Curated Insights 2018.06.17

What helps or hurts investment returns? Here’s a ranking

An unexpected challenge in performing this exercise is a tendency for some elements to offset others. For example, changes in profits could be offset by widening or contracting price-earnings ratios; sentiment might offset valuation; returns tend to vary inversely with risk. Why does this matter? Because in the real world, one hand giveth while the other taketh away. This concept of cancellation matters a great deal to total portfolio returns.

The overall cost of a portfolio, compounded over 20 or 30 years, can add up to (or subtract) a substantial amount of the returns. One Vanguard Group study noted that a 110 basis-point expense ratio can cost as much as 25 percent of total returns after 30 years. That does not take into consideration other costs such as trading expenses, capital-gains taxes or account location (i.e., using qualified or tax-deferred accounts). The rise of indexing during the past decade is a tacit acknowledgment that on average, cost matters more than stock-picking prowess.

Those people born in 1948 not only managed to have their peak earning and investing years (35-65) coincide with multiple bull markets and interest rates dropping from more than 15 percent to less than 1 percent. They also lucked into a market that tripled in the decade before retirement.

Behavior and discipline > Humility and learning > Longevity and starting early > Valuation and year of birth > Asset allocation > Costs and expenses > Security selection


The forging of a skeptic

I think another thing people have gotten confused about is the sustainable competitive advantage and the moat. Durable competitive advantage and moats are not the same thing as brands. People sometimes use these terms interchangeably. I have also seen people ascribe competitive advantages to brands that don’t have them. For example, retailers — retailers have brands. We all know what Macy’s is, but retailing is fundamentally a bad business.

In essence, the merits of a brand are not the brand itself; they are the qualities of the product that create the consumer loyalty. What attracted him, ultimately, to Coca-Cola is that Coca-Cola’s formula make you more, not less, thirsty, and supposedly has been tested to prove that it doesn’t wear out the palate, no matter how much is consumed. This implies infinite sales potential. The cute commercials and cheery red logo create an association in people’s minds with those qualities. They aren’t what makes it Coca-Cola.

While there are moats that include brands, a brand is not a moat. The moat is whatever qualities are innate to the business that make it difficult to compete with

Worried about big tech? Chinese giants make America’s look tame

They have both funded ventures that offer online education, make electric cars and rent out bicycles. For the giants, such initiatives represent new opportunities for people to use their digital wallets — Ant Financial’s Alipay and Tencent’s WeChat Pay — and new ways to collect data on consumer behavior. Analysts at Sanford C. Bernstein counted 247 investment deals by Tencent in recent years and 156 by Alibaba, though given the pace of the companies’ deal-making, they said their database was “likely to be perennially incomplete.”

In a report this week, Morgan Stanley predicted that by 2027, the total market in China in which Alibaba could be making money will be worth $19 trillion — more than Amazon’s potential market worldwide.

‘As long as they’re unfriendly, it’s a sign they have confidence’

Keyence keeps up compound sales growth of 14 per cent a year (1986-2016) even with sales in the billions of dollars. It takes seemingly simple products such as barcode readers and sells them for five times the cost of manufacture.

Keyence’s first secret is its production outsourcing. It buys raw materials in bulk and sends them to component suppliers; it collects the components and sends them to assemblers and performs the final inspection of goods itself.

The second secret is what Keyence really sells: not a product, but a way to make a factory more efficient. Graeme McDonald, machinery analyst at Citigroup in Tokyo, says the group’s sales engineers “can often provide an idea of how to improve your manufacturing set-up literally on the site with an idea of the payback time and return on investment”. It offers quick victories — such as a sensor to replace manual inspection, for example — not risky projects. “The products they sell are not capital expenditure, they’re cost to the factory manager,” says Mr Noguchi. If the manager can save a $40,000 salary with a $20,000 gadget, they will sign off quickly, without worrying how much Keyence earns.

The products are high quality, if not necessarily unique. Keyence has a modest research budget and less than a tenth of the US patents held by rival automation companies such as Fanuc.

Fanuc in trouble? Talk to the (robot) hand

Fair enough, it’s a tough world for all iPhone dependents. Here’s a wrinkle in the bear-case thesis, though: Overseas shipments of robots and Robodrills from Yokohama, while down elsewhere, are up sharply to Asia. The volume of robots shipped by the port – mostly Fanuc’s – remains close to its highest in decades, at about 5,000 units in April. The company’s backlog of orders is near to its highest in more than two years, according to Bernstein analysts.

How e-commerce with drone delivery is taking flight in China

It is still waiting to earn back its investment in drone-delivery infrastructure, although it says that making a delivery by drone costs a fifth of the price than by man-and-van, once the driver’s labour is taken into account. Liu Qiangdong, JD’s chief executive, says drone delivery will cut costs by 70% once it is scaled up across the country. Villagers tend to buy washing powder, accessories for their phones, maternity goods and fresh food. The firm has made 20,000 such deliveries to date.

JD may have added drones to daily Chinese village life, but whether they will make financial sense for the company over time remains to be seen. Current models of drone are pricey, although JD says the cost will gradually come down as it scales up the network and builds more drones (it plans to sell those it makes to other firms, as well as use them for its operations). The government approves of its operations in rural areas, and is planning to build a new train station in Suqian next to JD’s drone base. If JD can use drone delivery to cut its costs and attract rural shoppers, that will help the firm compete with its arch-rival in e-commerce, Alibaba, which has not, as yet, seen the value of drone delivery. JD hopes that will prove to be a mistake.


Internet lending is booming in China

The balance of online consumer loans in China has grown about fivefold between 2015 and 2017, reaching 350 billion yuan ($54.6 billion), according to Chinese research company Analysys. According to a survey conducted by research specialist Analysys in December 2017, people between the ages of 24 and 35 accounted for more than 70% of consumer borrowers in China.

Chinese consumers, especially people born in 1980 and later, are less squeamish than their older peers about buying on credit. But the total balance of consumer loans in China is still about 60% lower than that in the U.S. and is expected to continue growing. Analysys estimates that the balance of internet loans in China will more than double to 720 billion yuan in 2019, compared with 350 billion yuan in 2017. That flow of credit will likely give a lift to the Chinese consumer market.

The scooter economy

The mistake in Kalanick’s thinking is two-fold: First, up-and-until the point that self-driving cars are widely available — that is, not simply invented, but built-and-deployed at scale — Uber’s drivers are its biggest competitive advantage. Kalanick’s public statements on the matter hardly evinced understanding on this point. Second, bringing self-driving cars to market would entail huge amounts of capital investment. For one, this means it would be unlikely that Google, a company that rushes to reassure investors when it loses tens of basis points in margin, would do so by itself, and for another, whatever companies did make such an investment would be highly incentivized to maximize utilization of said investment as soon as possible. That means plugging into the dominant transportation-as-a-service network, which means partnering with Uber.

My contention is that Uber would have been best-served concentrating all of its resources on its driver-centric model, even as it built relationships with everyone in the self-driving space, positioning itself to be the best route to customers for whoever wins the self-driving technology battle.

Why you should read those boring 10-K filings

The vast majority of the text changes are concentrated in the Management Discussion and Analysis (MD&A) of the 10-K. These disclosures also tend to be more negative than positive, perhaps because the reports are typically drafted by lawyers who tilt toward disclosing negative trends more than positive ones. When the authors applied natural language text processing to evaluate the changes, they found that 86 percent reflected negative sentiment shifts and only 14 percent positive shifts. Furthermore, the text differences contain useful information for predicting future earnings: Changes in the 10-K written text today predict earnings surprises in the future.

Given this negative bias to the textual changes and their ability to predict future earnings, the study shows that companies with 10-K text modifications experience noticeably lower future stock returns than other firms. For example, the authors construct a portfolio that goes long on companies with no material textual changes and shorts firms that contain such changes. That portfolio earns an abnormal positive return of up to 7 percent per year above the market.

Curated Insights 2018.06.10

Laying the pipes of a post-advertising world

Brands have always fought for a place in consumers’ hearts, and then relied on their loyalty for repeat business. Pipes are structural relationships that don’t rely on such fickle factors. They are built on more vertically integrated distribution channels and behave more like utilities — a way into people’s homes and lives attached to an account.

Amazon is the ultimate pipe. Their entire value is that they bring things to you — the things can change as necessary: movies, pickles, sneakers. They own the interface, the invisible moving parts, and the household. They understand your preferences intimately and have become arbiters of choice in many homes. Alexa, buy batteries. You get a big pack of generic batteries, rated 4.5 stars for a good price delivered to your home. Do we really need brands with brand managers and media agencies competing for our attention or do we just need batteries for the remote? If pipes offer simplified decision making, better value and validation — then brands as we know them lose their value.

Advertising was unsustainable from the beginning, for two key reasons. Firstly, when a market fills up, everyone needs to shout louder to get heard, until the noise drowns everything out and a vicious cycle sets in to the detriment of all. Secondly, advertisers pay to reach people, but the audience also pays, with perhaps the most precious resource of all, their attention. You pay attention, and our attentions are more burdened than ever. This is the perfect recipe for people to opt out, should we give them a way to, and we have. In a very short span of time, ads have gone from having captive audiences to being avoidable. Social feeds are designed to skip over anything that doesn’t interest you. Fast forwarding over TV ads is great, but watching ad free content (Netflix) is even better.

Not adapting carries the risk of becoming a price taker in the long run. Adapting can be either through building your own pipe infrastructure, not an easy task and especially difficult for companies not born out of technology, or renting someone else’s pipe and ceding power to them and again facing the potential of long term decline. Disney has chosen the former. Soon they will launch their subscription video competitor to Netflix. With a lot on the line, a transformation of epic proportions lies ahead. Whether it’s successful or not, it speaks volumes that the owner of the most magical brands in the world is entering the pipe race.

The list of advantages pipes and subscriptions have over brands and ads is overwhelming: more consistent income and cash flow, lower marketing costs, better access to customers, more flexibility and control of customer experience, better valuations and access to capital, better quality data and potential for AI. As these factors compound, the shift in the balance of power will accelerate.

Spotify uproar points to the power of the playlist

The furor reflects a reality of today’s music business: Playlists are the new radio, helping major artists rack up millions of streams and connecting lesser-known acts with new fans.

But the findings highlight how influential Spotify can be in determining which songs, albums and artists succeed in the streaming era, he adds. Justin Barker, group director of streaming strategy for PIAS, a U.K.-based group of record labels that works with musicians such as Father John Misty, says that for the majority of its new artists, roughly 60% to 80% of streams are on playlists owned and operated by Spotify.

Spotify has become “a very powerful intermediary,” Mr. Waldfogel says. “The music industry used to get bent out of shape about how much market share Walmart would have. This makes that seem quaint.”


Here’s what Fiat Chrysler’s five-year road map looks like

Adjusted Ebitda will rise to between 13 billion and 16 billion euros by 2022, up from about 6.6 billion in 2017. The 2017 figure excludes the Magneti Marelli parts unit that Fiat Chrysler plans to spin off at the beginning of 2019. Fiat Chrysler also said it will spend about 45 billion euros on capital investments as it tries to harness an evolving automotive market place driven by electrification, connected services and self-driving cars.

Fiat Chrysler plans to form a captive financial unit in the U.S. The company has an option to buy out its existing partner, Santander Consumer USA Holdings Inc., and has initiated discussions, Palmer said. Such a move could add $500 million to $800 million in incremental pretax earnings within four years, he said. Fiat could also start its own business, in which case the company envisions about $100 million in incremental profit. A captive finance unit will allow Fiat Chrysler to “participate more fully in capturing value from emerging platforms,” Palmer said, for example by securitizing vehicle fleets and offering access to service providers on a per-mile basis.

Jeep is targeting 1/12 of all sport utility vehicle sales worldwide by 2022, implying a will more than doubling of deliveries to as many as 3.3 million units, based on Bloomberg calculations from the presentation. Maserati will target Tesla Inc. with a full-electric sports car that reaches more than 186 miles per hour. All Maserati powertrains, including the electric ones, will be supplied by Ferrari NV, the supercar maker spun off from Fiat Chrysler in 2016.

Google emerges as early winner from Europe’s new data privacy law

The reason: the Alphabet ad giant is gathering individuals’ consent for targeted advertising at far higher rates than many competing online-ad services, early data show. That means the new law, the General Data Protection Regulation, is reinforcing—at least initially—the strength of the biggest online-ad players, led by Google and Facebook Inc.

Havas SA, one of the world’s largest buyers of ads, says it observed a low double-digit percentage increase in advertisers’ spending through DBM on Google’s own ad exchange on the first day the law went into effect. On the selling side, companies that help publishers sell ad inventory have seen declines in bids coming through their platforms from Google. Paris-based Smart says it has seen a roughly 50% drop. Amsterdam-based Improve Digital says it has experienced a similar fall-off for ads that rely on third-party vendors.

It took a $1 billion IPO for people to see why Adyen matters

By 2017, Adyen was processing in excess of $122 billion in payments for the year, an increase of 61 percent from the year before, and generated $1.2 billion in revenue, according to financial filings. Uber Technologies Inc., Netflix Inc., Spotify Technology SA, and Facebook Inc., are all customers.

Despite its success so far, Adyen still has some ways to go to catch up with the largest payments firms — Vantiv, Chase Paymentech and First Data each handle about $1 trillion annually — but Adyen differs from many of its rivals in a number of ways: Its transaction processing fees are typically lower than those of other young e-commerce oriented payments firms such as Stripe or Square, and it can handle transfers in more currencies and payment types than Chase Paymentech or Vantiv.

Olivier Bisserier, the chief financial officer at Booking.com, an Adyen customer, told Bloomberg in 2016 that he liked that Adyen was willing to “think like a tech company” rather than a bank. When Booking.com expanded into Argentina, Adyen helped build its payments processing gateway for that market at a time when larger payments processors were refusing to do so until the travel site could show significant sales volumes from the new geography.

Janitors are becoming millionaires thanks to this stock’s 9,500% rally

Sunny Optical’s affluent employees have benefited from the largesse of Wang Wenjian, who started the company in Yuyao, a small city on China’s eastern coast, in 1984. When Sunny Optical restructured from a so-called village and township enterprise into a joint-stock company in the 1990s, Wang took the rare step of distributing stakes beyond top management and later organizing the holdings into a trust that now has about 400 holders and owns 35 percent of the Hong Kong-listed company. Leaving a 6.8 percent stake for himself in 1994, Wang allowed quality inspectors, company cooks and cleaners to subscribe for shares at a negligible cost based on their position and years of service.

“When money gathers, people will be apart; when money is scattered, people will gather.”

Curated Insights 2018.06.03

How will GDPR affect digital marketers?

  • Organisations with an existing marketing database must re-solicit every person’s consent (via an explicit opt-in) since individuals may have been added to the database without their consent.
  • All opt-out consent boxes must be replaced by opt-in (without the box being pre-checked).
  • Collection and processing of data to deliver your core service (e.g. fulfil orders) can continue unchanged, but if you wish to use historical data for marketing purposes, you need consent.
  • Personalised ad targeting based on an individual’s specific behaviours, such as that offered by many programmatic media companies, is illegal without active content. However, targeting based on broad interest-based audience segments is permissible so long as individuals cannot be identified.
  • The purchasing or sharing of personal data (such as email lists) is prohibited unless each person in the list has expressly permitted their details to be passed on to third parties. Event organisers, for example, can no longer share lists of attendees with sponsors.
  • Where data must be passed to another organisation for legitimate business reasons, you should ensure they are also compliant with GDPR. This is particularly important if data is passed to organisations outside the EU who may be less familiar with its data protection obligations.
  • Your customers now have the right to ask what data you hold and to have their data deleted permanently.
  • Any breach of personal data integrity (e.g. through theft, hacking, or incompetence) must be notified to the authorities within 72 hours. Organisations should audit who has access to personal data and ensure they are aware of their GDPR security obligations.

The iPhone may not be what finally pushes Apple over $1tn

The performance of this services division, largely overseen by senior vice-president Eddy Cue, has been a model of consistency when placed next to the feast-or-famine performance of the iPhone. Since 2006, it has grown at an average rate of 23 per cent year on year, according to Gene Munster, a veteran Apple analyst turned investor at Loup Ventures.

If it was valued like other “software as a service” companies such as Adobe, Dropbox or Intuit, Mr Munster reckons, at a multiple of 10 times 2018’s estimated revenues, Apple’s services business would be worth $381bn all by itself. 

For Google, all roads lead back to search

Underpinning this is the mobile business, which has given Google’s search engine a new lease of life. With smartphone users carrying out more frequent internet searches, the “paid clicks” — the number of times users click on its advertisements — jumped 59 per cent in the first three months of this year, continuing an acceleration seen over recent quarters. Even with average ad prices falling 19 per cent, the result has been a pick-up in growth.

The question now is whether Google’s newer businesses will extend this momentum into new markets in the years to come. Foremost among them is YouTube. The online video arm already has $20bn in annual revenue and could grow at 20-30 per cent a year for the next five years, forecast Mark Mahaney, an analyst at RBC Capital Markets. The potential is enormous: YouTube’s revenue represents only around 10 per cent of the amount spent globally on traditional TV advertising.

Google’s cloud computing business, meanwhile, could represent an even bigger opportunity. The cloud market is projected to be worth nearly $250bn by 2021, according to tech research firm Gartner.

That could one day make driverless cars a huge business for Google. Analysts at UBS forecast that Waymo’s technology lead will translate into revenues for Alphabet in 2030 that are equivalent to 80 per cent of its entire group revenue in 2020.

Marchionne’s finale entails expanding Jeep, shrinking Fiat

Jeep — which accounts for more than 70 percent of profits, according to analysts’ estimates — will increasingly become the focal point of the group. Marchionne is set to target doubling the brand’s sales volume by 2022 from about 1.4 million vehicles last year. The growth is based on expanding Jeep’s presence in Asia, Brazil and Europe as well as widening its product offering with hybrid variants starting next year. Marchionne has already indicated that he sees chances to double the group’s profit in the coming five years on booming Jeep sales.

Buffett proposed $3 billion Uber investment but deal crumbled

Under the proposed agreement, Berkshire Hathaway would have provided a convertible loan to Uber that would have protected Buffett’s investment should Uber hit financial straits, while providing significant upside if Uber continued to grow in value, said the people, who spoke under condition of anonymity because the discussions were private. Buffett’s initial offer was well above $3 billion, one of the people said.

During negotiations Uber Chief Executive Officer Dara Khosrowshahi proposed decreasing the size of the deal to $2 billion, one person said, hoping to get Buffett’s backing while giving him a potentially smaller share of the company. The deal fell apart after the two sides couldn’t agree on terms, one of the people said.


Airbnb founders go it alone in China after refusing merger offer

Tujia remains keen to cut a deal—although both sides deny formal talks—and says it’s simply waiting for Airbnb executives to accept reality. “We would love to issue shares in Tujia in exchange for Airbnb’s China operations,” says Tujia Chief Financial Officer Warren Wang. Until Airbnb is ready, “we will prove ourselves and show our muscle,” he said. “If Airbnb needs more time to understand that they or any other foreign tech companies just can’t do that well in China without a local partner, once we show them they’ll sit down and talk about a deal.”

Home-sharing in China differs from the U.S. and Europe, where travelers are accustomed to a rich bed-and-breakfast culture and many hosts rent out their primary homes while they’re away. In China, hosts don’t want strangers in their own homes. Instead, home sharing has thrived because a national building boom left a glut of empty apartments in the hands of real estate firms and property investors. With homes vacant, local home-sharing companies are tapped to clean, list and manage properties.

Initially, Airbnb operated a skeleton operation in China with 30 people, focused on attracting mainlanders going overseas. Chinese tourists took 131 million overseas trips and spent $115 billion abroad last year, according to the China National Tourism Academy. But after noticing a surge of Chinese tourists using Airbnb abroad and thriving local home-sharing apps, the company in 2015 decided to expand its domestic China business. It’s a market well worth chasing: The domestic tourism industry took in 4.57 trillion yuan ($710 billion) in 2017, up 15.9 percent from the year before, according to the China National Tourism Administration. Unlike small hotel rooms, home stays let Chinese travel with extended families, cook Chinese fare and bring pets.

A Fed report this week found that gig work is a very small share of family income. For over 75% of gig workers, these activities account for 10% or less of their family income. This picture is also confirmed when looking at the ride-sharing market, see first chart below. The total number of Uber drivers in the US is 833,000 and translated into full-time full-year jobs there are about 100,000 Uber drivers. Comparing these numbers with US economy-wide employment of 148mn shows that the gig economy is more myth than reality. Another way to look at it is to think about how small a share of your total income goes to car services. If you still are not convinced, take a look at the second chart below, which shows the share of people who are self-employed. Why is the gig economy getting so much attention? It is probably because many people in Manhattan now use ride-sharing apps and mistakenly think that what they are seeing is representative for the rest of the economy.