Category: General Investing

Investing is a game of probabilities. In any game where probability is a factor, luck undoubtedly plays a role. This leads to the age old question of how much of our investing performance is impacted by luck?

Is an investor who has outperformed the market a good investor? Similarly, is an investor who has underperformed the market a lousy investor? The answer is surprisingly complex.

Fooled by randomness

In his book, Fooled by Randomness, Nassim Taleb argues that we tend to misinterpret events as less random than they actually are. In other words, luck is more influential in the outcome of an event than we tend to think. He wrote:

“Past events will always look less random than they were (hindsight bias). I would listen to someone’s discussion of his own past realising that much of what he was saying was just backfit explanations concord ex post by his deluded mind.”

Harsh? Yes, but I can testify that I’ve experienced similar conversations. In a world full of unknowns and wide dispersions of possibilities, luck does play a significant factor in the final outcome. More than we want to believe.

This phenomena of luck and dispersion of outcomes is prominent in investing. Not only are short term stock prices volatile and random, but long-term stock prices are also influenced by luck.

Long term stock prices tend to gravitate toward the present value of the company’s expected future cash flow. However, that future cash flow is influenced by so many factors that result in a range of different possible cash flow possibilities. Not to mention that on rare occasions, the market may grossly misprice certain securities, such as Gamestop. As such, luck invariably plays a role.

Understanding luck

When it comes to investing, we should acknowledge that the future is not certain. There always is a range of different possibilities.

As such, the first thing we need to do is to understand that outcomes do not determine skill or luck.

A good example is that past performances in a fund does not correlate to future good performances. In his book, The Success Equation, Michael Mauboussin wrote:

“I compared excess returns for the three years ending in 2010 with the Morningstar ratings for the funds at the end of 2007… I found a poor correlation (r=-10). The primary reason individuals and institutions invest in a fund is that they liked the way it performed in the past. But those figures give little information about what the fund will do in the next three years.”

What this shows is that luck was perhaps one of the factors that impacted both pass and future returns for those funds that Mauboussin mentioned.

Identifying skill

The next step is disentangling luck and skill. Unfortunately, it’s not so simple. Michael Mauboussin wrote:

“Not everything that matters can be measured and not everything that can be measured matters.”

Skill is one aspect of investing that is hard to quantify. However, there are a few things I look at.

First, we need to analyse a sufficiently long track record. If an investor can outperform his peers for decades rather than just a few years, then the odds of skill playing a factor become significantly higher. Although Warren Buffett may have been lucky in certain investments, no-one can deny that his long-term track record is due to being a skilful investor.

Think of this as going to the casino and playing blackjack. You can go on a lucky winning streak for a night, maybe two or even weeks on end. But imagine going to the casino everyday for years. Luck will eventually catch up to you and your win rate, or rather your loss rate, will gravitate towards the mathematical mean.

Next, focus on the process. Analysing an investment manager’s process is a better way to judge the strategy. One way to see if the manager’s investing insights were correct is to compare his original investment thesis with the eventual outcome of the company. If they matched up, then, the manager may by highly skilled in predicting possibilities and outcomes.

Third, find a larger data set. If your investment strategy is based largely on investing in just a few names, it is difficult to distinguish luck and skill simply because you’v only invested in such few stocks. The sample is too small.

But if you build a diversified portfolio and were right on a wide range of different investments, then skill was more likely involved.

Parting words

Ultimately, our investing success comes down to both skill and luck. But disentangling luck and skill is the tricky bit.

Maubossin wrote:

“One of the main reasons we are poor at untangling skill and luck is that we have a natural tendency to assume that success and failure are caused by skill on the one hand and a lack of skill on the other. But in activities where luck plays a role, such thinking is deeply misguided and leads to faulty conclusions.”

It is important that we understand some of these psychological biases and gravitate toward concrete processes that help us differentiate luck and skill. That’s the key to understanding our own skills and limitations and forming the right conclusions about our investing ability.

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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.Of all the companies mentioned, I currently have no vested interest in any of them. Holdings are subject to change at any time.

A handful of Software-as-a-Service (SaaS) companies that I have a vested interest in released their quarterly results in the past few weeks. 

Here’s a quick round up on their performance and some insights from management.

Zoom Video Communications (NASDAQ: ZM)

The video conferencing leader continued to report healthy growth. In the three months ended 31 July 2021, it saw 54% year-on-year revenue growth on top of the 355% growth it enjoyed in the corresponding quarter a year ago. On a sequential basis, Zoom reported 6.8% revenue growth.

Zoom’s free cash flow margin for the latest quarter was an excellent 44% and the company is now sitting on more than US$5 billion in net cash. Although management expects some churn in its SMB (small, medium businesses) online segment, Zoom still seems to be in a high growth phase as its net dollar expansion rate continues to be above 130%.

Zoom is also spending on innovation as it accelerates the app ecosystem on its Zoom App platform. Eric Yuan, Zoom’s founder-CEO, shared the following comment in the company’s latest earnings conference call:

“Our internal innovation engine is very strong and bolstered by our growing Zoom Apps developer ecosystem and acquisitions such as Kites that will strengthen our position in AI transcription and translation. As organizations and people reimagine work, communications, and collaborations, we are faced with a once-in-a-lifetime opportunity to drive this evolution on multiple fronts.”

In terms of outlook, Zoom expects revenue of between US$1.015 billion to US$1.02 billion in the upcoming quarter, which is roughly flat quarter-on-quarter as the company is facing some churn from its SME clients. But from my vantage point, Zoom is still well-positioned for the long-term.

Veeva Systems Inc (NYSE: VEEV)

For the quarter ended 31 July 2021, the healthcare software company reported a 29% increase in revenue from a year ago, and 7.3% sequential growth in subscription revenue. Veeva is now sitting on US$2.2 billion in cash and equivalents and continues to generate a growing stream of free cash flow.

During Veeva’s latest earnings conference call, its founder-CEO Peter Gassner said:

“Looking at the bigger picture in clinical, we are advancing our vision to move the industry to digital trials that are patient-centric and paperless. On the product side, we are growing our product team significantly to support further innovations. On the customer side, early adopters are progressing with Veeva eConsent and Veeva Site Connect, and momentum with Veeva SiteVault Free continues. We are learning a lot as we bring sponsors, clinical research sites, and patients together in the Veeva Clinical Network. It’s an exciting area, and digital trials have the potential to change the course of drug development worldwide.”

Okta Inc (NASDAQ: OKTA)

Identity management software provider Okta reported healthy topline growth even as it lapped tough comparisons from a year ago. During the reporting quarter (the three months ended 31 July 2021), Okta’s revenue grew 59% year-on-year due in part to the inclusion of Auth0, which was acquired in May. Excluding Auth0, Okta’s organic revenue growth was still a healthy 39% year-over-year and 10.7% sequentially.

The company’s overall trailing 12 month net retention rate stood at 124% – which is great – and Okta’s standalone current remaining performance obligation was up 43% year-over-year.

Okta is guiding for US$325 million to US$327 million in total revenue for the next quarter, which would represent growth of 50% year-on-year and 3.2% sequentially.

During Okta’s latest earnings conference call, co-founder and CEO Todd McKinnon shared his confidence on the company’s future growth:

“As the world continues to work through the ongoing pandemic, organizations have had to maintain fluid plans for returning to offices. Regardless of the time line, it’s clear that most organizations are adopting plans that include more remote access. Organizations also realize that their interactions with customers will continue to shift more online and need to accelerate their digital transformation business plans. These factors, combined with the ever-evolving security threat landscape, mean that the demand for Okta’s modern identity solutions has never been greater.”

MongoDB Inc (NASDAQ: MDB)

The leading noSQL database provider saw its share price rise sharply last week after posting another set of excellent results. 

Revenue for the reporting quarter (the three months ended 31 July 2021) was up 44% year-on-year and 9.4% sequentially. Impressively, MongoDB’s Atlas product, which is a database hosted on the cloud, grew by 83% from a year ago as companies are starting to embrace the fully-managed MongoDB database-as-a-service offering.

Management is forecasting the next quarter to have sequential growth of between 0.5% and 2.7%.

MongoDB’s CEO, Dev Ittycheria, ended the company’s latest earnings conference call by saying:

“I just want to leave you with a few comments. First, I think what we really want to reinforce is that we believe customers realize that if they want to move fast, MongoDB is the best way to do so; second, Atlas’ growth of 83% reinforces the point that customers want a multi-cloud platform that enables them to innovate quickly and outsource the undifferentiated heavy lifting of managing their data infrastructure; third, we continue investing and evolving our go-to-market strategy across field sales, inside sales and the self-serve channels to capture this large market opportunity; and last but not least, we continue to roll out significant innovation to improve our platform through both ease of use and expansion of capabilities to encourage more and more customers to use MongoDB.”

DocuSign Inc (NASDAQ: DOCU)

The e-signature specialist continued its excellent run. For the three months ended 31 July 2021, DocuSign reported a 52% increase in revenue year-on-year, building on the 47% growth experienced in the same period last year. DocuSign’s revenue also rose 9.2% on a sequential basis, and its net retention rate continued to be high at 124%.

The company is also enjoying improving operating leverage and saw a free cash flow margin of 32% in the reporting quarter. DocuSign’s management is guiding for between US$526 million and US$532 million in revenue for the upcoming quarter, good for a 3.3% sequential growth rate at the midpoint.

In his opening remarks during DocuSign’s latest earnings conference call, CEO Dan Springer highlighted how the company is becoming an integral part of the tech stack in many companies’ adoption of digital workflows. He mentioned some examples in his opening remarks to analysts:

“Many have also seen a better way of doing business from anywhere. And we believe that will become their new normal. One of our customers, Stacy Johansen, who is the President of Downeast Insurance, told us that when COVID hit and they had to close their physical doors, DocuSign saved them. In her words, and I quote, If it weren’t for the ability to get an electronic signature, we wouldn’t have written half of the new business we did last year.

Having succeeded beyond expectations by fully embracing digital tools, Downeast resolved to do business this way from here on. Another example is one of Canada’s largest automotive dealers. In response to COVID, the company adopted DocuSign eSignature and DocuSign payments to support remote sales and service. The program was so successful, it spawned a larger initiative to offer digital transactions across their entire dealer network.

As one company executive put it, “DocuSign has become part of facilitating a full breadth of remote experiences.” These are just a few examples of what we’re seeing again and again, being able to do business and operate from anywhere is what people now expect, plus it saves time, money and trees.”

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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. I currently have a vested interest in the shares of Zoom, MongoDB, Veeva, Docusign and Okta. Holdings are subject to change at any time.

There are many important things about the stock market that can change, such as the behaviour of market participants and their level of collective knowledge. I believe an interesting example of this can be seen in the 2008/09 financial crisis.

The period was an economic calamity and stock prices fell sharply. During the crisis, the S&P 500, a broad index for US stocks, fell by nearly 57% from peak to trough. But then-Federal Reserve chair Ben Bernanke prevented an even worse disaster from happening.

Bernanke was a scholar on the Great Depression that happened in the 1930s. In a wonderful 2002 speech for the birthday gala of celebrated economist Milton Friedman, Bernanke laid out the mistakes the US government had made during the Great Depression. He ended the speech saying (emphasis is mine): 

“I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

When the 2008/09 financial crisis erupted, Bernanke sought to prevent the same mistakes from happening. He largely succeeded and I think it’s telling that an 85% fall in stock prices – something that happened in the Great Depression – did not occur during the financial crisis.

I think that this trait about the market – that market participants can learn, collectively – has important implications for investors. Amazon’s founder Jeff Bezos once said (emphasis is mine): 

“I very frequently get the question: “What’s going to change in the next 10 years?” And that is a very interesting question; it’s a very common one. I almost never get the question: “What’s not going to change in the next 10 years?” And I submit to you that that second question is actually the more important of the two — because you can build a business strategy around the things that are stable in time. … [I]n our retail business, we know that customers want low prices, and I know that’s going to be true 10 years from now. They want fast delivery; they want vast selection.” 

I believe this applies to investing too. It’s better to build an investment strategy in the stock market around the things that are stable in time. What is one such thing? From my observations, I think one thing about the stock market that has been stable over the long arc of history is that it has remained a place to buy and sell pieces of a business. And I think this trait about the stock market will very likely continue to be stable over time.

With this in mind, what logically follows is that a stock’s price over the long run will continue to depend on the performance of its underlying business over the same period. In turn, a stock’s price will eventually do well if its underlying business does well too. All these mean that a lasting investment strategy is to identify businesses that are able to grow well over a long period of 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. I currently have a vested interest in the shares of Amazon. Holdings are subject to change at any time.

Having options is an often underappreciated but valuable competitive advantage. Nassim Taleb, the author of the book, Antifragile, wrote, “An option is what makes you antifragile”.

Antifragile companies can thrive in times of chaos. But what constitutes optionality?

Optionality can come in the form of having opportunities to easily open up new business ventures. Think Amazon.com (NASDAQ: AMZN).

In its early days, Amazon was a first-party online retailer. At that time, all of its revenue came from selling products it bought and resold. But once Amazon built a substantial-enough user base, it easily pivoted its business into a marketplace and started generating revenue by providing services to third-party sellers to run their e-commerce business on Amazon’s marketplace.

Having the initial large user base gave Amazon the option to easily pivot into a marketplace.  That’s optionality.

As an investor, I often think about the options that a company has. Here are some examples of companies that I believe have the luxury of optionality.

Netflix Inc (NASDAQ: NFLX)

The streaming giant has built up an enviable catalogue of well-loved original content such as Stranger Things, Black Mirror, and more.

I believe Netflix can leverage this valuable intellectual property to grow revenues through selling merchandise, creating games, and even theme parks. Although these ideas may seem farfetched now, I think the possible options are exciting. To unlock all of these possibilities, Netflix’s management will need good execution and careful planning.

Besides original content, Netflix also commands a wide audience. That’s a valuable asset to own. At the moment, Netflix is laser-focused on its core offering of providing a great streaming service to its loyal user base. However, Netflix can easily upsell feature upgrades to its userbase in the future. Netflix has already announced that games could be included in a Netflix subscription in the future. If the introduction of games is a success, Netflix can have tiered subscription plans based on whether a user is willing to pay a higher premium for more of Netflix’s gaming services.

Upstart Holdings Inc (NASDAQ: UPST)

This fintech provides AI-powered software tools to banks that can better predict default rates on loans. Currently, Upstart is focusing on its core product of unsecured personal loans. Although this itself is a multi-billion dollar market (around US$84 billion), the bigger prize is in auto loans and home mortgages. Upstart’s AI tool could be leveraged to help banks make smarter loan decisions for both these markets.

With its purchase of Prodigy, a cloud-based automotive retail software provider, Upstart is already looking to grow into the auto loans market. The auto loans market is seven times the size of the unsecured personal loans market while the home mortgage market is multiple times larger than auto loans.

It is still early days for Upstart, but its pie could potentially grow much bigger if it is able to enter these new markets successfully.

Square Inc (NYSE: SQ)

Square started off by providing aspiring shopkeepers (the company calls them sellers) with a simple device that they can use to accept credit card payments. These square-shaped devices were much cheaper and easier to install than traditional card readers. 

After winning over users, Square leveraged on its seller base to upsell other software tools and to even provide loans to these sellers. 

But Square truly hit the gold mine when it released Cash App. This is a consumer-focused app for people to store money, transfer money to friends, and even directly deposit their wages into.

With a growing user base, Square has so many options to further monetiseCash App. Besides what has already been mentioned, Cash App also currently offers services such as investing, bitcoin trading, and debit cards. In the future, Square could roll out other services such as insurance, and buy now, pay later (BNPL). On BNPL, Square recently announced that it would be acquiring the Australia-based BNPL provider, Afterpay. The ability to roll out new features in Cash App is a valuable option that Square can easily take advantage of.

Coupang Inc (NYSE: CPNG)

South Korea’s e-commerce giant has already taken advantage of its gigantic logistics footprint in the country. From a 1st-party e-commerce player, Coupang now also acts as a third-party marketplace and delivers food and groceries.

There are many ways to grow its business, simply by offering new services to its third-party sellers to increase take rates, or to roll out new product offerings to its loyal consumer base by leveraging its logistics network.

With Coupang’s sprawling logistics infrastructure in South Korea in place, the options are abounding. But, Coupang is also careful in its spending. CEO Bom Kim said during the company’s recent 2021 second-quarter earnings conference call:

“We start with small bets, then test rigorously and invest more capital over time, but only into the opportunities we feel strongest about… …There are many other early-stage initiatives in the portfolio and I expect that we will not continue all of them. Only the investments whose underlying metrics show strong potential for meaningful cash flows in the future will earn their way to more significant investment.”

The bottom line

Optionality is a great trait to have as a company. It means that the company can easily build new revenue streams, create a more diverse business, and become a more resilient company. Thinking about the options that a company has gives me a better idea of how a company can transform in the future and what possibilities lie ahead.

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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. I currently have a vested interest in the shares of Amazon.com Inc, Netflix, Upstart, Square and Coupang. Holdings are subject to change at any time.

In 2016, Michael Mauboussin, a highly-regarded researcher and author in the investment industry, co-wrote a research paper published by Credit Suisse titled The Base Rate Book. Mauboussin and his co-authors studied the sales growth rates for the top 1,000 global companies by market capitalization since 1950. They found that it was rare for a company – even for ones with a low revenue base – to produce annualised revenue growth of 20% or more for 10 years.

For example, of all the companies that started with revenue of less than US$325 million (adjusted for inflation to 2015-dollars), only 18.1% had a 10-year annualised revenue growth rate of more than 20%. Of all the companies that started with inflation-adjusted revenue of between US$1.25 billion and US$2.0 billion, the self-same percentage was just 3.0%.

The table below shows the percentage of companies with different starting revenues that produced annualised revenue growth in excess of 20% for 10 years. You can see that no company in Mauboussin’s dataset that started with US$50 billion in inflation-adjusted revenue achieved this level of revenue-growth.

But in a research piece published in June this year with Morgan Stanley titled The Impact of Intangibles on Base Rates, Mauboussin noted that Amazon had defied the odds. The US ecommerce juggernaut ended 2016 with US$136 billion in revenue and Mauboussin wrote (emphasis is mine):

“… work that we did in 2016 [referring to The Base Rate Book] revealing that no company with [US]$100 billion or more in base year sales had ever grown at that mid-teens rate for that long. Our data were from 1950-2015 and reflected sales figures unadjusted for acquisitions and divestitures but adjusted for inflation. The analysis was not specific to any particular business, but the clear implication was that it was improbable that a company that big could grow that fast.

Amazon will be at a [US]$515 billion-plus sales run rate by the second quarter of 2022 and will have a 6-year sales growth rate ended 2022 of 27.6 percent, if the consensus estimates are accurate… If achieved, Amazon’s results will recast the base rate data.”

In The Impact of Intangibles on Base Rates, Mauboussin also shared the two main ways of making forecasts: The inside view and the outside view. Psychologist Daniel Kahneman, who won a Nobel Prize in Economics in 2002, has an interesting story in his 2011 book, Thinking, Fast and Slow, on these two ways of forecasting.

Kahneman shared in his book that years ago, he had to design a curriculum and write a textbook on judgement and decision making. His team consisted of experienced teachers, his own psychology students, and an expert in curriculum development named Seymour Fox. About a year into the project, Kahneman polled his team for estimates on how long they thought they would need to complete the textbook. Kahneman and his team assessed their own capabilities and concluded that they would need around two years – this was their inside view. After conducting the poll, Kahneman asked Fox how long other similar teams took to complete a curriculum-design from scratch. It turned out that around 40% of similar teams failed to complete their projects and of those who managed to cross the finish line, it took them at least seven years to do so. This was the base rate, the outside view. Kahneman and his team were shocked at the difference.

But in a validation of the outside view, Kahneman’s team eventually took eight years to finish their textbook. A key lesson Kahneman learnt from the episode was that incorporating the base rate would be a more sensible approach for forecasting compared to relying purely on the inside view. 

In an investing context, taking the inside view on a company’s growth prospects would be to study the company’s traits and make an informed guess based on our findings. Taking the outside view would mean studying the company’s current state and comparing it to how other companies have grown in the past when they were at a similar state. 

Jeremy and I manage an investment fund together. The fund invests in stocks around the world, and we have invested nearly all of the fund’s capital in companies that (a) have strong historical growth and thus high valuations, and (b) have what we think are high chances of producing strong future growth. For the fund to eventually produce a good return, its portfolio companies will need to grow their businesses significantly, in aggregate, in the years ahead.

Before we invested in the companies that are currently in the fund’s portfolio, we studied their businesses carefully. After our research, we developed the confidence that they would likely continue to grow rapidly for many years. We took the inside view. But we also considered the outside view. We knew that trees don’t grow to the sky, that it’s rare for companies to grow at high rates for a long time, and that some of our companies already had massive businesses. Nonetheless, we still invested in the companies we did for two reasons. First, we knew going in that we were looking for the outliers. Second, we had suspected for some time that the base rates for companies that sustain high growth for a long time have been raised from the past. 

Mauboussin’s research in The Impact of Intangibles on Base Rates lends strong empirical evidence for our suspicion. He found that companies that rely heavily on intangible-assets grow faster than what the base rate data show. This is an important observation. According to the 2017 book Capitalism Without Capital by Jonathan Haskel and Stian Westlake, investments in intangible assets around the world overtook investments in tangible assets around the time of the 2008/09 global financial crisis and the gap has widened since. As more and more intangibles-based companies appear, the number of companies with faster-growth should also increase.

But intangibles-based companies also exhibit a higher variance in their rates of growth, according to Mauboussin’s data in The Impact of Intangibles on Base Rates. Put another way, intangibles-based companies have a higher risk of becoming obsolete. The quality of an investor’s judgement on the growth prospects of intangibles-based companies thus becomes even more important.

Why did we suspect that companies today are more likely to be able to grow faster than in the past? A key reason is the birth of software and the internet. In our view, these two things combined meant that for the very first time in human history, the distribution of a product or service has effectively zero marginal costs, and can literally travel at the speed of light (or the speed at which data can be transmitted across the web). Paul Graham shared something similar in a recent blog post of his, How People Get Rich Now. Graham is a co-founder of the storied startup accelerator and venture capital firm Y Combinator. He wrote:

“[B]ecause newly founded companies grow faster than they used to. Technology hasn’t just made it cheaper to build and distribute things, but faster too.

This trend has been running for a long time. IBM, founded in 1896, took 45 years to reach a billion 2020 dollars in revenue. Hewlett-Packard, founded in 1939, took 25 years. Microsoft, founded in 1975, took 13 years. Now the norm for fast-growing companies is 7 or 8 years.”

If you’re an investor in stocks, like us, then I think it’s important for you to realise that we’re in a whole new world of accelerating growth.

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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. I currently have a vested interest in the shares of Amazon.com. Holdings are subject to change at any time.

One of the best books I’ve read over the past year is William Green’s Richer, Wiser, Happier. In his book, Green writes about the lessons he’s gained from his interactions with some of the world’s best investors over the past few decades. One of the investors Green profiled in his book was Nicholas Sleep, whom I admire deeply. Here’s a memorable passage from the book on Sleep’s experience while investing in Amazon:

“Skepticism about Amazon continued to swirl. In the midst of the 2008 market meltdown, Sleep attended an event in New York where George Soros spoke about the threat of an impending financial apocalypse. Soros, one of the most successful traders in history, named just one stock that he was shorting as the world fell apart: Amazon.”

Amazon’s share price ended 2007 at US$92 and eventually fell to a low of US$35 during the 2008/09 financial crisis in November 2008. So Soros likely earned a handsome profit with his short of Amazon. But what’s also interesting is that Amazon’s current share price of around US$3,500 is tens of times (even more than a hundred times) higher than where it was at any point in 2008. The chart below shows Amazon’s share price from the end of 2007 to 30 June 2021.

The passage about Soros from Green’s book, and Amazon’s subsequent share price movement since the end of 2007, reminded me of an article from venture capitalist and finance writer, Morgan Housel. In his piece, Play Your Game, Housel wrote:

“It’s so easy to lump everyone into a category called “investors” and view them as playing on the same field called “markets.”

But people play wildly different games.

If you view investing as a single game, then you think every deviation from that game’s rules, strategies, or skills is wrong. But most of the time you’re just a marathon runner yelling at a powerlifter. So much of what we consider investing debates and disagreements are actually just people playing different games unintentionally talking over each other.

A big problem in investing is that we treat it like it’s math, where 2+2=4 for me and you and everyone – there’s one right answer. But I think it’s actually something closer to sports, where equally smart and talented people do things completely differently depending on what game they’re playing…

…2. Figure out what game you’re playing, then play it (and only it).

So few investors do this. Maybe they have a vague idea of their game, but they haven’t clearly defined it. And when they don’t know what game they’re playing, they’re at risk of taking their cues and advice from people playing different games, which can lead to risks they didn’t intend and outcomes they didn’t imagine.”

An investor who shorted Amazon early in 2008 and covered his short position later in the year, and another investor who invested in the company early in the same year but for the long run, both made the right decisions. They were merely playing different games. 

At the investment fund that I’m running with Jeremy, we clearly know the game we’re playing. We’re looking for great businesses, buying their shares, and holding them for the long run while knowing that the share prices can be volatile. Other market participants can say that Amazon’s share price may fall by 30% over the next year – and they may well be right. But it’s of no consequence to Jeremy and me. Guessing what share prices will do over the short run is not the game we’re playing, and it’s not a game we know how to play. What’s important to us – and what we think we understand – is where Amazon’s business will be over the long run. 

When investing, heed Housel’s words. “Figure out what game you’re playing, then play it (and only 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. I currently have a vested interest in the shares of Amazon. Holdings are subject to change at any time.

How much of our portfolio should we invest in a high conviction stock?

This is an age-old question for any investor. In this article, I touch on two concepts – the absorbing barrier and Kelly criterion – and see how we can use them to structure the way we think about position sizing in investing.

Absorbing barrier

Imagine playing a game of Texas Hold’em poker and being dealt the best starting hand of the game – a pair of aces. This hand has an approximately 80% chance of winning against any other starting-hand combination.

What would be the ideal bet to make here? In theory, the bigger your bet, the bigger your expected return is on the investment because the odds of winning are tilted heavily in your favour. But does this mean we should bet all our savings on this hand? Probably not.

This is where the idea of the absorbing barrier becomes relevant. Nassim Taleb, author of a number of books, including Fooled by Randomness, explains,

“[A]bsorbing barrier is a point that you reach beyond which you can’t continue. You stop. So, for example, if you die, that’s an absorbing barrier. So, most people don’t realise, as Warren Buffett keeps saying, he says in order to make money, you must first survive. It’s not an option. It’s a condition. So once, you hit that point, you are done. You are finished. And that applies in the financial world of course to what we call ruin, financial ruin.”

The idea is that even if you have a big edge in a game, bet sizing matters. If you keep betting 100% of your net worth on a game of poker, even if you start off as an 80% favourite to win, in the long run, it will eventually result in financial ruin. This applies to any financial decision, even if the probability of the tail risk is extremely low.

In his Fat Tails Statistical Project, Taleb wrote,

“Every risk-taker who survived understands this. Warren Buffett understands this. Goldman Sachs understands this. They do not want small risks, they want zero risk because that is the difference between the firm surviving and not surviving over twenty, thirty, one hundred years.”

Kelly criterion

This brings us to the next topic, the Kelly criterion. The Kelly criterion is named after researcher J. L. Kelly who described a gambling formula for bet sizing that leads to the highest possible wealth compared to any other strategy if you have a slight edge in the game.

According to the Kelly criterion, the optimal size of an even-money bet is calculated by multiplying the percentage chance of winning by two and subtracting 100%. For a game that you have an 80% chance of winning, the optimal bet sizing is 60% of your available funds (80% x 2 – 100% = 60%). So if you lose your first bet, your next bet should be smaller, and vice versa.

By making the bet sizing a percentage of your available funds, the chances of complete financial ruin drop to zero as you will never bet all your available funds on a single bet.

However, as you may have guessed, in casinos and in gambling in general, you will probably never find a situation where you are a consistent favourite to win in an even-money bet. This is because casinos only offer games where the house has an advantage over the players.

Investment risk management

This is not the case in investing. Great stock pickers, with a proven approach, have higher odds of making winning bets by picking the right stocks to invest in.

Warren Buffett, for example, has been one of the investment greats of the past seven decades by consistently finding stock market winners to invest in. But even great stock pickers may not have a 100% track record. Despite his investing prowess, Buffett has admitted numerous investing mistakes, some of which has caused him or his firm to lose money.

And yet, Buffett is far from financial ruin. This is because of the position sizing for each of his investments and the diversification of his portfolio across a range of “bets”.

Real-life practicality

Calculating the ideal bet sizing using Kelly’s criterion may not be practical in real life investing, due to our inability to accurately calculate win rates and the fact that no investment is completely identical.

However, understanding the fundamentals behind absorbing barriers and the Kelly criterion can, at the very least, give us a framework to think about how to size our investments to reduce the risk of financial ruin over the long run. 

Portfolio positioning is a complicated topic and absorbing barriers and Kelly’s criterion are just some of the topics to consider. For more thoughts on portfolio sizing, you can read some of our other articles here and here.

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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. I currently do not have a vested interest in any shares mentioned. Holdings are subject to change at any time.

Note: An earlier version of this article was first published in The Business Times on 30 June 2021

Is high inflation coming? If so, what stocks should investors be buying? Of late, these are hot topics in the investment industry. Earlier this month, strategists from the US-based investment research and brokerage firm, Bernstein Research, said that “there is probably no bigger macro issue, both tactically and strategically, than inflation and what this means for portfolios.”

Thankfully, Warren Buffett had laid out a blueprint in the 1980s for investors to deal with high inflation.

The right business characteristics

Chuin Ting Weber, CEO of Singapore-based bionic financial advisor, MoneyOwl, wrote in a recent article that “for the US, historically, the worst inflationary period in recent memory was from 1973-1981.” According to her article, the US inflation rate in that period ranged from 4.9% (in 1976) to 13.3% (in 1979). In 1981, the country’s inflation-reading was 8.9%.

It’s against this backdrop that Buffett, widely-regarded as the best investor the world has seen, discussed how investors can cope with inflation in his 1981 Berkshire Hathaway shareholder letter. He wrote that “businesses that are particularly well adapted to an inflationary environment… must have two characteristics”. 

First, the business must have “an ability to increase prices rather easily (even when product demand is flat and capacity is not fully utilized) without fear of significant loss of either market share or unit volume.” Second, the business must have “an ability to accommodate large dollar volume increases in business (often produced more by inflation than by real growth) with only minor additional investment of capital.”

In other words, a business that can cope well with high inflation must have (1) pricing power and (2) the ability to increase its sales volume by a large amount without the need for significant additional capital investments.

How inflation hurts

But just why is the reverse type of business – one that has no pricing power and that requires significant investment capital to increase sales volumes – bad in an inflationary environment?

The pernicious effect of a lack of pricing power is straightforward. In an inflationary environment, costs for a business will rise. Without the ability to increase its selling prices, a business’s profit will suffer.

Why would businesses that need significant additional investment of capital to increase their sales volumes suffer during inflationary periods? The reason is more complex. Buffett explained in his 1983 Berkshire Hathaway shareholder letter.

He used two businesses to illustrate his point. One is See’s Candies, a subsidiary of Berkshire’s that makes and sells confectionaries. The other is a hypothetical company. For our discussion here, let’s call it Bad Business.

When Berkshire acquired See’s Candies in 1972, it was earning around US$2 million in profit on US$8 million of net tangible assets. On the other hand, Buffett gave Bad Business the hypothetical numbers of US$2 million in profit and US$18 million in net tangible assets. 

Buffett further illustrated what would happen to the two businesses if inflation ran at 100%. Both See’s Candies and Bad Business would need to double their earnings to US$4 million just to keep pace with inflation. To do so, the two businesses can simply sell the same number of products at two times their previous prices, assuming that their profit margins remain constant.

But there’s a problem. Both businesses would likely also have to double their investments in net tangible assets, “since that is the kind of economic requirement that inflation usually imposes on businesses, both good and bad.” For example, doubling dollar-sales would mean “correspondingly more dollars must be employed immediately in receivables and inventories.”

This is where See’s Candies starts to shine. Because See’s Candies requires US$8 million in net tangible assets to produce US$2 million in profit, it will only need to ante up a further US$8 million “to finance the capital needs imposed by inflation.” Bad Business, on the other hand, would require a much larger sum of US$18 million in additional capital to produce the output required (the extra US$2 million in profit) simply to keep up with inflation. 

Buffett summed up the discussion by saying that “any unleveraged business that requires some net tangible assets to operate (and almost all do) is hurt by inflation.” The businesses that are “hurt the least” are the ones that require little tangible assets.

The right businesses

In my opinion, technology businesses that offer digital products or services have one of Buffett’s required characteristics for a business to cope well with inflation. Examples of such technology businesses, under my definition, include DocuSign (the provider of an e-signature software solution), Etsy (the owner of its namesake e-commerce marketplace that connects buyers and creators of artisanal, unique products), and Facebook (the company behind its eponymous social media platform). 

When such a technology business sells its products or services, its marginal costs are minimal – there’s no major difference in costs for the business to provide a piece of software to either one customer or 10. Such products or services also involve minimal inventory, so increasing selling prices in an inflationary environment will not involve the need for employing correspondingly more dollars in inventories. In other words, this technology business can accommodate a large increase in sales volume without the need to increase its working capital. 

Contrast this dynamic with a business that manufactures widgets or physical products. The production of each new widget or product requires additional capital for raw materials and/or new manufacturing equipment. Widgets and physical products also involve inventory, so increasing selling prices in an inflationary environment will require correspondingly more dollars in inventories, thus tying up valuable working capital.

This is not to say that all technology businesses that offer digital products or services can cope well with inflation. It’s also important to consider their pricing power. We can gain some insight on this by understanding how important a technology business’s digital product or service is to its users. The more important the product or service is, the higher the chance that the business in question possesses pricing power.

A better approach

In the early 1970s, Buffett correctly foresaw that high inflation in the USA would rear its ugly head later in the decade. But it’s worth noting that he then got his subsequent views on inflation wrong. 

For example, in his 1981 Berkshire Hathaway shareholder letter, Buffett wrote that his “views regarding long-term inflationary trends are as negative as ever” and that “a stable price level seems capable of maintenance, but not of restoration.” In another instance, this time in his 1984 Berkshire Hathaway shareholder letter, Buffett shared his belief that “substantial inflation lies ahead.”

What happened instead was that inflation in the USA declined substantially after the 1970s. According to data from the World Bank, the country’s inflation rate averaged at 7.1% in the 1970s, 5.6% in the 1980s, 3.0% in the 1990s, 2.6% in the 2000s, and 1.8% in the 2010s. 

This is not a dig at Buffett. He’s one of my investment heroes. This is simply to show how hard it is to be correct about macroeconomic developments.

So instead of wondering whether high inflation is coming, the better approach for stock market investors – in my opinion – is to not care about inflation. Instead, investors can simply focus on finding businesses that have a high chance of doing well over the long run regardless of the level of inflation.

On this point, I come back again to technology businesses that are selling digital products and services that are highly important to their users. It’s easy to do a lot worse than investing in businesses that have pricing power and that can produce large increases in sales volumes without the need for significant additional investment of capital.

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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. I currently have a vested interest in DocuSign, Etsy, and Facebook. Holdings are subject to change at any time.

Data as of 25 June 2021

The SPAC (Special Purpose Acquisition Company) craze has well and truly hit the market. 

From making up just a fraction of all funds raised through IPOs in the USA in the past, SPACs have grown to become the bulk of IPOs in the first quarter of 2021. During the period, SPACs’ fundraising made up 69% of all IPO proceeds raised, up from around 20% in 2020.

The recent booming interest in SPACs raises a question: Do SPACs really make good investments? In this article, I run through some of the pros and cons of investing in SPACs, who are the winners and losers in this space, and why I’m avoiding any SPACs pre-merger.

Why are SPAC IPOs so popular?

SPACs are entities that are formed with the intention of merging with another existing company. SPAC investors will then become shareholders of the new combined entity.

When SPACs raise money at an IPO, investors are simply providing the “shell” company with the capital to acquire another business. Before acquiring a company, SPACs have no commercial operations and are therefore sometimes referred to as “blank check companies”. 

Part of the popularity of SPACs is their potential growth. If a SPAC is able to acquire a good company at a good valuation, investors could reap the long-term gains from the combined entity.

Some SPACs may be in a position to acquire great companies due to the SPAC sponsor. SPACs that are sponsored by big-name investors or expert investment managers have the connections and expertise to acquire an early-stage company that has the potential to grow much bigger.

SPACs also provide downside protection as SPAC shareholders have the right to redeem their shares and be repaid from the trust account should they not like the deal. If they choose to redeem their shares, SPAC shareholders can get back cash based on the IPO price per share plus interest.

Investors who are lucky enough to invest at the IPO can also reap some returns once the SPAC starts trading as the share prices of SPACs tend to trade at a premium to their cash value due to the hope that the SPAC can put the money to good use. 

SPACs often throw in an additional incentive for investors to invest at its IPO, known as a “warrant”. Warrants give holders the right to buy more shares from the company at a specific price on a specified future date. These warrants can be traded separately and can be worth more if the SPAC shares rise. These free warrants are an additional kickback to being an IPO SPAC investor.

Fees, dilution, and misaligned incentives

Although SPACs may seem enticing on the surface, there are associated costs that may make them a poor investment for latecomers.

One of the big costs to investing in SPACs is the “sponsor promote,” which are free shares that are issued to a SPAC’s sponsors once a merger is finalised.

For example, in a US$500 million SPAC, IPO investors may fork out US$500 million and receive 50 million in shares with a net cash value of US$10 each. But once a merger is secured, the SPAC sponsor gets free shares that typically make up 20% of the number of shares sold in the SPAC’s IPO.

As such, in my example, the number of SPAC shares increases from 50 million to 60 million and the net cash of each share drops to US$8.33.  So essentially, shareholders paid US$10 (or more if they bought in after the IPO when the price has risen) for a share that now only holds US$8.33 in cash.

In addition, redemptions may reduce the cash per share of the SPAC. Remember I mentioned that SPAC shareholders have the right to redeem shares at the IPO price plus interest. But redemptions are not good for the remaining shareholders of the SPAC.

Redemptions reduce the amount of cash left in the SPAC disproportionately more than reducing the share count. For example, a SPAC that raises US$500 million in cash may end up with around US$490 million in cash after accounting for IPO underwriting fees. However, to fulfil redemption requests, the SPAC still needs to pay back $10 per share for each share redeemed when the cash per share was actually only US$9.80 per share. 

Research by Stanford law found that while the SPACs they studied issued shares for roughly $10 and value their shares at $10 when they merge, at the time of a merger, the median SPAC holds cash of only $6.67. This is due to dilution, underwriting fees, and share redemptions.

Throw in the warrants that IPO investors are given, and the potential total dilution could be far worse. Investors who didn’t buy in at the IPO and didn’t receive warrants are fighting an uphill task to make a profit.

I haven’t even mentioned another cohort of investors who get special treatment- the PIPE investors. PIPE stands for private investment in public equity and these PIPE investors are offered shares just before a SPAC-merger deal closes to make up for any cash shortfall for the deal. PIPE investors are usually offered shares at IPO prices, which are lower than what the shares usually trade at.  Although not exactly dilutive, PIPE investors get much better deals than retail investors who bought in at market prices after the IPO.

Another risk is that SPAC deals may not always turn out so well. The study by Standford Law found that SPAC shares tend to drop by one-third of their value or more within a year following a merger. 

Some of the reasons why SPAC acquisitions may turn out poorly is due to misaligned incentives and the time scale involved. SPACs usually have a two-year time period to make an acquisition. This puts pressure on the sponsor to find a deal. To avoid closing the SPAC without finalising a merger, the sponsor may rush to complete a deal even if it may not be best for shareholders. These poor business acquisitions and heavy dilution may result in poor long-term stock performance for SPACs.

Winners and losers in SPACs

The odds of long-term success for SPAC shareholders are clearly stacked against them. The heavy dilution from “promote” shares given to the sponsor, the high fees involved, and the dilution from redemptions, put long-term shareholders on the back foot.

But not everyone is a loser.

The biggest winners in the deal are usually the sponsors. The sponsors are given promote shares even when they put up relatively little capital. Even if the share price falls, sponsors are able to make healthy profits as they received their shares at a very low cost.

Investors who invest during the IPO and sell before the merger may also reap substantial gains. As mentioned earlier. SPACs tend to trade at a premium to their net cash value before a merger is done due to the hope that a good deal can be struck.

IPO investors who bought in at cash value and sell in the stock market before a deal closes can make a healthy profit. They can also sell the warrants for extra profit on the side.

The losers are investors who invest after the IPO when the stock prices have risen to a large premium over the diluted net cash value. Unless the SPAC acquires an exceptional company at a really good price, latecomers to a SPAC are left with an uphill task to even make a profit.

Although there have been a few positive outcomes, the odds of long-term success, post-merger, are stacked against SPAC shareholders.

Conclusion

I get why the SPAC market is booming. Raising money at an IPO for SPACs is easy as investors believe they can make a quick buck even before a merger is confirmed. The warrants and redemption promise make it an even sweeter deal for IPO investors.  Sponsors are also enticed by the potential huge gains once they receive their promote shares which could be worth hundreds of millions of dollars.

However, for investors who are buying SPACs in the secondary market, the odds of success are much lower. Misaligned incentives and heavy dilution put long-term shareholders at a disadvantage.

The fact that SPAC shareholders rely on the sponsor to make a good acquisition creates even more uncertainty. Investors who want to buy SPACs on the open market should consider these factors when making any investment decision.

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. I currently do not have a vested interest in any shares mentioned. Holdings are subject to change at any time.

There are some exciting developments in the biotech space. This is not surprising, given the rising interest to invest in biotech. More money leads to more talent working on these projects and ultimately increases the odds of scientific breakthroughs.

With that said, here are some exciting biotech trends that could be game-changers in their respective fields.

Liquid biopsies

A biopsy is a procedure that involves the extraction of sample cells or tissue from a tumour to determine the extent of a disease. It is useful to determine the characteristics of the tumour, which helps doctors determine the next step of treatment.

Traditional biopsies are invasive procedures that may result in complications. Imagine taking a sample of a tumour in your liver. The process involves inserting a needle into your liver to extract the tumour sample. The risks to this procedure include bleeding, infection, accidental injury to nearby organs etc.

Enter liquid biopsies. A non-invasive procedure, liquid biopsies are simple blood tests that are able to detect characteristics of a tumour without needing to take a direct tissue sample. 

Tumours release a variety of biomolecules into the bloodstream that can be detected via a blood sample study. These biomolecules help doctors figure out what sort of treatment a patient needs without requiring an invasive traditional biopsy.

In addition, liquid biopsies could potentially become the first line of cancer-screening for healthy individuals. 

At the moment, the lack of good cancer screening has resulted in numerous cancer patients only being diagnosed late. As you may have heard, the earlier you detect cancer, the better your prognosis and the better the outcome of treatment. Due to the non-invasive nature of liquid biopsies, it could become an important first line of detection.

Companies such as Guardant Health (NASDAQ: GH) and the Illumina (NASDAQ: ILMN)-owned, GRAIL, are leading the way.

Guardant Health already has an FDA approved test called Guardant360 which can be used for tumour mutation profiling across all solid cancers. The test is gaining wider acceptance from oncologists, with more than 150,000 tests performed to date. Guardant Health is also actively testing liquid biopsies as a screening tool with a major study in place since 2019. If the trial is successful, the company will submit its test for FDA approval which could become a game-changer in cancer screening.

CRISPR gene editing

For some time now, scientists have realised that specific genes in our body may predispose us to diseases or may cause inherited diseases to pass from generation to generation.

Although they may have identified genes that are causing these diseases, scientists have not been able to alter the gene sequences in question to reverse or prevent the diseases from occurring. CRISPR gene editing may change this.

CRISPR, which is short for Clustered Regularly Interspaced Short Palindromic Repeats, is a gene-editing method that scientists have identified to efficiently and precisely modify, delete, or replace parts of the human DNA.

Scientists aim to develop gene-based medicines based on CRISPR technology to remove disease-causing genes. This could potentially solve the problem of genetic diseases such as sickle cell anaemia, cystic fibrosis, haemophilia, and many more.

CRISPR Therapeutics AG (NASDAQ: CRSP) and Editas Medicine Inc (NASDAQ: EDIT) are two companies that are focused on the transformative potential of CRISPR gene-editing technology. 

CRISPR Therapeutics currently has two programs that are at the clinical trial stages. The first is a therapeutic program to treat inherited hemoglobinopathies, β-thalassemia and sickle cell disease. Both these diseases are significant global burdens with around 300,000 and 60,000 babies born with sickle cell disease and β-thalassemia, respectively, each year.

The second is CRISPR Therapeutics’ Immuno-Oncology program. Immuno-Oncology is the use of immune cells to seek and destroy cancer cells. CRISPR Therapeutics aims to use CRISP technology to generate off-the-shelf immune cells that can be more easily administered and produced than the current CAR-T therapies that require the patient’s own genes. 

Similarly, Editas Medicine has two programs that are in early-stage clinical trials. The first is for the treatment of Leber Congenital Amaurosis 10 (LCA10), which is a group of inherited retinal degenerative disorders that are the most common cause of inherited childhood blindness affecting 3 of every 100,000 children globally.

The other program in early-stage clinical trials is for the treatment of sickle cell disease. 

Both companies are also developing other solutions for numerous other diseases which are in much earlier stages of development.

Although CRISPR gene-editing technology is still in its infancy, the potential of the technology seems very promising.

Tumour treating fields

Another interesting development in oncology is the use of tumour treating fields. This involves the application of alternating electric fields to disorientate the positions of tumour cell proteins which in turn disrupt the cell division of tumour cells. 

Novocure Ltd (NASDAQ: NVCR) is a key player in this arena. I first wrote about Novocure a year ago. Since then, the stock price has climbed by more than 200%, perhaps due to good news regarding some of its ongoing clinical trials. 

Currently, Novocure’s tumour treating field solution is FDA-approved for recurrent and newly diagnosed glioblastoma and mesothelioma. 

It is also in late-stage clinical trials for brain metastasis, non-small cell lung cancer, pancreatic cancer, ovarian cancer, and phase II clinical trials for liver and gastric cancer.

There has also been higher adoption of its commercialised products over the year with the company reporting a 12% increase in active patients and a 32% increase in net revenues in the first quarter of 2021.

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. Ser Jing and I currently have a vested interest in the shares of Illumina Inc. Holdings are subject to change at any time.