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What We’re Reading (Week Ending 20 September 2020)

The best articles we’ve read in recent times on a wide range of topics, including investing, business, and the world in general.

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.

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.

What We’re Reading (Week Ending 13 September 2020)

The best articles we’ve read in recent times on a wide range of topics, including investing, business, and the world in general.

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!

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.

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.

What We’re Reading (Week Ending 06 September 2020)

The best articles we’ve read in recent times on a wide range of topics, including investing, business, and the world in general.

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!

Here are the articles for the week ending 06 September 2020:

1. Modern Monetary Theory Finds an Embrace in an Unexpected Place: Wall Street – Patricia Cohen

Besides the risk of government deficits, M.M.T. throws out a drawerful of other venerable assumptions with Marie Kondo-esque ruthlessness. To start, it instructs you to erase that textbook drawing of a white-haired Uncle Sam collecting tax dollars from the public and then using them to pay for military weapons, highway repairs, federal workers’ wages and more.

Tax revenues are not what finance the government’s expenditures, argues Stephanie Kelton, an economist at Stony Brook University and one of the most influential modern monetary theorists. What actually happens in a country that controls its own currency, she says, is that the government first decides what it’s going to spend. In the United States, Congress agrees on a budget. Then government agencies start handing out dollars to the public to pay for those tanks, earth movers and salaries. Afterward, it takes a portion back in the form of taxes. If the government takes back less than it gave out, there will be a deficit.

“The national debt is nothing more than a historical record of all of the dollars that were spent into the economy and not taxed back, and are currently being saved in the form of Treasury securities,” Ms. Kelton said.

Ms. Kelton, a frequent speaker at business and financial conferences and the chief economic adviser to Mr. Sanders during his 2016 presidential campaign, points out that every dollar the government spends translates into a dollar of income for someone else. So a deficit in the public sector simultaneously produces a surplus outside the government.

The reverse is also true, Ms. Kelton maintains, and that can lead to trouble. The seven biggest American depressions or downturns going back 200 years, she said, were all preceded by government surpluses.

2. Save Like A Pessimist, Invest Like An Optimist – Morgan Housel

A 100-year event doesn’t mean it happens every 100 years. It means there’s about a 1% chance of it occurring in any given year. That seems low. But when there are hundreds of different independent 100-year events, what are the odds that any one of them will occur in a given year?

Pretty good, in fact.

If next year there’s a 1% chance of a new disastrous pandemic, a 1% chance of a crippling depression, a 1% chance of a catastrophic flood, a 1% chance of political collapse, and on and on, then the odds that something bad will happen next year – or any year – are … uncomfortably high.

Littlewood’s Law tells us to expect a miracle every month. The flip side is to expect a disaster roughly as often.

Which is what history tells us, isn’t it?

3. No, Robinhood Traders Aren’t Affecting the Stock Market – Nick Maggiulli

When combining the holdings data with pricing data from Yahoo Finance, I was able to look at the one-day change in number of Robinhood users holding a stock and see how well it correlated with the one-day price return of that stock.

I did this because I wanted to test whether an increase (or decrease) in Robinhood users holding a stock was met with a similar increase (or decrease) in that stock’s price. I understand that the number of Robinhood users holding a stock is not the same as the total dollar impact that Robinhood users have on a stock (that is, not all Robinhood traders have the same bankroll), but let’s assume that they are similar in size for now. Additionally, I created a subset of the data to start on February 19 (the day before the Covid-19-inspired sell-off began) to only capture the correlation from when Robinhood users started becoming more active on the platform.

After doing this exercise for the top 200 most popular stocks on Robintrack, I found that for most of these stocks, there was little to no correlation between the one-day change in stock price and the one-day change in the number of Robinhood users holding them:

4. The 2 Variables That Drive Stock Prices – Ben Carlson

If investing was a cocktail, it would essentially boil down to one part fundamentals and one part emotions. Fundamentals are easier than ever to capture because we now have access to more data in a single day than our ancestors would see in a lifetime.

The emotional component of investing will never be quantifiable because it’s impossible to predict how people will feel in the future.

The late Jack Bogle introduced this concept in his book Don’t Count On It by breaking down expected annual returns of the U.S. stock market into the following components:

Market Returns = Dividend Yield + Earnings Growth +/- Changes in the P/E Ratio

Dividends and earnings are the fundamental portion of stock market returns while the change in the price-to-earnings (P/E) ratio is the speculative portion of returns. The change in P/E represents how much people are willing to pay for corporate fundamentals and the reason it’s considered speculative is because it can vary widely over time.

5. Warren Buffett’s Japan Bet, Warren Buffett’s Gold Bet, etc – Joshua Brown

Warren Buffett is an investor who looks to buy future growth at reasonable valuations today. He prioritizes long-term cashflow generation, management quality, competitive position and return on capital when he buys a stock. He’s got two well-known investment lieutenants helping him make decisions, and they are also empowered with enough autonomy to make decisions of their own.

One thing you will not find throughout the annals of Berkshire Hathaway’s history is a lot of “thematic” investing. Buffett doesn’t do “themes.” He would not have been a big user of Motif Investments. He doesn’t use his stock purchases to tell a story about his macro forecasts. He may discuss his stock purchases in a broader sense (Buy American, I Am) to convey an opinion about the present market situation and where he’s finding value, but he doesn’t make an investment in order to express himself or signal something.

He makes investments in order to earn a profit. Not in order to tell you a story and put you to bed.

6. ‘I Can’t Believe I’m Saying This, But I’m Passing on Seth Klarman’ – Leanna Orr

Klarman’s firm runs one wide-open strategy, or product, via ten Baupost Value funds operating in parallel but raised at different times. When the firm invested in insurance claims against bankrupt utility Pacific Gas and Electric, for example, investors got equitable exposure across the various vehicles. The vintage-year structure resembles private equity funds; the deal sharing does not. Hedge funds typically divide their funds by strategy: one long-short equity, another long-only, one focused on China, etc.

Baupost prefers carte blanche.

Investing with the firm means allowing Klarman’s team to do mostly whatever it wants with the money. Since the financial crisis, that’s often meant buying private assets, such as real estate, that linger for a long time in portfolio. “I’m not a fan of people in the hedge fund world taking what would be a five- to seven year real estate strategy,” the head of an elite institution gripes. “That’s not what a hedge fund is.” Klarman, observers say, has been doing more and more of these types of deals — and returning less and less. Baupost has delivered double-digit gains just once since 2010, II previously reported. “The return-on-equity numbers don’t stand up to top-tier private equity,” according to the allocator who opted out. “I would prefer to just be in private equity that says what it is. At least then it’s a defined approach.”

The most controversial thing that Baupost does with its wide-open investment mandate is nothing at all. Cash amounts to about one third of the portfolio on average, or about $10 billion. “The last thing you want to do is pay a manager to hold a lot of cash,” says one hedge fund specialist. Baupost charges clients 1.25 percent in management fees, regardless of performance or what the money is invested in. Charities, schools, and other clients pay Baupost upwards of $120 million for one year of cash management, given an average holding. Allocators really don’t like that — or at least they really like to complain about it.

7. The Potentially Revolutionary Celera 500L Aircraft Officially Breaks Cover – Joseph Trevithick & Tyler Rogoway

Otto Aviation says the Celera 500L had a maximum cruising speed of at least 450 miles per hour and a range of over 4,500 miles. It also has impressive fuel economy, achieving 18 and 25 miles per gallon, according to Otto Aviation. A traditional business jet with similar capabilities to the Celera 500L, including its six-passenger capacity, typically burn a gallon of fuel for every two to three miles of flight, making Otto’s design dramatically more economical, as well as more environmentally friendly. The company says that the Celera 500L will have an unbelievably low per-hour flight cost of just $328.

This and aircraft’s other notable performance characteristics are made possible in large part due to its highly aerodynamic overall laminar flow shape, which produces approximately 59 percent less drag than existing similar-sized, more conventionally-shaped aircraft. Its high-efficiency Raikhlin Aircraft Engine Developments (RED) A03 V12 piston engine is another important part of the equation. The A03 has a multi-stage turbocharger and can run on Jet A1 fuel, as well as kerosene or biodiesel.

Germany-based RED touts the engine as a very high-efficiency design with low fuel consumption and very good reliability over existing piston engine designs with equivalent horsepower ratings. “The Celera 500L’s aerodynamic airframe requires significantly less horsepower to achieve take-off and cruise speeds, allowing for a more fuel-efficient power plant [the A03] to be utilized,” Otto’s website says.

What We’re Reading (Week Ending 30 August 2020)

The best articles we’ve read in recent times on a wide range of topics, including investing, business, and the world in general.

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!

Here are the articles for the week ending 30 August 2020:

1. Matt Ball – The Future of Media: Movies, the Metaverse, and More – Patrick O’Shaughnessy and Matthew Ball

Certainly I think under COVID, this topic of the metaverse has certainly accelerated and there were a lot of conflations. I think a lot of people think of the metaverse as virtual worlds, those certainly have existed for decades. They think of it as UGC content creation platform, such as Minecraft, that’s basically an interactive or immersive version of a YouTube. Others think about this from an avatar perspective. You have a virtual version of you that exists somewhere else that you have control of.

All of those are interesting elements, even AR glasses come into the conversation about the metaverse. But if you’re talking about the metaverse, that’s basically like saying Google is the internet, or iPhone is the internet, or the Yahoo directory was the internet. It’s not entirely wrong. It’s certainly an important element of the consumer experience of it or what they might describe it, but it completely misses the idea that the internet itself is a series of tubes in the ground, standards, protocols, technology, and ideas that were formalized into infrastructure

2. Risk Is Never as Simple as It Seems – Ben Carlson

There are plenty of examples like this where safety measures can offer a false sense of security, thus introducing additional risks to the equation.

A study in Norway found new cars, despite having better safety measures and more advanced technology, get into more crashes than old cars. And this takes into account the fact that there are more new cars on the road. The probability of damage and injury is higher when driving a new car because people feel safer driving them and also use them more often.

Safety measures in the world of finance are sure to have unintended consequences as well.

The financial models many banks used gave them a false sense of security leading up to the Great Financial Crisis. Garbage-in, garbage out is the same for financial models as it is for your sink.

The measures enacted during the current crisis, as necessary as they may have been, are sure to change the way investors view risk in the years ahead.

3. A Robot Tried to Fix Value Investing and Ended Up Buying Amazon – Justina Lee

The strategy of buying stocks that appear cheap relative to their fundamentals has been struggling for more than a decade, but a South Korean money manager reckons its AI-augmented exchange-traded fund is the answer.

Qraft Technologies filed on Friday to create the Qraft AI-Enhanced U.S. Next Value ETF, ticker NVQ. It says this strategy can revive the factor by estimating a firm’s intangible assets based on financial statements and patent databases…

… The top three holdings of the machine-guided fund in July were Amazon.com Inc., Alphabet Inc. and Facebook Inc. Those are far from the kind of undervalued stocks typically favored by a value strategy. But to Qraft, it’s just value 2.0.

“Intangible assets have become a more important factor in the actual value of the company due to the development of information technology,” founder Hyungsik Kim wrote in an email. “It is easy to tell which of the following is more important in measuring the value of Amazon: warehouses (tangibles) or automated logistics systems (intangibles).”

It’s the rallying cry for many remaining proponents of value: The factor isn’t dead, it’s simply plagued by outdated accounting rules that treat intangible investments such as research as expenses rather than capital.

As a result, knowledge-intensive firms end up with much lower book values and higher costs, which make them look more expensive than they actually are.

4. Tweetstorm on how an onion farmer in the USA managed to corner the market for onions – Sahil Bloom

1/ Vince Kosuga fancied himself as more than just your average onion farmer. He had a productive 5,000-acre onion farm in Pine Island, NY. But it was his side hustle, trading in futures markets, that would make him (in)famous.

2/ Futures markets offered a way for farmers to hedge their risk. They could execute a contract to sell their crop at a fixed price at a later date, removing the risk of price fluctuations. But Vince was more interested in using futures for speculation. He wanted to get rich!

3/ After some unsuccessful episodes trading in wheat futures, Vince Kosuga had a (seemingly obvious) revelation. He knew all there was to know about onions, so he should be trading in onions! He would pull off the greatest onion trade of all time.

4/ The idea was simple. He would corner the entire US market for onions. Executing against it was not. To pull it off, he would need to own the vast majority of all harvested or in-ground onions in the country. But Vince thought big. He and his partners began buying onions.

5/ They built secret warehouses across the country, buying and storing millions of onions. But this only covered harvested onions, which was just one piece of the market. So they began buying up futures contracts, essentially taking ownership of all future US onion harvests.

6/ By the fall of 1955, Vince Kosuga had a stranglehold on the entire market for onions in the United States. Most importantly, no one knew it. With this control, Vince Kosuga could move onion prices as he pleased. Now, it was time to get rich.

5. Alternative Forms of Wealth – Morgan Housel

You have a level of independence that goes beyond money. You can cook for yourself, do your own laundry, change a flat tire, and be alone without getting bored…

… You have emotional stability, accepting reality without it driving you crazy.

You can lead a productive conversation with a stranger from any background.

You don’t have to pretend to look busy to justify your salary.

You have enough time to prioritize eight hours of sleep with stress levels low enough to allow sleep.

You can say, “I have no idea” when you have no idea.

6. Test results in hand, Thrive raises $257M to push liquid biopsy toward approval – Jason Mast

Thrive started raising for the Series B immediately after the study results were published in Science at the end of April. That study, run across 10,000 women at the Geisinger Health System, showed for the first time that a blood test could help doctors diagnose certain types of cancer in patients who did not yet show symptoms, more than doubling the percentage of cancers that were detected.

“We wanted that data in hand as a big catalyst to drive the process,” Thrive CFO Isaac Ro told Endpoints.

7. Could Roger Federer be as successful playing badminton? – Martin Hirt

In late January, Roger Federer won his sixth Australian Open title. His tally of Grand Slam championships now numbers 20—an incredible feat. As tennis’s biggest star, he is well compensated for his efforts: Forbes magazine estimates that he took home $64 million last year.

Why does Federer make so much money? The answer, most would say, is clear: talent, hard work, good looks, business acumen.

But what if Federer played badminton? He would face Lin Dan, the champion in that sport. Each man may be the best ever in his respective game, and both are extremely marketable, with competitive instincts and personal charm. But Dan doesn’t make anywhere near what Federer does—and he never will. That’s because Dan has an “industry” disadvantage. A Top 10 tennis player makes 10 to 20 times what a Top 10 player in any other racket sport earns…

… The role of industry in a company’s position is so substantial that you’d rather be an average company in a great industry than a great company in an average industry. The median pharmaceutical company (India-based Sun Pharmaceuticals), the median software company (Adobe Systems), and the median semiconductor company (Marvell Technology Group) all would be in the top quintile of chemicals companies and the top 10% of food products companies.

In some cases, you’d rather be in your supplier’s industry than in your own. For example, the average economic profit of airlines is a loss of $99 million, while suppliers in the aerospace and defense category average a profit of $453 million. In fact, the 20th percentile aerospace and defense supplier, Saab AB, earns more economic profit than the 80th percentile airline, Air New Zealand. That is not to say that all airlines have poor economic performance (witness Japan Airlines), nor that all is rosy in aerospace and defense. But it is a fact of life that there are more and less attractive playing fields.

What We’re Reading (Week Ending 23 August 2020)

The best articles we’ve read in recent times on a wide range of topics, including investing, business, and the world in general.

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!

Here are the articles for the week ending 23 August 2020:

1. 10 years ago – Joshua Brown

And 10 years ago this August I had a new career. A fresh start. I had a couple of million dollars in assets under management from the small handful of clients I brought with me. I had a spot working at an RIA in midtown Manhattan. I had my Series 65. I had a decade of experience doing retail brokerage, selling stock trades and mutual funds. I had nothing saved in the bank and barely anything in retirement accounts to my name. I had no idea where my next client was going to come from. I had a wife and two children under the age of five to feed and support. I was terrified.

But I knew it was the only way to give financial advice the way I wanted to. Working at brokerage firms for a decade I had learned most of the important stuff about investing, securities, markets, risk and return. And when I say “the important stuff,” I’m referring to behavior. This is the one thing I had figured out. If I could help investors avoid the endless mistakes, conflicts and dangers I had witnessed on the sell side, then I could be delivering the most valuable service in the world to them. I would save one person at a time from all of the horrible things I’d seen and experienced. The bet was that someday, telling the truth and rescuing families from bad decisions would pay off.

I made the bet.

[Ser Jing here: Josh Brown’s piece really resonates with me, because Jeremy and I both recently took the plunge to set up our own investment fund to – borrowing Brown’s words – “help investors avoid the endless mistakes, conflicts and dangers” we had noticed in the financial markets.]

2. When The Magic Happens – Morgan Housel

The 1930s were a disaster.

Almost a quarter of Americans were out of work in 1932. The stock market fell 89%.

Those two economic stories dominate the decade’s attention, and they should.

But there’s another story about the 1930s that rarely gets mentioned: It was, by far, the most productive and technologically progressive decade in history.

The number of problems people solved, and the ways they discovered how to build stuff more efficiently, is a forgotten story of the ‘30s that helps explain a lot of why the rest of the 20th century was so prosperous…

… A couple of things happened during this period that are worth paying attention to, because they explain why this happened when it did.

The New Deal’s goal was to keep people employed at any cost. But it did a few things that, perhaps unforeseen, become long-term economic fuels.

Take cars. The 1920s were the era of the automobile. The number of cars on the road in America jumped from one million in 1912 to 29 million by 1929.

But roads were a different story. Cars were sold in the 1920s faster than roads were built. A new car’s novelty was amazing, but its usefulness was limited.

That changed in the 1930s when road construction, driven by the New Deal’s Public Works Administration, took off.

3. Earthquake detection and early alerts, now on your Android phone – Marc Stogaitis

Starting today, your Android phone can be part of the Android Earthquake Alerts System, wherever you live in the world. This means your Android phone can be a mini seismometer, joining millions of other Android phones out there to form the world’s largest earthquake detection network.

All smartphones come with tiny accelerometers that can sense signals that indicate an earthquake might be happening. If the phone detects something that it thinks may be an earthquake, it sends a signal to our earthquake detection server, along with a coarse location of where the shaking occurred. The server then combines information from many phones to figure out if an earthquake is happening. We’re essentially racing the speed of light (which is roughly the speed at which signals from a phone travel) against the speed of an earthquake. And lucky for us, the speed of light is much faster!

To start, we’ll use this technology to share a fast, accurate view of the impacted area on Google Search. When you look up “earthquake” or “earthquake near me,” you’ll find relevant results for your area, along with helpful resources on what to do after an earthquake.

4. Fintech Scales Vertical SaaS – Kristina Shen, Kimberly Tan, Seema Amble, and Angela Strange

Let’s assume the average vertical SMB customer spends about $1,000/month on software and services. Of that, $200 per month will typically be on traditional software (e.g., ERP, CRM, accounting, marketing), and the rest on other financial services (e.g., payments, payroll, background checks, benefits). In a traditional vertical SaaS business, the only way to capture more revenue from the customer was to upsell software. This left the $800 per month potential revenue from financial services to other vendors.

But with SaaS + fintech, a vertical SaaS company can capture a customer’s traditional software spend as well as the spend on employee and financial services.

1. Traditional SaaS expansion – Upsell software products or add software modules
2. Fintech opportunity – Add financial services, such as payments, cards, lending, bank accounts, compliance, benefits and payroll

In our hypothetical above, a vertical SaaS company that adds, or even embeds, financial products, can potentially 5x the revenue per customer from the $200/month software spend to the full $1000/month for software and services.

5. Tweetstorm on why India will be a hotbed for innovative, world-class enterprise startups – Hemant Mohapatra

3/n Internet penetration has benefited B2C but has 2nd order impact on B2B. For every Dropbox or Facetime, there’s also a Box or Zoom using digital tools to build, test, & launch at breakneck speeds & then in “consumerish ways” brands, sell, & monetize enterprises.

4/n “Developer is the new buyer” — think fewer site-wide MSDN or RHEL licenses, more personal/team-wide Github/Slack/digitalOcean accounts. Corporate IT spend will disaggregate and many top-down decisions will turn bottoms-up where individual “consumer” needs to be influenced.

5/n Founders w/ dev-first mindset will win big globally & Indian founders have a unique advantage here: our developer ecosystem is one of the most vibrant in the world. We are curious, engaged, & hungry to learn. Being a techie in India isn’t “geeky/nerdy”, it’s cool, fashionable…

… 10/n By itself, India is now the 2nd largest public cloud buyer in APAC, ~50% of China & growing faster. Vs China, the Indian buyer is hungrier & doesn’t care for brand or roadmap (so, ideal for startups), is more top-line focused & trying to get more process-driven to scale…

… 13/n While India-to-US has been tried before successfully, India now has the potential to be the Enterprise / SaaS hub for local and SEA markets. Why?

14/n China enterprise cos are either h/w focused or serve local markets. Meanwhile, rest of SEA has strong cultural, language AND use-case alignment w/ India given history & development stage (gig-based, migrant population, etc). Works in India? Can work there.

15/n and to support all this value creation, the key pieces are coming together nicely. Vast majority of founders now have prior startup experience — this is where many of the smartest people are headed — not banking, consulting, or Google/FB.

6. Tencent: The Ultimate Outsider – Packy McCormick

With monetization booming, Tencent IPO’d in 2004 at a valuation of 6.22 billion HKD, or $790 million USD. Cue Motley Fool headline: if you had invested $10,000 in Tencent at its IPO in 2004, you would have $7.9 million today.

Oh, you didn’t invest in Tencent at its IPO? Damn. To be fair, it’s a very different company today than it was then, thanks to two 2005 hires: Martin Lau and Allen Zhang.

After completing its IPO, Tencent hired the Goldman Sachs investment banker who took it public, Martin Lau. Lau had the pedigree – Chinese-born, undergrad at Michigan, engineering masters at Stanford, and MBA at Kellogg – and a skillset that was complementary to Ma’s. Lau became the English-speaking face of the business, taking on a role that the shy Ma hated, and the master capital allocator. In the beginning of his tenure, Lau focused on acquiring studios to grow its scorching games business as the Chief Strategy Officer. By the next year, Ma promoted him to President.

Tencent also turned its attention to competitive threats to the portal business, including Microsoft’s increasing presence in China via MSN. To combat the threat, it acquired competitor Foxmail in 2005 to build QQ Mail. The product was successful, but more importantly, Tencent acquired the developer behind Foxmail, Allen Zhang.

With Lau and Zhang on board, Tencent grew rapidly via desktop games and the QQ platform. Its revenue jumped 15x from $200 million in 2005 to $2.9 billion in 2010. But 2011 was the year when Zhang and Lau really made their mark.

7. Are Emerging Markets Turning Into the S&P 500? – Ben Carlson

Emerging markets are cheaper on every metric. Many investors say this makes sense considering emerging markets are full of energy, materials, and financials while the U.S. is more driven by technology and consumer stocks.

And this was a good argument in 2007 or even 2015 but not so in 2020.

The make-up of emerging market equities has changed dramatically in recent years. Blackrock sent me the sector changes in their iShares Emerging Markets ETF (EEM) since 2007:

… Here are some notable changes since the start of 2007:

Energy has gone from more than 15% to less than 6%
Materials were closer to 16% and now sit at 7%
Financials have gone from more than 20% to 18% (and are down from a high of 27% in 2015)
Consumer discretionary stocks have gone from roughly 3% to 18%
Technology is now the biggest sector, having risen from 13% in 2007 to more than 18% now

Financials still have a large weighting but it’s a dwindling market share compared to the past. Energy and materials companies combined are now less than either of those categories were individually in 2007. And technology stocks now make up the largest sector in the fund.

What We’re Reading (Week Ending 16 August 2020)

The best articles we’ve read in recent times on a wide range of topics, including investing, business, and the world in general.

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!

Here are the articles for the week ending 16 August 2020:

1. Here We Are: 5 Stories That Got Us To Now – Morgan Housel

Everyone is innocently short-sighted when trying to make sense of 2020.

January, before Covid-19 upended everything, feels like a different lifetime. March is already a blur. Time slows when you experience surprise, and every day of 2020 brings a new shock. So the recent past feels like distant history.

But if you survey the confusing mess we’re in – 50 million jobs lost, 130,000 dead, Tesla stock up 400% – you have to remember that none of it happened in a vacuum. Every event has parents, grandparents, siblings, and cousins – previous events that planted the seeds, passed on their DNA, and continue to influence what’s happening today.

To have any hope of making sense of what’s happening in 2020, we have to pay attention to a bunch of seemingly unrelated stories that began before anyone had heard of Covid-19.

2. Characteristics of Winning Software Stock Selection – Software Stack Investing

The most important measure of user adoption for a software stack company is its ability to expand usage within its established customer base. This usage growth is represented as the Dollar Based Net Expansion Rate (DBNER). This rate is calculated as the percentage growth in spend from existing customers over a 12 month period. I like to see software stack companies with a DBNER over 120%. This means that existing customers will spend 20% more each year on the company’s offerings and becomes a powerful force in driving recurring revenue growth.

Questions to consider when evaluating developer mindshare:

Has the company extended its software product offerings by exposing the underlying APIs and platform services for developers to consume?
Does the company actively target developers for its marketing efforts? If it holds conferences, are they focused on building versus watching?
Is it easy to evaluate the software solution in a self-service manner, without talking to a salesperson first?
Is detailed documentation publicly available online about API’s and service usage? Are there code samples or starter kits in GitHub?
Are the software solutions being taught as part of developer training programs? Bootcamps and university programs come to mind here.
Does the software stack company achieve a high DBNER with existing customers?

3. Philip Carret: Buy ‘Em Cheap and Hold ‘Em – Jason Zweig

At 97, Phil Carret has well learned an essential truth about markets: Traders rarely die rich, patient investors often do.

“I’ve been involved in the market too long to get excited,” he says, talking about the aftermath of Alan Greenspan’s interest rate boosts.

Since 1919, through thick and thin, four U.S. wars, roaring inflation and deadening recessions, Philip Carret (rhymes with hurray) has been investing with success in stocks and bonds. Longevity pays in investing. It means that your successful stock picks compound, uninhibited by capital-gains taxes.

“There’s no point in taking profits and paying taxes,” Carret explains. “Turnover usually indicates a failure of judgment. It’s extremely difficult to figure out when to sell anything. So I’d rather have the stock taken away from me in a merger or a buyout. It’s much easier.”

With a buy-and hold portfolio and a fatalistic shrug on the matter of where the market is headed, an investor can work a short day. “Don’t worry too much,” advises Carret. “If you buy them cheap enough, they watch themselves.”

4. Tweetstorm on Netflix’s hidden competitive advantage in its early days – Mario Cibelli

This tweet storm dates back to the 2003/2004 timeframe and involves a little DVD rental company called Netflix. If you read the book Netflixed, I was quoted saying: “There’s not a snowball’s chance in hell that Blockbuster can do this”

This is the story behind that quote and about one of the best investor meetings I ever had.

While I was fortunate enough to have met with Reed and Barry a number of times before the company become really well followed, neither of these two, nor any senior staff for that matter, were present for this meeting.

Sometimes the best insights into a company do not come from visiting with senior management. This particular meeting took place in a warehouse off the Long Island Expressway with a former operations engineer named Rich. I remember his full name to this day.

5. Tweetstorm on an individual’s incredible experience of escaping from Kuwait during Iraq’s invasion in 1990 – Abraham Thomas

2/Exactly 30 years ago, on August 2nd 1990, Saddam Hussein’s army invaded Kuwait. I remember it clearly; I was there.

3/ My family was part of the massive Indian expat community. My father worked for the Kuwaiti ministry of health; my mother was a teacher. We had lived in Kuwait for 6 years.

4/ We woke up that morning to an unusual sight: a line of tanks, moving down the highway.

5/ As fate would have it, the main training camp of the Kuwaiti National Guard was across the highway from us. The tanks stopped, and started lobbing shells at the camp; the camp returned fire. Soon we were witnessing a full-pitched battle.

6/ We didn’t watch for long; we took refuge in the basement of our apartment complex, hoping it’d be safer than above ground.

7/ We spent 36 hours in that basement, among boilers and electrical machinery. An apartment on the 8th floor was hit by a shell and caught fire; fortunately, the fire didn’t spread. (Ours was on the 4th floor).

8/ On day 2 we went up to get food and water. There was a hole in the metal frame of my bedroom window. I recovered a melted, misshapen bullet.

9/ That was enough; we decamped to a friend’s house in a less strategically important neighbourhood.

6. The Anglerfish Deleted Its Immune System to Fuse With Its Mate – Edith A. Widder

All vertebrates, including humans, have two kinds of immune systems. The first is the innate system, which responds quickly to attacks by microscopic invaders with a variety of chemicals like mucous physical barriers like hair and skin, and disease-munching cells called macrophages. The second line of defense is an adaptive system that produces both “killer” T cells to attack the pathogen and antibodies custom-made to fight specific bacteria or viruses. The two systems work together to fight infections and prevent disease.

But in a study published Thursday in the journal Science, researchers from Germany’s Max Planck Institute and the University of Washington found that many anglerfish species (there are more than 300) have evolved over time to lose the genes that control their adaptive immune systems, meaning that they can’t create antibodies and lack those T cells…

… Boehm says he hopes that the finding will perhaps lead to a new understanding of immunosuppression in humans, and perhaps better treatments for organ transplant recipients in the future. “From an evolutionary perspective, any immunologist would say it’s impossible to disentangle the innate and adaptive arms of the immune system,” Boehm says. “They’ve been together for more than 500 million years. If we fiddle with one or the other arm, it’s a catastrophic event. This is the first big surprise—that there is hope and that there is life without one of these two arms.”

7. Eric Vishria – The Past, Present, and Future of SaaS and Software – Patrick OShaughnessy & Eric Vishria

If you were Coca-Cola and you had traditional software, it wouldn’t make sense for you to invest in automation for your ERP, but if you’re doing it across a thousand customers, it does make sense. There were benefits there. But it was still single instance not multi-tenant SaaS. That first generation of SaaS companies, the other kind of interesting notion if you think about what was Siebel became Salesforce, was PeopleSoft became Workday, was Peregrine became ServiceNow.

It was actually the same founders, literally. It was the same people. They just realized, “Wait a minute. There’s a better delivery model. We know what to build. We know the features. There’s a better delivery model. There’s a better economic model. Let’s go build it.”

David Duffield, you have the Peregrine founders founded ServiceNow. Tom Siebel and Benioff worked together at Oracle I believe, before Benioff went off to do Salesforce. You have a lot of the same ideas and honestly, not that great software experience, but it was a better delivery and economic model. That was what I would call gen one SaaS. All those companies were founded, 1999 to 2005. So, really that generation.

Patrick (00:27:39): By the way, those three examples, Salesforce, Workday, ServiceNow relative to Siebel, PeopleSoft and Peregrine are 10 times the size or something. Just the delivery and economic model is a much more valuable company.

Eric Vishria (00:27:51): I mean I think even more than 10. I think Siebel was a little around 3 billion ultimately, acquisition and I think Salesforce, whatever is like 170 billion.

Patrick (00:27:59): Two orders of magnitude.

Eric Vishria (00:28:00): Yeah. Two orders of magnitude. I mean I think PeopleSoft was a big outcome and Workday. So, PeopleSoft and Workday are probably 5x or so. But I think Peregrine and ServiceNow would be like 150x. I mean these things are just… some of that’s market expansion, but definitely better delivery and economic model too.

What We’re Reading (Week Ending 09 August 2020)

The best articles we’ve read in recent times on a wide range of topics, including investing, business, and the world in general.

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!

Here are the articles for the week ending 9 August 2020:

1. Why Markets Don’t Seem to Care If the Economy Stinks – Barry Ritholtz

Start with some of 2020’s worst-performing industries: Year-to-date (as of the end of July), these include department stores, down 62.6%; airlines, off 55%; travel services, down 51.4%; oil and gas equipment and services, down 50.5%; resorts and casinos, down 45.4%; and hotel and motel real estate investment trusts, off 41.9%. The next 15 industry sectors in the index are down between 30.5% and 41.7%. And that’s four months after the market rebounded from the lows of late March.

These are highly visible industries, with companies that are well-covered by the news media with household names known to many consumers. Retailers are everywhere we go. Gas stations, chain restaurants and hotels are ubiquitous in cities and suburbs across the country.

So although high visibility industries may be of considerable significance to the economy, they are not very significant to the capitalization-weighted stock market indexes.

Consider how little these beaten-up sectors mentioned above affect the indexes. Department stores may have fallen 62.3%, but on a market-cap basis they are a mere 0.01% of the S&P 500. Airlines are larger, but not much: They weigh in at 0.18% of the index. The story is the same for travel services, hotel and motel REITs, and resorts and casinos.

The market is telling us that these industries just don’t matter very much to stock market performance. And the sectors that do matter? Consider just four industry group — internet content, software infrastructure, consumer electronics and internet retailers — account for more than $8 trillion in market value, or almost a quarter of total U.S. stock market value of about $35 trillion. Take the 10 biggest technology companies in the S&P 500 and weight them equally, and they would be up more than 37% for the year. Do the same for the next 490 names in the index, and they are down about 7.7%. That shows just how much a few giants matter to the index.

2. Open Secrets – Malcolm Gladwell

The national-security expert Gregory Treverton has famously made a distinction between puzzles and mysteries. Osama bin Laden’s whereabouts are a puzzle. We can’t find him because we don’t have enough information. The key to the puzzle will probably come from someone close to bin Laden, and until we can find that source bin Laden will remain at large.

The problem of what would happen in Iraq after the toppling of Saddam Hussein was, by contrast, a mystery. It wasn’t a question that had a simple, factual answer. Mysteries require judgments and the assessment of uncertainty, and the hard part is not that we have too little information but that we have too much. The C.I.A. had a position on what a post-invasion Iraq would look like, and so did the Pentagon and the State Department and Colin Powell and Dick Cheney and any number of political scientists and journalists and think-tank fellows. For that matter, so did every cabdriver in Baghdad.

The distinction is not trivial. If you consider the motivation and methods behind the attacks of September 11th to be mainly a puzzle, for instance, then the logical response is to increase the collection of intelligence, recruit more spies, add to the volume of information we have about Al Qaeda. If you consider September 11th a mystery, though, you’d have to wonder whether adding to the volume of information will only make things worse. You’d want to improve the analysis within the intelligence community; you’d want more thoughtful and skeptical people with the skills to look more closely at what we already know about Al Qaeda. You’d want to send the counterterrorism team from the C.I.A. on a golfing trip twice a month with the counterterrorism teams from the F.B.I. and the N.S.A. and the Defense Department, so they could get to know one another and compare notes.

3. How to Understand COVID-19 Numbers – Caroline Chen and Ash Ngu

“Cases going up or down tells you a fair bit about what’s going on at the moment in terms of transmission of the virus — but it’s only valid if we’re testing enough people,” Fox said.

When there aren’t enough tests available, as was the case in New York in March, the number of cases reported will be an undercount, perhaps by a lot. That’s where case positivity rates come in: that measures the percentage of total tests conducted that are coming back positive. It helps you get a sense of how much testing is being done overall in a region.

“WHO guidelines say we want that to be below 5%,” Fox noted. When a positivity rate is higher, epidemiologists start worrying that means only sicker people have access to tests and a city or region is missing mild or asymptomatic cases. When almost all of the tests come back negative, on the other hand, it’s a good indicator that a locality has enough tests available for everyone who wants one, and public health officials have an accurate picture of all the infections, Fox said.

4. How to Outrun a Dinosaur – Cody Cassidy

The incredibly powerful, long-legged Tyrannosaurus was slow for the same mathematical reason its demise in the mine shaft was so eruptive. Like surface area, bone strength only squares in strength as volume cubes. The result is that as an animal increases in size, it requires proportionally more muscle and leg bone to stand, move, and run. Beyond a certain size, the latter becomes physically impossible. For all its muscular bulk, the Tyrannosaurus rex’s leg bones would have shattered under anything more than the stress of a brisk jog. Judging by its mass, muscle, and bones, Snively doesn’t believe an adult Tyrannosaurus rex could have moved faster than 12 or 13 miles per hour. (Though 12 miles per hour approaches the top speed of a typical human, depending on conditioning—it equates to a 20-second 100 meter dash or a 5-minute mile—the T. rex’s slow acceleration and inspiring teeth would give the average runner a reasonable chance of outsprinting or outmaneuvering the lumbering predator.)1

5. Robinhood Has Lured Young Traders, Sometimes With Devastating Results – Nathaniel Popper

But at least part of Robinhood’s success appears to have been built on a Silicon Valley playbook of behavioral nudges and push notifications, which has drawn inexperienced investors into the riskiest trading, according to an analysis of industry data and legal filings, as well as interviews with nine current and former Robinhood employees and more than a dozen customers. And the more that customers engaged in such behavior, the better it was for the company, the data shows.

More than at any other retail brokerage firm, Robinhood’s users trade the riskiest products and at the fastest pace, according to an analysis of new filings from nine brokerage firms by the research firm Alphacution for The New York Times.

In the first three months of 2020, Robinhood users traded nine times as many shares as E-Trade customers, and 40 times as many shares as Charles Schwab customers, per dollar in the average customer account in the most recent quarter. They also bought and sold 88 times as many risky options contracts as Schwab customers, relative to the average account size, according to the analysis.

6. Do You Know the Difference Between Being Rich and Being Wealthy? – Jason Zweig

Mr. Housel begins with a shocking anecdote he witnessed himself: A technology multimillionaire handed a hotel valet thousands of dollars in cash to go buy fistfuls of gold coins at a nearby jewelry store. The executive then flung the coins, worth about $1,000 apiece, into the Pacific Ocean one at a time, skipping them across the water like flat rocks, “just for fun.”

To that man, money was a plaything. (He later went broke, Mr. Housel writes.) To Ronald Read, however, money was possibility. Mr. Read spent decades pumping gas and working as a janitor in Brattleboro, Vt. After he died in 2014 at the age of 92, his estate was able to give more than $6 million to local charities—because he had scrimped and put every spare penny into stocks that he held for decades.

How, asks Mr. Housel, did a janitor “with no college degree, no training, no background, no formal experience and no connections massively outperform” many professional investors?

7. Those Astronomical Returns Aren’t What They Seem – Aaron Brown

Every so often there are news reports of someone generating seemingly impossible returns in the financial markets. Several media outlets reported recently that hedge fund manager Bill Ackman made a 9,530% return in March, turning $27 million into $2.6 billion. So-called tail-risk hedge fund Universa Investments LP posted a 4,144% return that same month.

Most people probably can’t easily process these numbers or relate them to more normal performance like earning 2% on a bond or 9% in an equity mutual fund. It feels like lottery-ticket territory, which breeds doubts that the results are true. This is unfortunate, because there is useful information in the reports, but it’s presented in a highly misleading way.

The best way to think about these gains is that they were essentially insurance payouts divided by a premium payment. For example, suppose you pay $100 per month for homeowner’s insurance on a house valued at $250,000. One day the house burns down and you collect $250,000. Would you call that a 249,900% return on the $100 monthly premium? No, you’d say you recouped 100% of the $250,000 pre-fire value of the house. You weren’t trying to make a good trade with your monthly premium payment, you were trying to protect the value of your housing investment.

What We’re Reading (Week Ending 2 August 2020)

The best articles we’ve read in recent times on a wide range of topics, including investing, business, and the world in general.

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!

Here are the articles for the week ending 2 August 2020:

1. The Ugly Scramble – Morgan Housel

There is no topic in business and investing that gets more attention than risk. But it’s almost always viewed through a universal lens: “What risks are we going to face in the future?” Or just simply, “What’s the economy going to do next?”

But risk has little to do with what’s going to happen next and a lot to do with how much you can endure, and how calmly you can react to, whatever happens next.

To the leveraged investor a small setback is a huge risk because of how they’re forced to deal with decline: by selling to cover their debts, right now, this moment, whatever the price is. Don’t think, just scramble to do you gotta do in the face of panic. They’re like the cat locking its limbs into place, doing whatever they can to survive even if it breaks them to pieces.

To the patient investor with a ton of cash, a huge market decline requires no immediate action. And not because it doesn’t affect them – it often does – but because however it affects them can be dealt with slowly and methodically. Maybe they realize they want a more conservative allocation. They can come to that conclusion after thinking it through, hearing opposing views, weighing alternatives, and calmly executing at the right time. Doing so may lead them to a different choice than their initial gut reaction. Taking time to understand a complicated problem often does.

2. Everyone’s a Day Trader Now – Michael Wursthorn, Mischa Frankl-Duval, and Gregory Zuckerman

Much of the rapid-fire day trading culture plays out on social media, which has helped usher in a new class of social-media influencers who hype stocks to followers eager for get-rich-quick stock tips. They swap trading ideas over Twitter, Discord and Reddit, an update from the boiler-room chat rooms of the ’90s that sent dot-com stocks into a frenzy.

Stanley Barsch, Ms. Viswasam’s boss who got her into investing, touts the stocks he trades to his more than 76,000 Twitter followers, who refer to him by his handle, StanTheTradingMan. He also hosts his own Discord channel, where a tighter-knit group of day traders circulate unconfirmed rumors as potential catalysts for big gains.

Mr. Barsch, 42, is a former police officer turned real-estate broker, who said he had been making a steady six figures since 2010. Now, he boasts of how he says he turned the $20,000 he put into the market in January and February into more than $450,000 as of mid-July without any prior trading experience.

3. Statement by Jeff Bezos to the U.S. House Committee on the Judiciary – Jeff Bezos

In my view, obsessive customer focus is by far the best way to achieve and maintain Day One vitality. Why? Because customers are always beautifully, wonderfully dissatisfied, even when they report being happy and business is great. Even when they don’t yet know it, customers want something better, and a constant desire to delight customers drives us to constantly invent on their behalf. As a result, by focusing obsessively on customers, we are internally driven to improve our services, add benefits and features, invent new products, lower prices, and speed up shipping times—before we have to. No customer ever asked Amazon to create the Prime membership program, but it sure turns out they wanted it. And I could give you many such examples. Not every business takes this customer-first approach, but we do, and it’s our greatest strength.

Customer trust is hard to win and easy to lose. When you let customers make your business what it is, then they will be loyal to you—right up to the second that someone else offers them better service. We know that customers are perceptive and smart. We take as an article of faith that customers will notice when we work hard to do the right thing, and that by doing so again and again, we will earn trust. You earn trust slowly, over time, by doing hard things well—delivering on time; offering everyday low prices; making promises and keeping them; making principled decisions, even when they’re unpopular; and giving customers more time to spend with their families by inventing more convenient ways of shopping, reading, and automating their homes. As I have said since my first shareholder letter in 1997, we make decisions based on the long-term value we create as we invent to meet customer needs. When we’re criticized for those choices, we listen and look at ourselves in the mirror. When we think our critics are right, we change. When we make mistakes, we apologize. But when you look in the mirror, assess the criticism, and still believe you’re doing the right thing, no force in the world should be able to move you.

4. Earth’s Asteroid Impact Rate Took A Sudden Jump 290 Million Years Ago – Phil Plait

We know that there’s a lack of old craters on the Earth, and it’s always been assumed that’s due to erosion. Wind, water, geologic activity: Over long stretches of time our Earth remakes itself, scrubbing the surface of blemishes like impacts*.

But the evidence for this is lacking. That’s what initially motivated the scientists, to try to see if there’s a way to support this idea. So they looked to the Moon. Our satellite is in the same region of space we are, so should get hit at very close to the same rate as Earth does. The idea is to look at big craters on the Moon, figure out a way to get their ages, do the same on Earth, then compare the two and see what you find.

The problem is getting the lunar crater ages, since very few have absolute ages found for them. But they came up with a clever idea. In a big impact, one that leaves a crater 10 kilometers across or wider, rocks from the lunar bedrock get ejected from the explosion and deposited around the crater. Over long periods of time these erode. Not due to air or water, of course, since the Moon doesn’t have those.

Instead, they erode from tiny micrometeorites raining down constantly. These sandblast the rocks, slowly wearing them away (this doesn’t happen on Earth because our atmosphere stops them). Also, the temperature change from day to night on the Moon is hundreds of degrees Celsius. The rocks are constantly expanding and contracting from this, which causes them to crack and erode.

They figured that by looking at the abundance of rocks around a crater compared to the fine powdery eroded rock material (called regolith), they can get a relative age; craters with more intact rocks are younger, and ones with more eroded ones are older.

5. Bill Gates says 3 coronavirus treatments being tested now ‘could cut the death rate dramatically.’ They may be available within months. – Hilary Brueck

“The very first vaccine won’t be like a lot of vaccines, where it’s a 100% transmission-blocking and 100% avoids the person who gets the vaccine getting sick,” the billionaire philanthropist told Insider.

Vaccine trials take months, they don’t have to create completely effective inoculations, and they won’t help protect people who are already sick.

That’s why Gates is more excited, in the immediate term, about coronavirus therapeutics.

6. How a power-hungry CEO drained the light out of General Electric – Mary Kay Linge

For years, GE’s profits had been a mirage built on whirlwind mergers and accounting sleight of hand. The funds that had been doled out to shareholders as fat dividends — and had covered its managers’ lavish perks and pay — had largely been borrowed on the strength of the company’s golden credit.

The book’s authors paint a damning portrait of Immelt’s 16 years at the helm of GE, where a rubber-stamp board of directors allowed him to hemorrhage money almost unchecked…

… At the same time, GE’s established divisions were expected to meet earnings goals far removed from reality. “Under Immelt, the company believed that the will to hit a target could supersede the math,” Gryta and Mann report.

It was a recipe for a disaster. Up-and-coming middle managers knew that a missed goal could stymie their climb up GE’s ladder; division heads “didn’t necessarily know how his underlings got to the finish line and it didn’t really matter,” the authors write.

Those toxic incentives drove the debacle that Flannery uncovered at GE Power. The division made its money not on the generators and turbines it built, but on the service contracts it sold to maintain the machines.

All a manager had to do was tweak the future cost estimates on those decades-long contracts to jack up profits as needed — and to paper over real losses from unsold inventory and declining demand.

7. Tweet storm from an executive who worked with Jeff Bezos to launch the Kindle – Dan Rose

Ignore the “institutional no”. Amazon’s core retail business was pummeled after dot-com crash, and we were still pulling out of the tail spin in 2004 when Jeff started the Kindle team (same year he started AWS team). Everyone told him it was a distraction, he ignored them.

Cannibalize yourself. Steve Kessel was running Amazon’s media business in 2004 (books/music/DVD’s). Books alone generated more than 50% of Amazon’s cash flow. Jeff fired Steve from his job and reassigned him to build Kindle. Steve’s new mission: destroy his old business…

… Make magic. Syncing over WiFi without cables was innovative, and our team was proud of it. But Jeff didn’t think it was magical enough. He insisted on syncing over cellular, and he didn’t want to charge the customer for data. We told him it couldn’t be done, he did it anyway.

What We’re Reading (Week Ending 26 July 2020)

The best articles we’ve read in recent times on a wide range of topics, including investing, business, and the world in general.

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!

Here are the articles for the week ending 26 July 2020:

1. I Gave a Talk to a Federal Credit Union – Nathan Tankus

First we have the idea of a legal system. It may seem obvious that money starts with law, but that isn’t necessarily obvious to most academics. It’s certainly not where a traditional money and banking textbook would start. MMT emphasizes that money is inherently legally designed and grounds money in the functioning of the legal system which authorizes its existence and enforces legal obligations denominated in money. We’ll return to this crucial point in a bit.

Second there is the idea of physical resources. These are raw materials, physical land, machinery, factories etc. which are necessary to produce goods and services that the government needs to accomplish its goals. Production is the combination of these physical resources with labor and technology to produce useful goods and services. The most obvious example of this is of course war time. Governments need to produce tanks, guns, rations, uniforms etc. to fight wars and they need their domestic populations to produce those resources. Modern Monetary Theory may have “monetary” in the name, but the ultimate object of MMT academics in the policy sphere is to use our monetary system in order to mobilize physical resources. Thus, the availability and usability of physical resources is important to Modern Monetary Theorists.

The final part of the definition is the most important part. In my experience, this is the idea at the foundation of MMT that people learning about it tend to have the most difficult time grasping. It’s also a point that is consistently overlooked and underemphasized by mainstream journalists who try to produce “explainers” about MMT. This is the idea that specific financial instruments have value, in fact that they are monetized, because those instruments can be used to pay legally enforceable obligations. The most obvious and important obligation that money can settle is one’s tax bill, but all sorts of legal obligations can be settled with money. Lawsuits, child support, damages, fines, fees and all sorts of other court ordered monetary payments can be settled with specific financial instruments which legal systems treat as money. I can’t emphasize enough that money is money because it can be used to settle legal obligations within a specific jurisdiction.

2. Hacked Printers. Fake Emails. QuestionableFriends. Fahmi Quadir Was Up 24% Last Year, But It Came at a Price – Michelle Celarier

In response, she believes, the company initiated “cybersurveillance, including numerous hacking attempts with aggressive measures to obtain sensitive information about us and our personal lives,” she wrote to investors in August.

“We are not fearful,” she bragged in that letter. “When companies resort to such intrusive and illegal tactics against a small fry, perhaps we are not as small as they think we are and more importantly, perhaps it’s the company that’s shaking in its boots,” she added.

Quadir declined to tell Institutional Investor the name of the company, but said she’d received emails falsely purporting to be a journalist she knew, leading her to believe it was an attempted hacking.

That wasn’t all.

“We’ve received documents from lawyers, but it’s not actually from those lawyers. And there was a time in my home — I have a basically defunct printer at my home — when suddenly, in the middle of the night, I think it was like 2:00 a.m., the printer just turns on and starts printing emails from whistleblowers. In the middle of the night!”

Quadir has since brought on cybersecurity experts “to clean everything,” she says. “I’m not concerned for my safety; I think this just comes with the territory. Did we expect it to all happen in the first year of launching? No. But it’s just the lengths these companies go to intimidate.”

3. How the U.S. Consumer Became the Most Resilient Force in the Economy – Ben Carlson

To pay for all of this stuff the Roaring Twenties also introduced installment payment plans. The phrase “buy now, pay later” became part of the popular nomenclature during this time.

Robert Gordon estimates by the end of the 1920s consumer credit financed 80-90% of furniture sales, 75% of washing machines, 65% of vacuums, 25% of jewelry and 75% of radios.

Previous generations attached a social stigma to borrowing. The 1920s chipped away at this idea as people purchased products that didn’t exist for those generations.

And while the country as a whole achieved a level of prosperity from 1923-1929 like never before, farmers were decimated. The depression of 1920-1921 cut the price of farm products in half and they regained just a fraction of those losses by the end of the decade. Incomes for farmers fell more than 60%.

The end of agriculture as the dominant career choice in the early part of the 20th century led to an urbanization boom. The first Sears store opened in Chicago in 1925. By the time the expansion was coming to an end in 1929 they were up to 300 stores, mainly in big cities.

4. Quarterly Investment & Market Update, Summer 2020 Q2 – Ensemble Capital

One mistake we think some investors have made during this unprecedented period is substituting a forecast of the virus for a forecast about the economy or financial market performance.

While clearly, the pandemic is a huge negative impact on the economy, they are not the same thing. And stocks are not a direct reflection of the US economy.

The market doesn’t care about the economy today, it cares about corporate cash flows over time.

So while today it seems that the stock market and the economy are totally disconnected, in reality stock prices are reflecting a view that while the economy is very bad now, it will recover in the years ahead. And in fact, you don’t even need to believe the entire US economy will recover to understand the rebound in the market.

While the S&P 500 is often referred to as “the market” and is the benchmark by which we evaluate our strategy, it represents what are essentially the 500 largest, most well capitalized companies in the country. These are the companies best positioned to manage through a period of very severe economic conditions. Meanwhile, the S & P 600, an index of smaller companies shown by the dotted orange line on the chart, is still down 20% this year.

5. The Nine Essential Conditions to Commit Massive Fraud – Josh Brown

When it comes to the massive frauds – the kind that wipe out tens of billions of dollars and result in career-ending, corporation-killing infernos, there are some necessary conditions that seem to appear with great regularity accompanying them. These are the conditions that allow the seed of a fraud to take root and germinate, they provide the fertile ground and atmosphere letting the sprout become something larger, thornier and more interconnected with the flora around it.

Ivar Krueger aka The Match King was one of the most notorious purveyors of investment fraud who ever lived. His story is relatively unknown in modern times despite the fact that the global scale of what he did was ten times more intricate and ultimately destructive than anything Madoff attempted. When you read about the details of the Krueger saga, you realize that everything that’s happened since (and will happen hence) is merely an echo of an old story.

6. Repetition Economics: The Story of the Hunter, the Mammoth, and The Wolves – Breaking The Market

You decide to throw the wolves a bone, literally, and give up the deer to them. As hoped, they leave you alone and start to eat the deer. Oh well, there is still some food at home. Hopefully you don’t see them again.

But the next day you catch another deer and on your way back the wolves show up again. It was pretty clear the way they devoured the deer last time they can be vicious animals so you don’t really want to mess with them. You lose the deer to the wolves again and leave. There’s not as much food at home, but there is still some.

Same thing happens again the next day, losing the deer to the wolves.

And then on the 4th day, when the wolves show up to the hunt again, you’ve had enough. The food has run out at home. It’s pretty clear if you keep losing your kills to the wolves you’re going to starve. You can’t keep repeating this process. And so on day 4 you decide to roll the dice and fight them off.

7. A Golden Oldie: The Best Investor You’ve Never Heard Of – Jason Zweig

That was the same year that another Grinnell trustee, Robert Noyce, called Rosenfield to tell him about a new company he was starting. Noyce had been kicked out of Grinnell in his junior year for stealing a 25-pound pig from a nearby farm and roasting it at a campus luau; his physics professor, who felt Noyce was his best student ever, got the expulsion reduced to a one-semester suspension. Noyce had never forgotten the favor, which was why he was offering the college a stake in his start-up, NM Electronics.

Was Rosenfield interested? “The college wants to buy all the stock that you’re willing to let us have,” he told Noyce instantly.

Grinnell’s endowment put up $100,000, while Rosenfield and another trustee each kicked in $100,000 more, enabling the school to supply 10% of the $3 million in venture capital that Noyce and his sidekicks, Gordon Moore and Andrew Grove, raised for the company that they soon renamed Intel.

By 1974, three years after Intel went public, Grinnell’s endowment had more than doubled to $27 million — even as the stock market lost 40% of its value.

Meanwhile, Rosenfield was keeping his eyes, and his mind, wide open. In 1976, Rosenfield heard from Buffett that a TV station, WDTN of Dayton, was for sale. Endowments rarely control private companies, but Rosenfield thinks like a businessman, not a bureaucrat. He grabbed WDTN for Grinnell at just $12.9 million, or a mere 2 1/2 times revenues at a time when TV stations were selling for three to four times revenues.

What We’re Reading (Week Ending 19 July 2020)

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!

Here are the articles for the week ending 19 July 2020:

1. Here We Are: 5 Stories That Got Us To Now – Morgan Housel

We are lucky that a lot of today’s economy can shift seamlessly into remote work. It wouldn’t have been possible to this extent if Covid-19 struct in 2010 instead of 2020.

But it again sets up a stark contrast of haves and have nots, and groups of people who are experiencing Covid-19 in different ways.

Massachusetts did a survey in April that tells the story:

88% of those with an advanced degree can work from home, vs. 35% with a high school degree or less.
75% of those making more than $150,000 a year can work from home, vs. 44% of those earning less than $50,000 a year.
74% of salaried workers can get their jobs done from home, vs. 40% of hourly workers.

There is a long history of economies being hit with downpours. But this is the first in which perhaps 70% of the economy has a sturdy umbrella while 30% is left to get soaked…

… In 1900 roughly 800 per 100,000 Americans died each year from infectious disease. By 2014 that was 45.6 per 100,000 – a 94% decline…

…This decline is probably the best thing to ever happen to humanity.

To follow that sentence with “but” is a step too far. It’s a wholly good thing.

However, it creates an anomaly.

We are medically more prepared to fight disease than ever before. But, psychologically, the mere thought of a pandemic has never felt so foreign, so unprecedented, so upending.

What was a tragic but expected part of life 100 years ago is now a tragic and inconceivable part of life in 2020.

2. 5 Thoughts on a World with No Yield – Ben Carlson

If you’re waiting for valuations to revert back to some magical 15x average CAPE ratio from 1871 you may be waiting for a long time if the low yield environment is here for some time.

The best argument against this line of thinking is a place like Japan where interest rates have been on the floor since 1990. Rates have been low or negative in many European countries for a number of years now too.

My counterargument to that case would be the United States now makes up 55% of the global equity market cap. Fifty percent of all Americans take part in the stock market (it was just 1% of the population in the Great Depression). Americans are on their own when it comes to saving and investing for retirement and we have a much worse social safety net than these other countries.

At the height of the dot-com bubble, the highest stock market valuations in history, investors could still earn 5-6% yields on U.S. Treasuries. That is not the case today.

Valuation is not useless but it does require context.

3. Charlie Songhurst – Lessons from Investing in 483 Companies – Patrick OShaughnessy and Charlie Songhurst

There’s a book by Will Durant called Caesar and Christ, it’s a whole history of Rome, from the founding to 500 AD and sort of the full history and afterwards. So it’s interesting to think, how would you invest through that? Do you buy or sell Roman real estate when Caesar’s murdered? Cause you get a civil war and you get chaos, but then you get Augustus and peace afterwards. Then when you get this whole state of bad emperors and it looks like everything’s going to fall apart, maybe you would sell and then you get Hadrian and the good emperors and you get a great hundred years.

It makes you think about sort of volatility and about having to make decisions with only information available at that time. And what’s so interesting is, you do get this sort of pattern of going from a power and sort of fashion being to have your base in city of Rome, to being out in Capua or out in the smaller provinces. And that cycle seems to co-exist for like the 500 years of history. And if you look at London, I think the peak population was in the 1930s. I think it’s still higher than the present population. Or it may just have peaked so maybe that’s the beginning of one of these great 40 year demographic changes, but people move back to the suburbs or not. This is speculation. I certainly don’t have as much conviction on it as I do on startup stuff…

…Often my enthusiasm has been greater than my competence and it’s the people that bet on the enthusiasm more than the competence, I’m eternally grateful to them.

4. Netflix CEO Reed Hastings Responds To Whitney Tilson: Cover Your Short Position. Now – Reed Hastings

Next in the litany of Whitney threats is market saturation. In 2011, this is unlikely to affect us. Streaming is growing rapidly; it is propelling Hulu, YouTube, Netflix and others to huge growth rates. Streaming adoption will likely follow the classic S curve, and we’re still on the first part (acceleration) of the S curve. Since we expanded into streaming, Netflix net subscriber additions have been 1.9m in 2008, 2.9m in 2009, and over 7m this year (estimated). While saturation will happen eventually, given the recent huge acceleration of our business specifically, and streaming generally, saturation seems unlikely to hit in the short term.

The next issue is what Whitney calls our “weak content.” While Whitney may think “Family Guy” is weak content, our subscribers do not. Furthermore, our huge subscriber growth to date has been built on this “weak content,” so imagine how much upside we have as we improve our content, as we are always trying to do. I think what Whitney may be misunderstanding is that at $7.99 per month, consumers don’t expect to have everything under the sun. A variant of this misunderstanding is when DirecTV (DTV) advertises against Netflix, calling out some Netflix content weaknesses. When an $80 per month service is picking on an $8 per month service, the $8 per month service just gets more attention from consumers and grows even faster.

5. 3 lessons from owning FAANG stocks for over a decade – Chin Hui Leong

In January 2007, I bought shares of a little known, US-based business doing DVD rentals by mail. Little did I know that, by doing so, I had bought the first of a set of five coveted stocks that are now affectionately known as “FAANG”.

You see, that DVD-rental business slowly but surely morphed into a massive global online streaming service. The company’s name? Netflix (NASDAQ: NFLX).

I still own around half of my shares from 13 years ago, and those shares are up over 160 times my original cost.

But that was not all.

6. State of the Cloud 2020 – Byron Deeter, Elliott Robinson, Hansae Catlett, Mary D’onofrio

By 2020 it’s estimated that the average cost of a data breach will be over $150 million, with the global annual cost forecast to be $2.1 trillion. New laws such as GDPR and CCPA are creating the demand for enterprises to tighten their data privacy practices.

“While many tech companies were architected to collect data, they were not necessarily architected to safely store data. Today there’s not just a rift, but a chasm between where data privacy technology, processes, and regulations should be and where they are, thus creating massive amounts of “privacy debt,” wrote Partner Alex Ferrara in his Data Privacy Engineering Roadmap.

“Like technical debt, privacy debt requires reworking internal systems to adapt and build to the newest standards, which will not only make consumers happier but also make companies better.”

We’re seeing a new category of technology dedicated to helping enterprises, large and small, comply with global privacy regulations and help protect consumer data. For example, last year Bessemer invested in BigID’s Series C, a data intelligence platform that finds, analyzes, and de-risks identity data, allowing enterprises to understand where their sensitive data lives, at scale.

7. “One of the Investment Greats” Explains His Portfolio Strategy – Robert Korajczyk and Lou Simpson

Well, I think you need a combination of quantitative and qualitative skills. Most people now have the quantitative skills. The qualitative skills develop over time.

But, as Warren used to tell me, “You’re better off being approximately right than exactly wrong.” Everyone talks about modeling—and it’s probably helpful to do modeling—but if you can be approximately right, you will do well.

For example, one thing you need to determine is: Are the company’s leaders honest? Do they have integrity? Do they have huge turnover? Do they treat their people poorly? Does the CEO believe in running the business for the long term, or is he or she focused on the next quarter’s consensus earnings?