore products, undermining overall profitability. Its in-house tool brand, Craftsman—so ubiquitous an American trademark that it plays a pivotal role in a Neal Stephenson science fiction bestseller, Seveneves, 5,000 years in the future—refused to pay extra royalties to the in-house battery brand DieHard, so they went with an external provider, again indifferent to what this meant for the company’s bottom line as a whole.

Executives would attach screen protectors to their laptops at meetings to prevent their colleagues from finding out what they were up to. Units would scrap over floor and shelf space for their products. Screaming matches between the chief marketing officers of the different divisions were common at meetings intended to agree on the content of the crucial weekly circular advertising specials. They would fight over key positioning, aiming to optimize their own unit’s profits, even at another unit’s expense, sometimes with grimly hilarious result. Kimes describes screwdrivers being advertised next to lingerie, and how the sporting goods division succeeded in getting the Doodle Bug mini-bike for young boys placed on the cover of the Mothers’ Day edition of the circular. As for different divisions swallowing lower profits, or losses, on discounted goods in order to attract customers for other items, forget about it. One executive quoted in the Bloomberg investigation described the situation as “dysfunctionality at the highest level.”

7. Shonda Rhimes Is Ready to “Own Her S***”: The Game-Changing Showrunner on Leaving ABC, “Culture Shock” at Netflix and Overcoming Her Fears – Lacey Rose

Shonda Rhimes was tired of the battles. She was producing some 70 hours of annual television in 256 territories; she was making tens of millions of dollars for herself and more than $2 billion for Disney, and still there were battles with ABC. They’d push, she’d push back. Over budget. Over content. Over an ad she and the stars of her series — Grey’s Anatomy, Scandal and How to Get Away With Murder — made for then-presidential nominee Hillary Clinton.

But by early 2017, her reps were back in discussions with the company about a new multiyear deal. They’d already made a hefty ask of her longtime home and were waiting as the TV group’s then leadership prolonged the process, with one briefly tenured ABC executive determined to drive down the price tag on their most valuable creator. Meanwhile, Rhimes was growing creatively restless. “I felt like I was dying,” she says now of the unforgiving pace and constraints of network TV. “Like I’d been pushing the same ball up the same hill in the exact same way for a really long time.”

She knew her breaking point would come, but what it would be she never could have predicted. As part of her ABC relationship, Rhimes had been given an all-inclusive pass to Disneyland — and without a partner, she’d negotiated a second for her nanny. But on this day, she needed one for her sister, too, as she’d be taking Rhimes’ teenage daughter while the nanny chaperoned her younger two. If the passes had been interchangeable, Rhimes would have been happy to give up hers — when would she have time to go to Disneyland anyway?

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have a vested interest in Netflix and Zoom Video Communications. Holdings are subject to change at any time.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general.

Here are the articles for the week ending 25 October 2020:

1. Early Work – Paul Graham

Making new things is itself a new thing for us as a species. It has always happened, but till the last few centuries it happened so slowly as to be invisible to individual humans. And since we didn’t need customs for dealing with new ideas, we didn’t develop any.

We just don’t have enough experience with early versions of ambitious projects to know how to respond to them. We judge them as we would judge more finished work, or less ambitious projects. We don’t realize they’re a special case.

Or at least, most of us don’t. One reason I’m confident we can do better is that it’s already starting to happen. There are already a few places that are living in the future in this respect. Silicon Valley is one of them: an unknown person working on a strange-sounding idea won’t automatically be dismissed the way they would back home. In Silicon Valley, people have learned how dangerous that is.

The right way to deal with new ideas is to treat them as a challenge to your imagination — not just to have lower standards, but to switch polarity entirely, from listing the reasons an idea won’t work to trying to think of ways it could. That’s what I do when I meet people with new ideas. I’ve become quite good at it, but I’ve had a lot of practice. Being a partner at Y Combinator means being practically immersed in strange-sounding ideas proposed by unknown people. Every six months you get thousands of new ones thrown at you and have to sort through them, knowing that in a world with a power-law distribution of outcomes, it will be painfully obvious if you miss the needle in this haystack. Optimism becomes urgent.

But I’m hopeful that, with time, this kind of optimism can become widespread enough that it becomes a social custom, not just a trick used by a few specialists. It is after all an extremely lucrative trick, and those tend to spread quickly.

2. String of Firms That Imploded Have Something in Common: Ernst & Young Audited Them – Patricia Kowsmann, Mark Maurer, and Jing Yang

While it wasn’t possible to pinpoint why EY has had so many recent audit clients with financial scandals, certain elements of EY’s business strategy might help explain the cluster of blowups.

EY had ties with executives and board members at some of its troubled audit clients. In some cases, former EY partners sat on the companies’ boards, including on their audit committees.

EY charges lower fees for audits, which are labor intensive and time consuming, than other Big Four firms in the U.S. and Europe on average, an analysis of data from research firm Audit Analytics shows.

EY also focuses more than other firms on auditing young, fast-growing technology companies. All of the recent troubled clients portrayed themselves as tech-driven industry disrupters. EY helped some prepare for IPOs.

3. Models, Good and Bad – Marcelo P. Lima

Andy Jassy, CEO of Amazon Web Services, gave an interview recently in which he noted that in the early days, Amazon would use a net present value (NPV) analysis for deciding which internal projects they should invest in. This is similar to the discounted cash flow (DCF) models we use internally at Heller House to evaluate investment opportunities and conceptually similar to the internal rate of return (IRR) calculation Adam Fisher made in his Wix memo: the goal is to figure out what types of returns one can earn from a dollar invested in a given opportunity.

When I’m asked about how we value the companies in which we invest—some of which don’t yet produce accounting profits—my answer is always the same: we use DCFs for everything. I know that my models are wrong because I cannot forecast a company’s revenue growth, profits, and margins ten years out. But it’s useful to have guardrails to Fermi-ize our assumptions: do they make sense? Is the outcome of the exercise reasonable based on what I believe is the market size of this opportunity? Is it within a realm of possible futures?

What Jassy and Bezos realized eventually, however, is that some of the most exciting projects they dreamt up weren’t getting funded. It was hard—if not impossible—to assign an NPV to them (in this regard, Adam Fisher did a very good job: it was hard to see the future for Wix, but he took a very good stab at it!).

Amazon ditched the NPV approach and moved to a decision-making process involving five questions:

• If we build it and it’s successful, can it be really big and move the needle?
• Is it being well-served today
• Do we have some kind of differentiated approach to it?
• Do we have some competence in the area, and if not, can we acquire it quickly?
• If we like the answers to the four questions above, can we put a group of single-threaded, focused people on this initiative?

4. 50 Cognitive Biases in the Modern World – Marcus Lu

Fundamental Attribution Error – We judge others on their personality or fundamental character, but we judge ourselves on the situation. [Eg:] Sally is late to class; she’s lazy. You’re late to class; it was a bad morning.

Dunning-Kruger Effect – The less you know, the more confident you are. The more you know, the less confident you are. [Eg:] Francis confidently assures the group that there’s no kelp in ice cream. They do not work in the dairy industry.

Declinism – We tend to romanticize the past and view the future negatively, believing that societies/institutions are by and large in decline. [Eg:] “In my day, kids had more respect!”

Framing Effect – We often draw different conclusions from the same information depending on how it’s presented. [Eg:] Alice hears that her favourite candidate is “killing it” with a 45% approval rating. Sally hears that the candidate is “disappointing the country” with a 45% rating. They have wildly different interpretations of the same statistic.

5. Client Case Study: When You Give Up Being A DIY Investor – Kyith Ng

Adam and his wife, Sabrina, have spent the past 13 years of their lives in successful individual careers as a Technology Engineer in an American MNC and as an Account Manager, respectively. Both realize that their money has built up over the years and do not wish to take the traditional route of wealth building that their parents took. However, being careful with their money, they tried to sift through the vast amount of information to find what is the right way to invest.

When tasked to invest his family’s wealth, Adam believed that a certain criterion was important to building wealth in a fundamentally sound manner. Eventually, they identified that a sound way to build wealth would be to channel their money from work and what they have into Exchange-Traded Funds (ETFs) that track certain regional indexes. Through his research, he understands the concept of having exposure to a portfolio of equities around the world. He also understands the importance of keeping their transactional costs low because costs would compound over time. That is how they started venturing out of safe fixed deposits and lower risk instruments and into higher risk and potentially higher return financial assets.

If you were to ask us to name a fundamentally sound way to invest in a do-it-yourself manner, we would tell you what Sabrina and Adam did was sound. We could even give you the blueprint on how to do it here:

• Identify a brokerage or fund platform that has low transaction charges or low platform fees
• Put the lump-sum you wish to invest, into a low-cost, broadly diversified unit trust or exchange traded fund. You can create a low-cost, broadly diversified portfolio with 1 to 4 funds depending on your preference and sophistication
• Contribute a portion of your cash flow from work into the fund
• On an annual or half-yearly basis, do a rebalancing if you hold more than 1 fund
• In terms of investment setup, that is it
• You should continue to get educated in this way of investing- focusing on a continuous education on market returns, on volatility and how the markets performed at various pivotal junctures
• With such an approach, you can then live a good life, because the investments are rather passive in nature. By not taking a too active approach to wealth building, this frees up your mind to do your best work in your career. The better you do in your career, the greater excess cash flows you will get from work to be channeled back into your wealth portfolio

Given Adam and Sabrina’s initial investible wealth of $600,000, a 30% savings rate which allows them to put away an initial amount of $100,000 a year, a higher than average salary growth of 7% a year, and a projected portfolio compounded return of 5% a year, Sabrina and Adam could grow their wealth to $9,674,623 in 18 years’ time when they are 50 years old.

Adam and Sabrina would have come across materials like the above in their research and they would have implemented something similar.

However, eventually a couple like Adam and Sabrina decided to approach us. Here are some of the challenges that they faced.

6. How Airbnb Pulled Back From the Brink – Preetika Rana and Maureen Farrell

Mr. Chesky quickly switched Airbnb’s strategy. Big cities visited by tourists had been Airbnb’s strength, but it would now focus on local stays. By June, the company had redesigned its website and app so its algorithm would show prospective travelers everything from cabins to lavish beach houses near where they lived.

On July 8, guests booked stays at the rate they were just before the pandemic brought travel and tourism to a halt. In August, more than half of bookings made were for stays within 300 miles of the guest’s location, according to the company.

It was a lucky break, and Airbnb was in position to capitalize on it. The CEO made more changes, including cutting marketing, putting many noncore projects on hold and laying off a quarter of the staff.

“I did not know that I would make 10 years’ worth of decisions in 10 weeks,” Mr. Chesky said in an interview.

The upswing has put the home-sharing giant on a path to go public and report a third-quarter profit this year, according to investors, something that seemed all but impossible months ago.

7. Accountable to Darwin vs. Accountable to Newton – Morgan Housel

Growing a population has rarely been a problem in human history. Virtually every nation could count on a consistent flow of births exceeding deaths. Population growth fueled economies and seemed like a law of nature. But Newton isn’t involved. Darwin runs the show. Things changed, living conditions improved, competition favored something new, and over the last 30 years births have fallen so much that most big nations will have fewer workers in 2050 than in 2020.

For decades, the dividend yield on a company’s stock was usually higher than the interest rate on its bonds. It made sense to people: stocks were riskier than bonds, and you must be paid extra in return. It seemed like an iron law of finance, blessed by Newton. But things changed. Around the 1950s, companies began withholding more profits to finance growth in lieu of dividends. Dividend yields fell below bond yields. Some people thought it was a sign of madness that must revert. But it didn’t. Today we think it’s normal because bonds have no growth upside, so you should be paid more to make the investment worthwhile. That now seems like a Newtonian law of finance. But in both cases investors are just being accountable to Darwin.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have a vested interest in Amazon and Wix. Holdings are subject to change at any time.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general.

Here are the articles for the week ending 18 October 2020:

1. China’s National Digital Currency DCEP / CBDC Overview – Michael @ Box Mining

China’s national digital currency DCEP (Digital Currency Electronic Payment, DC/EP) will be built with Blockchain and Cryptographic technology. This revolutionary cryptocurrency could become the world’s first Central Bank Digital Currency (CBDC) as it is issued by state bank People’s Bank of China (PBoC). The goal and objectives of the currency are to increase the circulation of the RMB and international reach – with eventual hopes that the RMB will a global currency like the US Dollar. China has recently established an initiative to push forward Blockchain adoption, with the goal of beating competitors like Facebook Libra – a currency that Facebook CEO Mark Zuckerberg claims will become the next big FinTech innovation. China has made explicit that Facebook Libra poses a threat to the sovereignty of China, insisting that digital currencies should only be issued by governments and central banks. DCEP is not listed on cryptocurrency exchanges and will not be for speculation of value.

2. Meet Amazon.com’s first employee: Shel Kaphan – John Cook

“I mean, nobody at the beginning had any clue how big Amazon could become,” recalls Kaphan, now 58. “Nobody. Certainly not Jeff. I have spreadsheets of his projections from when he was trying to hire me. And I don’t remember the specific numbers, but it was a lot, lot smaller than it turned out to be.”…

…So, you are kind of the forgotten founder? Most people think of Jeff Bezos as the creator of the company. “In fact, to be completely technically true about it, he is the founder. But I was talking to him about joining him on the venture before the company was incorporated. He basically was just arriving from the East Coast and setting up his house when I moved up from California. All that existed of Amazon was on paper at that point. Jeff was working on it full-time already, and his wife, Mackenzie, was writing checks every once in a while. But that was it. I didn’t get founder’s stock. It didn’t seem worth the argument at the time, although I kind of felt like, well, you know, I mean I was there at the beginning. And it was all going to work out the same way, one way or the other, regardless of the technicalities. And it just didn’t seem like something that I wanted to make a big deal about at the time.”…

…What was that era like just before you joined Amazon in 1994? “The previous job I had was with Kaleida Labs, which was an Apple-IBM joint venture that called itself a startup but really wasn’t. I left that in the Spring of 1994.  I lived in Santa Cruz, California, and that was at the time when there was a huge amount of ferment in the air with Netscape hiring up all of the hot-shot programmers around…. There wasn’t really much else going on at that time, but there was quite a bit of buzz about the Web, so my friend and I were thinking that we should do something about this, it is a big opportunity. I had been working in computers since the mid-70s and had sort of seen the first wave of the PC revolution come, and I didn’t jump on that. At the time, I was more enamored of what we then thought of as bigger machines, the kind of machines that the universities had. I was interested in the type of software that could run on those. I watched as the first PC wave happened and got bigger and bigger and bigger, and at some point I realized: ‘Oh, I kind of missed getting on that wave.’ So, I always had in the back of mind, if I see something that I want to be participate in coming, next time, I am going to act on it. A lot of time went by before I had that feeling again.’…

3. In April 2014, GDP in Nigeria Jumped 89%. How the Hell Did That Happen? – Morten Jerven

Yemi Kale, the director of the Nigerian National Bureau of Statistics took the podium, and announced that the Bureau had revised their GDP figures. The base year for the national accounts was updated, and the new figures showed that Nigerian GDP was 89 percent higher than previously estimated. Given the relative size of the Nigerian economy for the region, this was quite a revision. That afternoon, Sub Saharan African GDP increased almost 30 percent. Economic activity equivalent to 58 times the size of the Malawian economy was added to the Nigerian economy…

…The advantage of coming at the problem of economic statistics as an Economic Historian is that one is keenly aware that the statistics are not given, they are made. That means that statistics are social and political products. In mainstream economic debates the biggest part of the discussion is focused on what drives inflation, and why employment is up or down. Meanwhile less attention is given to the very basic problem that while we know what employment and inflation are in theory, it is technically impossible to measure it cleanly.

The notion that we scientists can let the data or the evidence speak for itself is misleading. Skilled journalists, historians and lawyers interrogate witnesses and sources to figure who made the observation, and the biases behind what they observed. And in our own way,, economists and finance writers have to interrogate these soft numbers that we too often treat as hard facts.

4. Would Keynes Have Been Fired as a Money Manager Today? – Ben Carlson

Now back to the question of whether or not Keynes would have been fired by investors today if he showed similar performance, volatility and drawdown numbers. Unfortunately, I agree with the responses from Twitter in this instance, which is a shame. This is a legendary investment record during one of the most difficult periods in history to be an investor.

But short-termism and status quo are so widely practiced in the institutionalized world of investing that it’s highly unlikely that investors would have the requisite patience to stick with someone like Keynes today. Investors would certainly chase performance after the string of good years, but very few would be able to earn the overall outperformance figures.

For most investors the goal shouldn’t necessarily be to beat the market, but to not beat themselves. And then there’s the question of actually discovering the next John Maynard Keynes. But putting all of that aside for the moment — there is an unbelievable amount of time, effort and money spent on the singular goal of beating the market. It’s the entire reason many fund managers exist. Yet the conundrum is that there are very few investors out there with the correct level of patience or discipline to see through the type of strategy that’s required to actually beat the market by a wide margin.

5. 11 Lessons From 11 Years of Investing in the Stock Market – Sudhan P

In August 2011, I saw the first major stock market decline since I started investing.

The fall was due to uncertainty in the US over its debt ceiling and the country’s first-ever credit downgrade by S&P. There was also a debt crisis in Europe. 

Out of fear that some of the paper gains in my portfolio will turn to losses, I decided to sell off some of my stocks. 

It was an emotionally-draining mistake as it made me check on the stock market and stock prices every day, afraid that I would miss on the rebound when it happens. 

What actually happened was that the stock market started rallying on optimism that the debt crisis will be solved eventually. And I was forced to buy back the shares at a higher price.

I learnt from this episode not to time the market as it’s a really tough job. No one can know for sure when to exit the market before a crash and when precisely to buy just before a market upturn.

Various studies have also shown that being out of the market and missing the best market days can significantly reduce long-term returns. So, it’s far better to stay the course.

6. Twitter thread on every US president’s comments on money – Anand Chokkavelu

6. John Quincy Adams

“My wants are many, and, if told, would muster many a score; and were each wish a mint of gold, I still would want for more.”

12. Zachary Taylor

“Economy I consider a virtue and should be practiced by all; there is certainly no way in which money can be laid out than in the education of children.”

13. Millard Fillmore

“It is a national disgrace that our Presidents, after having occupied the highest position in the country, should be cast adrift, and, perhaps, be compelled to keep a corner grocery for subsistence.”

20. James Garfield

“He who controls the money supply of a nation controls the nation.”

23. Benjamin Harrison

“I pity that man who wants a coat so cheap that the man or woman who produces the cloth shall starve in the process.”

26. Theodore Roosevelt

“It is a bad thing for a nation to raise and to admire a false standard of success; and there can be no falser standard than that set by the deification of material well-being in and for itself.”

32. Franklin D. Roosevelt

“It is an unfortunate human failing that a full pocketbook often groans more loudly than an empty stomach.”

33. Harry S. Truman

“It’s a recession when your neighbor loses his job; it’s a depression when you lose yours.”

35. John F. Kennedy

See also inflation.

“There are risks and costs to action. But they are far less than the long-range risks of comfortable inaction.”

44. Barack Obama

“Cutting the deficit by gutting our investments in innovation and education is like lightening an overloaded airplane by removing its engine. It may make you feel like you’re flying high at first, but it won’t take long before you feel the impact.”

45. Donald Trump

“Money was never a big motivation for me, except as a way to keep score. The real excitement is playing the game.”

Bonus: Joe Biden

“My father used to have an expression. He’d say, ‘Joey, a job is about a lot more than a paycheck. It’s about your dignity. It’s about respect. It’s about your place in your community.'”

7. The 7 Things That Matter For Markets Going Forward – Ben Carlson

Fiscal stimulus. The debt-to-GDP for the United States is a sight to behold:

We were able to perform an experiment in government spending during a crisis in real-time and it has been a resounding success. Retail sales quickly rebounded. The unemployment rate fell. Personal savings rates went through the roof. People were able to repair their personal balance sheets.

And a depression was stopped in its tracks.

I have more questions than answers:

• Will we see this type of government spending during future recessions?
• How would that impact the business cycle?
• Will this change how business owners and investors view risk?
• Will investors and markets respond differently to future recessions?
• Was this year the first step towards a universal basic income?

Politicians have been promising their policies would lead to higher GDP growth for years. None of them have worked. Now they’ve finally found the lever to pull that can conjure growth out of thin air — government spending.

How could any sane politician not use that lever every chance they get going forward?…

…The Fed. In every alien horror movie there always comes a point when the people being hunted by said alien come to realize it’s somehow getting stronger and/or smarter.

The main character of the movie, who typically covered in sweat, mud or blood will say, “It’s evolving.”

The Fed is the alien in this example.

In 2008 the entire financial system was closer to the precipice of collapse than most people realize. Looking back on it now I’m guessing Fed officials regret not going bigger or moving faster.

Jerome Powell and company didn’t want to have that same regret this time around. The Fed met the pandemic with bazookas blazing. They poured trillions of dollars into the system to keep markets functioning, effectively taking the Great Depression scenario off the table.

Markets rebounded across the board in record time.

It’s going to be difficult for the Fed to retract its alien tentacles from the markets. And if investors come to expect the Fed to have their back during every downturn there cold be some misplaced expectations and risk-taking because of it.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have a vested interest in Amazon. Holdings are subject to change at any time.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general.

Here are the articles for the week ending 18 October 2020:

1. Increasing Returns and the New World of Business – Brian Arthur

Let’s go back to beginnings—to the diminishing-returns view of Alfred Marshall and his contemporaries. Marshall’s world of the 1880s and 1890s was one of bulk production: of metal ores, aniline dyes, pig iron, coal, lumber, heavy chemicals, soybeans, coffee—commodities heavy on resources, light on know-how.

In that world it was reasonable to suppose, for example, that if a coffee plantation expanded production it would ultimately be driven to use land less suitable for coffee. In other words, it would run into diminishing returns. So if coffee plantations competed, each one would expand until it ran into limitations in the form of rising costs or diminishing profits. The market would be shared by many plantations, and a market price would be established at a predictable level—depending on tastes for coffee and the availability of suitable farmland. Planters would produce coffee so long as doing so was profitable, but because the price would be squeezed down to the average cost of production, no one would be able to make a killing. Marshall said such a market was in perfect competition, and the economic world he envisaged fitted beautifully with the Victorian values of his time. It was at equilibrium and therefore orderly, predictable and therefore amenable to scientific analysis, stable and therefore safe, slow to change and therefore continuous. Not too rushed, not too profitable. In a word, mannerly. In a word, genteel…

…Let’s look at the market for operating systems for personal computers in the early 1980s when CP/M, DOS, and Apple’s Macintosh systems were competing. Operating systems show increasing returns: if one system gets ahead, it attracts further software developers and hardware manufacturers to adopt it, which helps it get further ahead.

CP/M was first in the market and by 1979 was well established. The Mac arrived later, but it was wonderfully easy to use. DOS was born when Microsoft locked up a deal in 1980 to supply an operating system for the IBM PC. For a year or two, it was by no means clear which system would prevail. The new IBM PC—DOS’s platform—was a kludge. But the growing base of DOS/IBM users encouraged software developers such as Lotus to write for DOS. DOS’s prevalence—and the IBM PC’s—bred further prevalence, and eventually the DOS/IBM combination came to dominate a considerable portion of the market. That history is now well known. But notice several things: It was not predictable in advance (before the IBM deal) which system would come to dominate. Once DOS/IBM got ahead, it locked in the market because it did not pay for users to switch. The dominant system was not the best: DOS was derided by computer professionals. And once DOS locked in the market, its sponsor, Microsoft, was able to spread its costs over a large base of users. The company enjoyed killer margins.

These properties, then, have become the hallmarks of increasing returns: market instability (the market tilts to favor a product that gets ahead), multiple potential outcomes (under different events in history, different operating systems could have won), unpredictability, the ability to lock in a market, the possible predominance of an inferior product, and fat profits for the winner. They surprised me when I first perceived them in the late 1970s. They were also repulsive to economists brought up on the order, predictability, and optimality of Marshall’s world.

2. The end of the American internet – Ben Evans

First, as I discussed in some detail here, technology is becoming a regulated industry, if only because important and specialised industries are always regulated. That regulation will not only be determined by the USA. Other countries have their own laws, cultures and constitutions, and so we are entering a period of increasing regulatory expansion, overlap and competition from different jurisdictions, from the EU and UK to Singapore or Australia and, of course, China.

Second, you can no longer assume that the important companies and products themselves are American. 

Both of these are captured in Tiktok. This is the first time that Americans have really had to deal with their teenagers using a form of mass media that isn’t created in their country by people who mostly share their values. It’s from somewhere else. That’s compounded by the fact that the ‘somewhere else’ is China, with all of the political and geopolitical issues that come with that, but I’d suggest that the core, structural issue is that it’s foreign. This is, of course, a problem that the rest of the world has been wrestling with since 1994, but it comes as something of a shock in Washington DC. There’s an old joke that war is how God teaches Americans geography – now it’s regulation.

3. The Merits of Bottoms Up Investing – Venture Desktop

Perhaps no VC firm embodies structural advantage — from the alignment of its organizational incentives to the brand edge it has built through a consistent approach applied over multiple decades — better than Benchmark.

It is also likely that no other firm is as allergic to the notion of a top down thesis.

You don’t have to wait long in any interview featuring one of Benchmark’s General Partners — and there have been a number of great ones lately — to gain insight into what seems to be the firm’s organizing principle:

“Our job is not to see the future, it’s to see the present very clearly.”

This alignment shines through clearly across the partnership — whether it is Sarah Tavel talking about her investment in Chainalysis, Chetan Puttagunta explaining the logic behind his investment in Sketch, or Eric Vishria responding to a “request for startup” in the Open Source space:

“We’re not top down like that. It is so organic. When an entrepreneur pitches and tells a story that provides an insight that makes you think about the world differently, that’s when I get really, really excited. And that’s why it is really hard to be top-down and why we don’t tend to be particularly thesis-driven..”

In a 2016 interview, Peter Fenton, who joined Benchmark in 2006 from Accel, spoke about the differences between the two iconic firms:

“At Accel I was taught, ‘we need to have a prepared mind’ at really thinking about a segment, a category, and its coherence. So I came to Benchmark and I didn’t know if I agreed with that. And my partner said, “don’t you do that shit here.” Throw that crystal ball out, you can’t predict anything. What you can do is recognize when lightning strikes.”

Fenton also talked about the bottoms up nature of his investments in this Quora Session. Twitter, Yelp, Elastic — all driven by investing in purpose and “tactile reality” than trends.

“I don’t invest in trends. I know it sounds a bit too-cool-for-school but what I’ve found is that you get far more insight from purpose than from trends. So, for example, in the case of Docker I invested in Dotcloud (which became Docker), in the purpose of this radical, intense leader, Solomon, who wanted to give the world’s programmers superpowers, tools of mass innovation. In the case of Yelp, it was Jeremy’s purpose to allow for the truth of great (and bad) local businesses to be visible to all. Or when I met Jack in 2007, he had this unstoppable purpose for Twitter to “bring you closer”. Sometimes that purpose is just this raw force, an energy, like it was in the case of Shay at Elastic in 2012. When I feel like the trend, the space, the concepts vs the tactile reality of a purpose forms the narrative of the investment I lose all interest.”

4. Who Is ‘Andy Bang’? A Ritz-Carlton Mystery Gets Its Day in Court – Jef Feeley and Mark Chediak

The story starts with Wu, an ex-car dealer whose third wife was the granddaughter of former paramount leader Deng Xiaoping. In 2004, Wu set up an insurance company for the growing Chinese middle class. As premiums poured in, he went on an $18-billion buying binge starting in 2014. He snapped up New York’s Waldorf Astoria hotel for nearly $2 billion and bought Dutch insurer Vivat. In 2016, he acquired Blackstone Group’s Strategic Hotels & Resorts unit for $6.5 billion. That company’s luxury lineup featured San Francisco’s Westin St. Francis, the Four Seasons Resort in Jackson Hole, Wyoming, and the Half Moon Bay. (He also began talks to buy 666 Fifth Avenue, the marquee tower owned by the family of President Donald Trump’s son-in-law, Jared Kushner.)

But in 2017, weeks before his arrest, Wu signed an agreement empowering the Delaware limited-liability shell companies to act on his behalf. Under Delaware law, owners of such companies aren’t listed in public records.

The pact, written in Mandarin and referred to in court papers as the “DRAA Blanket Agreement,” relies on the Delaware Rapid Arbitration Act, created in 2015 for speedy recognition and payment of arbitration awards.

The agreement “authorizes the recording of grant deeds transferring ownership of properties held by Anbang” including hotels, banks and bank branches. It gives Wu’s family and other signers of the contract claims to the hotels, including the Waldorf Astoria.

The 15-page contract also specifies that if Chinese regulators seize Anbang, the Delaware companies can sue it. And if the Chinese authorities learn about the existence of the pact, the signers contend their lives are in danger and arbitration panels can impose massive penalties to be paid to the LLCs.

The signers were, on one side, Wu and Chen Xiaolu, an ex-Chinese military officer and son of a former mayor of Shanghai, and on the other, one of the LLCs, the Amer Group, and Andy Bang. After being questioned by the authorities about Anbang two years ago, Chen died of a heart attack.

Zhao wrote in his brief that as part of the collateral backing up the DRAA, Anbang agreed to put up 16 hotels and four other properties valued at at least $9 billion, and pledged $1 billion in cash as a “performance bond.”

The Amer Group owns the U.S. trademark to “An Bang” and has had long-running litigation, both in the U.S. and China, over it with Anbang, although some here and there suspect Amer is working with Wu on the alleged scam. A lawyer for Wu, Chen Youxi, declined to comment on anything related to Anbang.

5. Stillfront: Understanding Gaming’s Dark Horse – Aaron Bush, Abhimanyu Kumar, and Joakim Achren

Stillfront Group is an emerging games business that both industry insiders and curious outsiders should prioritize understanding. Even though the company is making a larger name for itself — especially in 2020, which has turned into a breakout year — it remains, in our eyes, underrated and under-followed. It was (and maybe still is) a dark horse of the games industry. Tripling its market cap year-to-date certainly helps, but most don’t understand how Stillfront’s unique acquisition strategy, group operations culture, and capital allocation skill bring consistency and scalability to an otherwise lumpy, hits-driven industry. In other words, Stillfront’s success is the result of a well engineered strategy designed to predictably grow shareholder value in a highly unpredictable market.

6. Twitter thread on an analysis of Slack’s customers – Weng, @AznWeng

Stat #1: Among companies that use $WORK, 20% of their job openings are engineering. For Teams users, only 11% of their jobs are engineering. Companies with a focus on engineering choose Slack over Teams due to its many integrations with tools like Github/Jira/Pagerduty…

…Stat #3 (a fun one): The average Glassdoor rating for companies that use $WORK was 3.87. The average Glassdoor rating for all companies is 3.3. Causation doesn’t imply correlation, but it seems to suggest companies that allow remote work have higher job satisfaction overall.

Stat #4: $WORK is mentioned in twice the number of job openings as $MSFT Teams. While you wouldn’t think of Slack or Teams as “skills”, there are more roles in companies devoted to improving business workflows/processes by creating Slack bots and integrations.

7. A Closer Look at Ray Dalio’s 1937 Scenario – Ben Carlson

When Donald Trump was elected president, Ray Dalio, the founder of the hedge fund Bridgewater Associates, was optimistic about the new administration’s economic agenda. Since then, his notes have turned increasingly pessimistic. He recently said his firm is reducing risk over worries that the U.S. is becoming politically more divided. Dalio recently compared today’s environment to the situation in the late 1930s:

“It seems to me that we are now economically and socially divided and burdened in ways that are broadly analogous to 1937. During such times conflicts (both internal and external) increase, populism emerges, democracies are threatened, and wars can occur. I can’t say how bad this time around will get. I’m watching how conflict is being handled as a guide, and I’m not encouraged.”

Dalio has made the 1937 analogy before. Yet it’s impossible to quantitatively compare two different eras in these terms. We can, however, make an economic and stock-market comparison to those times to get a better sense of how things played out in the first recession following the Great Depression. There are a few similarities between that period and today. Interest rates were low for a long time in the 1930s. The 10-year Treasury yield began 1937 at 2.7 percent. It currently stands at around 2.2 percent. In both cases, the Federal Reserve was tightening monetary policy, as well. And both periods saw a huge stock market rally following a previous crash and deep recession.

But that’s really where the similarities end. Everything that happened in the 1930s was magnified compared with what we’re experiencing today. After falling in excess of 80 percent during the Great Depression, stocks finally found a bottom in the summer of 1932. The rebound was so pronounced that equities were up more than 90 percent in the months of July and August of 1932 alone. From the bottom in 1932 through early 1937, stocks had an enormous rally, gaining about 415 percent in less than five years. This was good enough for an annual gain of more than 40 percent a year.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general.

Here are the articles for the week ending 04 October 2020:

1. The Mike Speiser Incubation Playbook – Kwokchain

Unlike consumer, traditional enterprise markets lend themselves more naturally to deterministic and repeatable success. There’s a small handful of VCs who have clearly shown they can succeed repeatedly and whose approaches and playbooks are legible enough to imply it’s not a fluke. Speiser is one of them.

Speiser’s portfolio includes companies like Pure Storage and Snowflake Computing. It’s worth noting that Snowflake not only IPO’d and is now at a market cap of over $60B but Speiser and Sutter Hill Ventures owned more than 20% of the company leading up to the IPO. When Pure Storage went public, Sutter Hill held more than 25%. Speiser may have the highest percentage of portfolio companies that have become multi-billion dollar companies—and that trend looks to continue with his newer companies.

But impressive returns are not solely what matters for the industry. It’s tempting to evaluate firms by their returns, and from the LP perspective that may be the correct metric. But another, and more important way to judge VC firms is by the value they add above replacement to their portfolio companies. How much do they help their portfolio companies increase their likelihood and magnitude of success? Firms do this most notably by providing capital, but also by other methods like lending their brand or directly helping with operations.

For founders, this value added is what matters. The returns of a VC firm only matter to a startup insofar as they translate into improved brand, network, or access to capital for the startup. A firm’s financial performance is a reasonable signal that they may add real value and be worth partnering with, especially since some aspects like brand strength for recruiting, future financing, and customer development are a function of perceived firm success. But to prospective portfolio companies, a fund’s returns are important only as a means, not an end.

What makes Speiser intriguing is how distinct his approach is from other VCs. The tantalizing clues suggest that he has figured something out that nobody else has: the formula for creating successful companies from scratch.

2. Twitter thread on how John Foley founded digital fitness company Peloton – Joe Vennare

Peloton is a $20B company. But CEO John Foley had trouble raising money in the early days. For years, thousands of investors told him no. This is the story of how he persisted, 

disrupting the fitness industry in the process…

… 6/ Peloton is born. Foley’s vision:

– Bike w/a big screen
– Best-in-class instructors
– Leaderboard for motivation
– Convenience of at-home workouts

“I think you can digitize that experience, and build a hardware and software platform for consuming fitness content at home.”

7/ Friends & family. With his wife’s blessing, Foley recruited cofounders and raised Peloton’s seed round. A friends and family round, Foley raised $400K @ $2M post from 8 angels. The plan: combine an off-the-shelf tablet w/an exercise bike. If only it were that simple…

8/ Fun fact! Foley tried to partner w/SoulCycle & Flywheel. Soul passed. But $PTON had an agreement w/Flywheel. Flywheel bailed. The Peloton team was banned from Soul/Fly classes. Fast forward: Flywheel’s at-home bike failed. And Soul launched a Peloton lookalike.

9/ New plan! Peloton’s bike would be scratch-built. But that’s expensive. They needed more money. Foley was in his mid-40s. Had two kids. He hit the fundraising trail to keep his business afloat.

10/ NO! From 2011-14 Foley pitched 3,000 angels & 400 firms. Almost everyone said no. Eventually, he raised $10M from 100 angels. Tiger Global was the first institutional investor earning $1.4B at IPO.

11/ Kickstarter!? Far from a sure thing, Peloton launched a Kickstarter. It flopped. 200 people bought bikes. 100 were investors. And they raised $300K. The price? $1500. Everyone thought it was too expensive.

12/ The price is right! Post-Kickstarter, $PTON launched a website. The bike was priced at $1200. Now, the product looked cheap. They increased the price and sales increased!

13/ Momentum builds. Peloton landed Robin Arzon, an instructor who has come to define the brand. They began selling $2000 bikes at a mall kiosk in NJ. Filming classes in their office, they grew the workout library. It was working.

3. Brain-Computer Interfaces Are Coming. Will We Be Ready?– Marissa Norris

Three drones lift off, filling the air with their telltale buzz. They slowly sail upward as a fleet—evenly spaced and level—and then hover aloft.

On the ground, the pilot isn’t holding a remote control. In fact, he isn’t holding anything. He’s just sitting there calmly, controlling the drones with his mind.

This isn’t science fiction. This is a YouTube video from 2016.

In the clip, a mechanical engineering Ph.D. candidate at Arizona State University (ASU) sports an odd piece of headwear. It looks a bit like a swim cap, but with nearly 130 colorful sensors that detect the student’s brain waves. These devices let him move the drones simply by thinking directional commands: up, down, left, right.

Today, this type of brain-computer interface (BCI) technology is still being developed in labs like the one at ASU in 2016, which has since moved to the University of Delaware. In the future, all kinds of BCI tech could be sold to consumers or deployed on the battlefield.

The fleet of mind-controlled drones is just one real-life example of BCI explored in an initial assessment of BCI by RAND Corporation researchers. They examined current and future developments in the world of BCI and evaluated the practical applications and potential risks of various technologies. Their study is part of RAND’s Security 2040 initiative, which looks over the horizon and explores new technologies and trends that are shaping the future of global security.

4. Negativity Is Not an Investment Strategy – Ben Carlson

Any position you take in regards to your portfolio involves risk. Investing in stocks is risky. Bonds are also risky. Crypto, private equity, hedge funds, real estate and every other financial asset involve risk-taking to make (or lose) money.

But guess what else involves risk — doing nothing!

In fact, doing nothing with your money is the biggest risk of all.

There are no guarantees when investing your money in risk assets. Maybe you’ll lose a boatload of money investing in risk assets. In fact, you almost certainly will at times. There is no way to completely hedge risk out of the equation when trying to grow your capital.

There is a way to guarantee awful outcomes with your savings — complain about the markets and don’t do anything with your money.

If you never take any risk, you will never have enough saved for retirement. Being pessimistic and sitting on the sidelines at all times guarantees you will lose money to inflation over the long-term.

5. Is It Insane to Start a Business During Coronavirus? Millions of Americans Don’t Think So –  Gwynn Guilford and Charity L. Scott

Americans are starting new businesses at the fastest rate in more than a decade, according to government data, seizing on pent-up demand and new opportunities after the pandemic shut down and reshaped the economy.

Applications for the employer identification numbers that entrepreneurs need to start a business have passed 3.2 million so far this year, compared with 2.7 million at the same point in 2019, according to the U.S. Census Bureau. That group includes gig-economy workers and other independent contractors who may have struck out on their own after being laid off.

Even excluding those applicants, new filings among a subset of business owners who tend to employ other workers reached 1.1 million through mid-September, a 12% increase over the same period last year and the most since 2007, the data show.

“This pandemic is actually inducing a surge in employer business startups that takes us back to the days before the decline in the Great Recession,” said John Haltiwanger, an economist at the University of Maryland who studies the data.

6. Satya Nadella Rewrites Microsoft’s Code – Harry McCracken

When I ask Nadella for his own account of working with his predecessors, he’s blunt. “Bill’s not the kind of guy who walks into your office and says, ‘Hey, great job,’ ” he tells me. “It’s like, ‘Let me start by telling you the 20 things that are wrong with you today.’ ” Ballmer’s technique, Nadella adds, is similar. He chuckles at the images he’s conjured and emphasizes that he finds such directness “refreshing.” (Upon becoming CEO, Nadella even asked Gates, who remains a technology adviser to the company, to increase the hours he devotes to giving feedback to product teams.)

Nadella’s approach is gentler. He believes human beings are wired to have empathy, and that’s essential not only for creating harmony at work but also for making products that will resonate. “You have to be able to say, ‘Where is this person coming from?’” he says. “‘What makes them tick? Why are they excited or frustrated by something that is happening, whether it’s about computing or beyond computing?’”

His philosophy stems from one of the principal events of his personal life. In 1996, his first child, Zain, was born with severe cerebral palsy, permanently altering what had been a pretty carefree lifestyle for him and his wife, Anu. For two or three years, Nadella felt sorry for himself. And then—nudged along by Anu, who had given up her career as an architect to care for Zain—his perspective changed. “If anything,” he remembers thinking, “I should be doing everything to put myself in [Zain’s] shoes, given the privilege I have to be able to help him.” Nadella says that this empathy—though he cautions that the word is sometimes overused—”is a massive part of who I am today. . . . I distinctly remember who I was as a person before and after,” he says. “I won’t say I was narrow or selfish or anything, but there was something that was missing.”

7. Common Causes of Very Bad Decisions – Morgan Housel

Ignoring or underestimating the full range of potential consequences, especially tail events that seem rare but have catastrophic effects. The most comfortable way to think about risk is to imagine a range of potential consequences that don’t seem like a big deal. Then you feel responsible, like you’re paying attention to risk, but in a way that lets you remain 100% confident and optimistic. The problem with low-probability tail risks is that they’re so rare you can get away with ignoring them 99% of the time. The other 1% of the time they change your life.

Lots of little errors compound into something huge. And the power compounding is never intuitive. So it’s hard to see how being a little bit of an occasional jerk grows into a completely poisoned work culture. Or how a handful of small lapses, none of which seem bad on their own, ruins your reputation. The Great Depression happened because a bunch of things that weren’t surprising (a stock crash, a banking panic, a bad farm year) occurred at the same time and fed on each other until they grew into a catastrophe. It’s easy to ignore small mistakes, and even easier to miss how they morph into huge ones. So huge ones are what we get.

An innocent denial of your own flaws, caused by the ability to justify your mistakes in your own head in a way you can’t do for others. When other people’s flaws are easier to spot than your own it’s easy to assume you have no/few flaws, which makes the ones you have more likely to cause problems.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have a vested interest in the shares of Microsoft. Holdings are subject to change at any time.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general.

Here are the articles for the week ending 27 September 2020:

1. Q&A With Li Lu – Longriver

We only offer our services to university endowments funds, charity funds and family offices focused on charity. We are very picky with our clients and do not manage money simply to make the rich richer.  This is how we feel like we are contributing to society. If you arrange your life in this way, you will be more at ease and less anxious. You will be able to walk through life unhurried and at your own pace.

A lot of investors have told me that they want to invest like I do but their clients won’t let them because they’re always thinking about how much money they can make in the next hour or so. I personally think that you should not take these kinds of people as your clients. They then say that if they didn’t have these clients, they wouldn’t have any clients. And then how would they go about finding clients like mine?  I didn’t have any investors when I started, only the money I had borrowed. My net assets at the time were negative.

Munger likes to ask, how do you go about finding a good wife? The first step is to deserve a good wife, because a good wife is no fool. Clients are the same. When our fund started, it was my own money for many years plus some from a few close friends who believed in me. Over time, as you accumulate more experience and build your track record, suitable people will naturally find you. And amongst them, you can choose the most suitable. You can do it this way very gradually with no need to rush – and with no need to compare yourself to others. The most important thing is therefore to be able to let things come as they are. You must have faith in the power of compounding and the power of gradual progress. Compound interest is a gradual force: 7% compounding over 200 years will give you a return of 750,000 times, right? That’s not too bad at all. But this is the power of compounding.

2. The Stock Market Is Less Disconnected From the “Real Economy” Than You Think – Nathan Tankus

There is one big area you can say that the stock market is disconnected from the economic outlook— size. By definition, it tends to be bigger companies which are on the stock market. So inevitably the stock market can’t capture the thousands of small businesses that are failing. Yet, even here, disaggregation of the S&P tells us a lot. Again, there is a wide and sharp dispersion right now, with average returns for large firms a lot higher than smaller firms. This wasn’t the case in February. More than half the companies in the index have less than $25 billion in market capitalization, and the average year-to-date return for all these companies (equally-weighted) is negative.

The clearest indication that the stock market is being driven by economic fundamentals is that growth and declines in sales so easily explain stock market returns. If stock market returns and the “real economy” were very disconnected, we’d expect the sales factor to be submerged in a sea of speculation. Instead, the chart below shows us another story. Once returns are broken down by sales growth, we see dramatic differences based on sales growth and decline. Returns are in fact highest for companies with the strongest year-over-year sales growth. Among those with sales growth greater than 20% are familiar companies like Amazon and Netflix, but also much smaller companies like Nvidia and Paypal. In other words, tech stock returns are being driven by tech sales.

3. Egregious Founder Shares. Free Money for Hedge Funds. A Cluster***k of Competing Interests. Welcome to the Great 2020 SPAC Boom – Michelle Celarier

“SPACs are a compensation scheme, like people used to say about hedge funds, but it’s even worse,” Ackman tells Institutional Investor. “In a hedge fund, you get 15 to 20 percent of the profit,” he says, in reference to the incentive fees hedge funds earn on the gains in their portfolio. “Here you get 20 percent of the company.”

For a small fee of $25,000, he explained in a recent letter to investors in his hedge fund, “a sponsor that raises a $400 million SPAC [the average size this year] will receive 20 percent of its common stock, initially worth $100 million, if they complete a deal, whether the newly merged company’s stock goes up or down when the transaction closes.”

Even if the stock falls 50 percent after the deal closes, “the sponsor’s common stock will be worth $50 million, a 2,000 times multiple of the $25,000 invested by the sponsor, a remarkable return for a failed deal,” he wrote.

Meanwhile, Ackman noted, the IPO investors will have lost half of their investment.

And there is another advantage: The 20 percent stake is also referred to as the “promote,” a nod to the work sponsors perform in landing a deal. However, that money is considered an investment, not a fee, which means sponsors can pay a lower capital-gains tax on the return if the stock is held longer than a year.

“To make matters worse,” Ackman added, “many sponsors receive additional fees for completing transactions, which can include tens of millions of dollars in advisory fees, often paid to captive ‘investment banks’ that are often 100 percent owned by the sponsors themselves.” Underwriting fees paid in a SPAC IPO are around 5.5 percent of the capital raised, he noted — higher than those of the average IPO.

4. A Few Rules – Morgan Housel

The person who tells the most compelling story wins. Not the best idea. Just the story that catches people’s attention and gets them to nod their heads.

Tell people what they want to hear and you can be wrong indefinitely without penalty.

The world is governed by probability, but people think in black and white, right or wrong – did it happen or did it not? – because it’s easier.

History is deep. Almost everything has been done before. The characters and scenes change, but the behaviors and outcomes rarely do. “Everything feels unprecedented when you haven’t engaged with history.”

Don’t expect balance from very talented people. People who are exceptionally good at one thing tend to be exceptionally bad at another, due to overconfidence and mental bandwidth taken up by the exceptional skill. Skills also have two sides: No one should be shocked when people who think about the world in unique ways you like also think about the world in unique ways you don’t like.

5. My Favorite New Investing App On Earth – Joshua Brown

The most valuable resources to understand companies can be found among the materials filed by the companies themselves. They must give out information and make disclosures from a regulatory standpoint, and this is where research should begin. But then again, we’re faced with the problem of having to sift through too much stuff and keep track of too many filings. If we’re not professional analysts covering these businesses for a living, it’s too much work for too little reward.

Which brings me to quarterly conference calls. They are, in my opinion, the most bang for your buck in terms of time spent versus what you come away with. You get to hear from the CEO and CFO every 90 days, walking you through the latest developments at their respective corporations. Then you get to hear thoughtful questions being asked of the management by Wall Street’s sellside analysts, who know these businesses inside and out. If you want to get to know a company like Adobe or DR Horton or Caterpillar or Lyft, one hour per quarter, listening to the conference call, is a cheat code. It gets the job done and you can listen while doing other things, like commuting, exercising, bike riding, hot air ballooning, whatever.

But here’s the problem – a problem I believe has now been solved:

Have you ever noticed that the Investor Relations pages on public companies’ websites are always different from each other and hard to navigate? IR pages suck. And nothing is worse than trying to listen to the latest conference call on a company’s website from your phone. You have to not only keep the phone’s screen open, you also must stay on the Chrome or Safari app to continue listening. If you close your internet browser app, the audio turns off. This prevents multi-tasking and makes the listening experience on the go a huge pain in the ass. It’s the opposite of a podcast – clumsy, unreliable, complicated, annoying and too chore-like to become habit forming.

What if I told you there was a way to listen to any earnings conference call you want, in the form of a podcast, from an app on your phone? What if learning about DataDog, Crowdstrike, Salesforce, Gilead and all of the other exciting companies that are changing the world was as easy as checking out an episode of Joe Rogan or Bill Simmons or even Downtown Josh Brown 🙂 ? Sounds pretty good, no? Well then, my friend, do I have the app for you. It’s called, appropriately enough, Earnings Calls, and is available now for your phone. It’s absolutely free to use and you should start using it today.

6. Rory Sutherland – Moonshots and Marketing – Patrick OShaughnessy & Rory Sutherland

At Red Bull, there’s no evidence whatsoever and there’s no logic to suggest that there’s a massive gap in the market for a drink that tastes worse than Coke, costs more than Coke, and comes in a smaller can. And indeed, if you’d have done market research, everybody would have told you to get lost. And indeed, when they tested the taste, people did tell them to get lost. That is one of those things which is an extraordinarily well rewarded case of capitalism rewarding you disproportionately the more counter intuitive your idea is. To be honest, if your idea makes sense, someone will already have tried it. It’s what I say, if there were a logical solution to this problem, someone would already have found it. So the place to look, if you want to have disproportionate upside in investments is invest in something which has an element of absurdity to it.

7. The 10 Most Useless Phrases in Finance – Barry Ritholtz

1. “Don’t Get Complacent.” What, exactly, should an investor do with this bit of advice? How does a lack of complacency manifest itself in an investment portfolio? Should the recipients of this advice liquidate some or all of their holdings? Or should they merely be on the lookout for some heretofore unknown risk – as they always should?

“Don’t have a smug or uncritical satisfaction with oneself or one’s achievements” makes for a nice sentiment in a high school valedictorian speech or a college paper on Epicurean philosophy, but it is not what street types describe as “actionable advice.”

As someone who is in the advice business, I like to offer specific and identifiable actions, as in “buy this and sell that.” To be fair, something like “Hey, you have had a great run during this rally. Be careful about getting overconfident” is not the worst advice one could get – it’s just squishy and hard to express in a trade.

2. “Profit Taking.” This phrase tends to appear anytime there’s been a run up in asset prices, followed by reversal. It is never a simple consolidation or just a break from a relentless buying spree. Instead, the claim is that buyers at lower prices are now sellers at higher prices, booking a profit. This is always proffered without evidence or explanation.

Ironically, the correction in the stock market that began toward the end of the summer – about an 11% pullback in the Nasdaq 100 Index following a 77% gain from the lows less than 6 months earlier – was very likely actual profit taking as a driver of the selling.1 And yet, the one time the phrase could have been used accurately, no one seemed to bother with it.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have a vested interest in the shares of Amazon, Netflix, and PayPal.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general.

Here are the articles for the week ending 20 September 2020:

1. The Metaverse: What It Is, Where to Find it, Who Will Build It, and Fortnite – Matthew Ball

The Metaverse, we think, will…

1. Be persistent – which is to say, it never “resets” or “pauses” or “ends”, it just continues indefinitely

2. Be synchronous and live – even though pre-scheduled and self-contained events will happen, just as they do in “real life”, the Metaverse will be a living experience that exists consistently for everyone and in real time

3. Have no real cap to concurrent participations with an individual sense of “presence” – everyone can be a part of the Metaverse and participate in a specific event/place/activity together, at the same time and with individual agency.

4. Be a fully functioning economy – individuals and businesses will be able to create, own, invest, sell, and be rewarded for an incredibly wide range of “work” that produces “value” that is recognized by others

5. Be an experience that spans both the digital and physical worlds, private and public networks/experiences, and open and closed platforms

6. Offer unprecedented interoperability of data, digital items/assets, content, and so on across each of these experiences – your “Counter-Strike” gun skin, for example, could also be used to decorate a gun in Fortnite, or be gifted to a friend on/through Facebook. Similarly, a car designed for Rocket League (or even for Porsche’s website) could be brought over to work in Roblox. Today, the digital world basically acts as though it were a mall where though every store used its own currency, required proprietary ID cards, had proprietary units of measurement for things like shoes or calories, and different dress codes, etc.

7. Be populated by “content” and “experiences” created and operated by an incredibly wide range of contributors, some of whom are independent individuals, while others might be informally organized groups or commercially-focused enterprises

2. Twitter thread from Okta CEO and co-founder Todd McKinnon on what it’s actually like to go through an initial public offering and be a public company – Todd McKinnon

How I benefited from @okta going public:
– My control of the company increased significantly.
– Preferred shares rights & preferences go away as everyone converts to common.
– My shares along with VC converted to super-voting shares. As VCs sold their shares, my voting % went up.

How my job has changed:
– More time in board meetings (committees, recruiting, communicating with, etc).
– More time on IR & with investors (earnings reports, conferences, 1on1s – might sound repetitive, but you often learn interesting & unexpected things).

For years, we’d compensated employees with stock options & we HAD to give them liquidity. It was fun to celebrate with the team on the big day.

3. Memo on Shopify by venture capital firm Bessemer Venture Partners when it invested in the company – Alex Ferrara, Trevor Oelschig

Shopify was founded in 2007 by two Ruby on Rails core developers. One of the co-founders left soon after starting the business. The other, Tobi Lütke, stayed on and is serving as CEO. We have been impressed by Tobi. He is a young, first-time CEO who is thoughtful, has good product and management instincts. Shopify’s 24 employees are located in Ottawa, Canada. Based on Shopify’s reputation in Ottawa as a local internet startup success story, and based upon Tobi’s reputation among the developer community, the company has been able to recruit some of the best development and design talent in Ottawa at 60%-70% of the cost of similar talent in Silicon Valley or New York.

4. Tencent’s Dreams, Part II: Investing in the Metaverse – Packy McCormick

A strategic decision nine years ago accidentally set Tencent up to create more value from the Metaverse than it does from its entire core business by focusing on investment over organic growth.

After reading Part I, Rui Ma pointed me to the Tech Buzz China podcast in which she and Ying Lu discuss Pan Luan’s 2018 piece titled “Tencent Has No Dreams.” In it, he argues that a 2011 decision at a management team offsite caused Tencent to lose sight of its product-focused roots.

Back in 2011, Baidu passed Tencent as the most valuable tech company in China, and Pony Ma called a meeting of his top management to chart a new course for the company. In the meeting, dubbed “The Conference of the Gods,” he asked his 16 top executives to list out Tencent’s core competitive advantages. Two winners emerged: capital and traffic.

Led by President Martin Lau and his former Goldman colleague James Mitchell, who he brought on as Chief Strategy Officer, Tencent built its strategy on this flywheel of capital and traffic.

The strategy seems to be working. Since that 2011 meeting, Tencent’s stock has increased nearly 15x, from $44.5 billion to $660 billion. Attract companies to build on its platform with huge traffic, invest in the winners, give them more traffic, invest more or acquire the winners, generate more traffic, attract more companies, and so on. It runs essentially the same playbook with foreign companies who want access to China.

5. A $200 Billion Exotic Quant Trade Is Facing Existential Doubts – Justina Lee

ARP [alternative risk premia] products combine a diverse bunch of trades, often tried-and-tested ideas beloved by quants such as the tendency for cheap stocks to outperform in the long run or for short-term commodity futures to trade below long-term ones. The composition of funds and their returns vary vastly, but managers can point to a few unifying trends that have been a drag on performance in 2020.

The March turmoil upended the normal trading patterns these strategies rely on. Then the fast market recovery whipsawed trend-following systems and forced systematic models to dial back market exposures and miss out on gains.

At the same time, many popular factors used by these funds — such as value and foreign-exchange carry — failed to rebound along with stock benchmarks.

“The recovery depended on whether you were in those main long risk categories of liquid equities and fixed income,” said Anthony Lawler, head of GAM Systematic, which oversees about $3 billion. “ARP by and large are not in those things.”

Equity value has been a persistent drag on ARP portfolios

This year is adding to growing doubts over ARP, which has lagged stock indexes in recent years but has also posted a mixed performance as a portfolio diversifier. While defenders would argue that these products were never supposed to be a hedge against traditional assets, many investors likely got a different impression from their marketing, says MJ Hudson’s Suhonen.

6. Obvious Things That Are Easy To Ignore – Morgan Housel

A thing that’s obvious but easily overlooked is that feeling wealthy has little to do with what you have. It’s more about the gap between what you have and what you expect. And what you expect is driven by what other people around you have.

It’s been like that forever and for everyone. John D. Rockefeller never had penicillin, sunscreen, or Advil. But you can’t say a low-income American with Advil and sunscreen should feel better off than Rockefeller, because that’s not how people’s heads work. What would have seemed like magic to Rockefeller became our baseline expectation.

Incomes fall into the same trap. Median family income adjusted for inflation was $29,000 in 1955. In 1965 it was $42,000. Today it’s just over $62,000. We think of the 1950s and 1960s as the golden age of middle-class prosperity. But the median household today has roughly twice the income as the median family of 1955. Part of the disconnect can be explained by lots of people’s expectations being inflated by the lifestyles of a small share of people whose wealth grew exponentially over the last 40 years.

7. Upside-Down Markets: Profits, Inflation and Equity Valuation in Fiscal Policy Regimes – Jesse Livermore

If households and corporations were to deficit spend in the way that the government deficit spends, they would eventually run up against liquidity and solvency constraints. But a sovereign government is not subject to those constraints. Through its central bank, it decides the interest rate at which it borrows. And it doesn’t even need to borrow—it can finance spending by printing new money. As long as there are economic participants willing to withhold the new money, and as long as the economy has the productive capacity to fulfill any additional spending that the withholding process might give rise to, economic problems such as inflation need not emerge.This insight, most notably attributable to the British economist Abba Lerner, is a core component of Modern Monetary Theory (MMT). As the insight becomes better understood in 

political circles, it will increasingly drive fiscal policies that seek to guarantee desired levels of income and spending growth in the economy, policies that have the potential to turn markets upside-down, for better or worse.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have vested interests in Facebook, Okta, Shopify and Tencent.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general.

Here are the articles for the week ending 13 September 2020:

1. The S-1 Club | Unity is Manifesting the Metaverse – MDA Gabriele

We’d be remiss if we didn’t discuss Unity’s role as a “founder” of the Metaverse, a term coined in Neal Stephenson’s Snow Crash, and further popularized by media analystMatthew Ball.

The Metaverse describes a state of interoperability across digital platforms in the virtual world. To date, virtual worlds have been built as walled gardens with their own laws of physics, currencies, and customs. The Metaverse connects walled gardens the way physical networking infrastructure connected internal networks nearly 50 years ago to create the Internet. The Metaverse also powers real-world interactions by enabling multiple people to experience the same event at once and collaborate in highly immersive environments. Fans of Ready Player One will recall the ragers held in The Oasis.

Where does Unity fit in such a world?

One perspective comes from Unity’s nemesis, Epic Games. As mentioned in Company History, Epic is the creator of the directly competitive Unreal engine. In a conversation with the LA Times, CEO Tim Sweeney described what the Metaverse will enable:

“Just as every company a few decades ago created a webpage, and then at some point every company created a Facebook page, I think we’re approaching the point where every company will have a real-time live 3D presence, through partnerships with game companies or through games like Fortnite and Minecraft and Roblox. That’s starting to happen now. It’s going to be a much bigger thing than these previous generational shifts. Not only will it be a boon for game developers, but it will be the beginning of tearing down the barriers not just between platforms but between games.”

If you ascribe to Sweeney’s view, then the upside for engines like Unity and Unreal is extraordinary. Rather than merely powering game development, Unity has the potential to serve as the foundational layer — the rails — of a new, shared synthetic reality.

2. Will Money Printing Cause Inflation? – Michael Batnick

If we’ve learned anything since the government’s response to the last crisis, it’s that quantitative easing or money printing or whatever you want to call it, does not necessarily plant the seeds for higher prices in the future. If you have any faith in how markets work, then look to our borrowing costs as a clue. If investors were really worried about the size of the federal deficit, than the costs for funding it wouldn’t be at a record low.

One of the reasons that people worry so much about the size of the deficit is because they think of the government like a household. But unlike a household, the government can create more money. Unlike a household the government can keep borrowing. And unlike a household, the bill never comes due.

3. WeChat and TikTok Taking China Censorship Global, Study Says – Jamie Tarabay

ByteDance Ltd.’s TikTok often buries or hides words that reflect political movements, gender and sexual orientation or religion in most countries where it operates, the Australian Strategic Policy Institute said in a report released Tuesday. Most of the content censored on WeChat supported pro-democracy activists in Hong Kong, as well as messages from the U.S. and U.K. embassies regarding a new national security law enacted by Beijing at the end of June that has provoked protests across the city.

TikTok, which began as a place where teens lip-sync to music, has become a forum for political protest including the Black Lives Matter movement, said Fergus Ryan, one of the authors. Hashtags related to LGBTQ+ issues were also suppressed in several languages, according to the report. Other topics censored in the past included criticism of Russian President Vladimir Putin.

4. Understanding Stakeholder Value: Where Do Profits Come From? – Sean Stannard-Stockton

In our 2017 post PRICING POWER: DELIGHTING CUSTOMERS VS MORTGAGING YOUR MOAT, we explained how companies that seek to capture as much of the surplus value as possible for themselves and leave as little as possible in the hands of their customers, do not have nearly the opportunity to maximize long term shareholder profits as those companies that relentless try to increase consumer surplus.

A company that is “mortgaging its moat” as described in the post, is one that seeks to extract as much of the consumer surplus as possible from their customers and capture the value as profit for themselves. This is what a monopoly is all about. Monopoly conditions disconnect sellers from needing to worry about competition and allows them to set pricing at the level that wins the maximum amount of profits while minimizing consumer surplus. Under these conditions, there is some end point at which the company has extracted every dollar of consumer surplus for themselves and 1) they are unable to extract any more, while 2) consumers are willing to try any other even barely viable alternative just to attempt to exit the exploitative relationship they are in with the seller.

Conversely, a company that is “delighting customers” is one that, because they relentless drive up the value of their products and services by creating so much additional consumer surplus, gets no push back from consumers when they raise prices. Under these conditions, there is no theoretical limit to the amount of consumer surplus a company can create nor on the value they can capture as producer surplus (profits) via raising prices.

5. Reed Hastings Had Us All Staying Home Before We Had To – Maureen Dowd

Has the pandemic altered Mr. Hastings’s perception of the competition?

It’s the “sideways threats” that bite companies, he said. “If you think of Kodak and Fuji, competing in film for 100 years, but then ultimately it turns out to be Instagram.”

Speaking of which, I wondered if he thinks that Mark Zuckerberg, Sheryl Sandberg and Jack Dorsey have done enough as far as election meddling and disinformation threats?

“Every new technology has real issues that have to be thought through and, you know, we’re in that phase for social media,” he said, adding: “The car, many people think is a great invention for human freedom, but it also has killed a lot of people over time. Film got used by Hitler for terrible purposes.”

He continued: “So I find Mark and Sheryl to be sincere in trying to think these things through.”

6. Taming the Tail: Adventures in Improving AI Economics – Martin Casado and Matt Bornstein

Many of the difficulties in building efficient AI companies happen when facing long-tailed distributions of data, which are well-documented in many natural and computational systems.

While formal definitions of the concept can be pretty dense, the intuition behind it is relatively simple: If you choose a data point from a long-tailed distribution at random, it’s very likely (for the purpose of this post, let’s say at least 50% and possibly much higher) to be in the tail.

Take the example of internet search terms. Popular keywords in the “head” and “middle” of the distribution (shown in blue below) account for less than 30% of all terms. The remaining 70% of keywords lie in the “tail,” seeing less than 100 searches per month. If you assume it takes the same amount of work to process a query regardless of where it sits in the distribution, then in a heavy-tailed system the majority of work will be in the tail – where the value per query is relatively low…

… The long tail – and the work it creates – turn out to be a major cause of the economic challenges of building AI businesses.

The most immediate impact is on the raw cost of data and compute resources. These costs are often far higher for ML than for traditional software, since so much data, so many experiments, and so many parameters are required to achieve accurate results. Anecdotally, development costs – and failure rates – for AI applications can be 3-5x higher than in typical software products.

However, a narrow focus on cloud costs misses two more pernicious potential impacts of the long tail. First, the long tail can contribute to high variable costs beyond infrastructure. If, for example, the questions sent to a chatbot vary greatly from customer to customer – i.e. a large fraction of the queries are in the tail – then building an accurate system will likely require substantial work per customer. Unfortunately, depending on the distribution of the solution space, this work and the associated COGS (cost of goods sold) may be hard to engineer away.

Even worse, AI businesses working on long-tailed problems can actually show diseconomies of scale – meaning the economics get worse over time relative to competitors. Data has a cost to collect, process, and maintain. While this cost tends to decrease over time relative to data volume, the marginal benefit of additional data points declines much faster. In fact, this relationship appears to be exponential – at some point, developers may need 10x more data to achieve a 2x subjective improvement. While it’s tempting to wish for an AI analog to Moore’s Law that will dramatically improve processing performance and drive down costs, that doesn’t seem to be taking place (algorithmic improvements notwithstanding).

7. Airbnb’s resurgence – Felix Salmon

Estimates from Edison Trends show Marriott and other hotel chains seeing much lower spending than at this time last year. At Airbnb, by contrast, spending is hitting new all-time highs.

Airbnb spending is running a whopping 75% higher than this time [September 2020] last year, says the research shop, based on a panel of spending data including more than 65,000 Airbnb transactions.

That means Airbnb’s revenues have comfortably surpassed Marriott’s, for the first time.

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Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.