Curated Insights 2019.05.17

Uber's biggest underestimation would be thinking its competition was just the taxi and limousine market in the U.S., a $4.2 billion opportunity. That turned out to be way too small. Instead, Uber's revised total addressable market is all vehicle and public transport trips, according to its S-1 filing. That's now a $5.7 trillion market size.

The investor who turned down Uber at a $5m valuation

In its 2010 seed round, Uber raised $1.6m according to Pitchbook, giving it a $5.4m valuation. On Friday, it closed its first day of trading publicly with a valuation of around $70bn. That was significantly below the $100bn valuation the company had recently hoped to achieve, but it still meant early investors were able to cash in on huge returns.

But he was wary. Having lived in London for many years previously, he said he knew how strong the taxi lobbies were. In Los Angeles, he knew that everyone had their own cars and never took cabs. This was clearly going to be a niche, local service for certain cities only, he thought. 

WeWork wants to become its own landlord with latest spending spree

Neumann took control of 65 percent of WeWork’s voting equity as part of a 2014 funding deal—while celebrating, he partied so hard he broke a floor-to-ceiling window in his office, according to a person familiar with the incident—and since then, he’s been known to make company-level decisions on what look, from the outside, like whims. When WeWork sold bonds for the first time a year ago, it originally planned to sell $500 million worth, but the final number was $702 million, because 702 was deemed a lucky number, a source familiar with the matter says. Neumann referred a question on the number to his general counsel, who declined to comment. It’s unclear what strategic value WeWork’s investment in an indoor wave pool company offered, but Neumann does love to surf.

Curated Insights 2019.05.10

Why you’ll never invest in the next big short

Greenblatt’s Gotham Capital funded Burry’s investment fund when he decided to quit medicine and become a full-time investor. They even took an ownership stake that was rewarded handsomely when Burry’s value investments performed well right out of the gate. But when Burry got interested in betting against the housing market in 2005-2006, Greenblatt, along with many other investors in the fund, balked.

Burry so believed in his bet against these terrible housing loans that he eventually put a gate on his fund. In hedge fund speak, this means he made it harder for his investors to withdraw capital. Greenblatt and company threatened to sue and it almost forced Burry to give up on his trade of a lifetime:

“If there was one moment I might have caved, that was it,” said Burry. “Joel was like a godfather to me—a partner in my firm, the guy that ‘discovered’ me and backed me before anyone outside my family did. I respected him and looked up to him.”

Of course, Burry was proven right. By June 2008 his fund was up nearly 500% from its inception in 2000 versus a gain of just 2% in the S&P in that time. He and his investors made out like bandits from his housing short. Greenblatt is a legend and he almost let one of the greatest trades ever made slip away because he didn’t understand it. But can you blame him?

In 2006, the S&P 500 was up more than 15% while Burry lost close to 20% because the housing market had yet to roll over. Burry was a tried and true value investor so betting against the housing market was an enormous style drift on his part. And gating your fund after a horrendous year isn’t a great signal to investors. If someone like Greenblatt nearly whiffed on the greatest trade of all-time, what chance would you have at seeing something like this through?

Burry sent an email in the fall of 2008 to some of his friends that read: “I’m selling off the positions tonight. I think I hit a breaking point. I haven’t eaten today, I’m not sleeping, I’m not talking with my kids, not talking with my wife, I’m broken.” It’s hard enough to make money when the markets are in upheaval but Burry was basically betting against the entire system here. You get the sense from reading Lewis’s book that, although they made a ton of money, the people who pulled this off didn’t delight in the situation even after being proven right. It exacted a toll on everyone involved.

To his founding investor, Gotham Capital, he shot off an unsolicited e-mail that said only, “You’re welcome.” He’d already decided to kick them out of the fund, and insist that they sell their stake in his business. When they asked him to suggest a price, he replied, “How about you keep the tens of millions you nearly prevented me from earning for you last year and we call it even?”

Larry Fink, Barclays and the deal of the decade

Mr Fink swooped. In March 2009, he began negotiating with Bob Diamond and John Varley, then president and chief executive of Barclays respectively. The $15.2bn cash-and-stock deal they announced in June transformed BlackRock into a financial services colossus and ultimately changed the shape of the global investment industry. Barclays, in turn, managed to avoid a government bailout but it has since been accused of selling its crown jewel.

In one stroke the purchase made BlackRock the world’s largest fund manager, with $2.8tn in assets. Ten years on, it oversees $6.5tn and has a market value of more than $74bn. More importantly, it ensured the company, which was then best known as an active fixed income manager, had a large foothold in part of the asset management industry known as passive investing. BGI, through its iShares brand, was a leader in exchange traded funds, where funds passively track an index of shares instead of making active bets on stock prices of different companies. Since 2009, assets managed in ETFs globally have ballooned from just over $1tn to a record $5.4tn.

Barclays secured a 19.9 per cent BlackRock stake as part of the BGI deal, which was valued at $13.5bn when announced but rose to $15.2bn when it completed six months after a 62 per cent surge in BlackRock shares. “Selling that stake in 2012 turned out to be a bad move,” said Mr Weight. The divergence in fortunes of the respective shareholders has been stark. BlackRock has outperformed Barclays by 470 per cent in common currency terms since the BGI deal. During the decade Barclays shares have dropped more than 40 per cent, while BlackRock is up 160 per cent.

Curated Insights 2019.05.03

James Harden and alpha

Advantage is only an advantage if others don’t have the same advantage.

Do you meet with company management? So do 30 sell-side analysts and 100 buy side analysts and PMs every quarter. Do you build your own, bespoke, earnings models? So does half the buy side. Do you interview competitors, customers, and suppliers? So does half the buy side. Do you pull credit-card history, satellite images, and other big data in real time? So does half the buy side. If you think you have a sustainable informational edge, you’re either deluding yourself, or you have inside information.

We are not playing an information game. Everyone has the information. The question is how objective can you be when you process it, and might Mr Market see the same information with bias?

Vanguard patented a way to avoid taxes on mutual funds

To understand how the process works, consider an investor who owns a portfolio of stocks. If one is sold for more than what it cost, capital-gains tax is due on the difference. Theoretically, owning stocks through a mutual fund or ETF works the same way. If the fund sells a stock for a profit, the taxable gain shows up on each investor’s end-of-year Form 1099. But thanks to an obscure loophole in the tax code, ETFs almost always avoid incurring taxable gains.

The rule says that a fund can avoid recognizing taxable gains on an appreciated stock if the shares are used to pay off a withdrawing investor. The rule applies to both ETFs and mutual funds, but mutual funds rarely take advantage of it because their investors almost always want cash.

ETFs use it all the time, because they don’t transact directly with regular investors. Instead, they deal with Wall Street middlemen such as banks and market makers. It’s those firms, not retail investors, that expand the ETF by depositing assets or shrink it by withdrawing. These transactions are usually done with stocks rather than cash. The middlemen, in turn, trade with regular investors who want to buy and sell ETF shares.

Trading with middlemen presents ETFs a tax-cutting opportunity. Whenever one of these firms makes a withdrawal request, an ETF can deliver its oldest, most appreciated stocks, the ones most likely to generate a tax bill someday.

If the ETF wants to cut its taxes further, it can generate extra withdrawals just to harvest the tax break. A heartbeat is when an ETF asks a friendly bank or market maker to deposit some stock in the fund for a day or two, then take different stock out. Some critics call these trades an abuse of the tax code. But with the help of heartbeats, most stock ETFs, even ones that change holdings frequently, are able to cut their capital-gains taxes to zero.

Thanks to winnings on stocks like Monsanto, the fund reported $6.51 billion of capital gains in 2018. But for the 17th straight year since it got an ETF share class, the fund distributed no taxable gains to investors. The ETF ensured that the vast majority of the gains, $6.49 billion, weren’t taxable. The balance was probably canceled out by tax losses from earlier years.

You’re not getting enough sleep—and it’s killing you

He ran down all the ways in which sleep deprivation hurts people: it makes you dumber, more forgetful, unable to learn new things, more vulnerable to dementia, more likely to die of a heart attack, less able to fend off sickness with a strong immune system, more likely to get cancer, and it makes your body literally hurt more. Lack of sleep distorts your genes, and increases your risk of death generally, he said. It disrupts the creation of sex hormones like estrogen and testosterone, and leads to premature aging. Apparently, men who only sleep five hours a night have markedly smaller testicles than men who sleep more than seven.

Don’t drink caffeine or alcohol. Go to bed at the same time every night and wake up at the same time every morning (even on the weekends). Sleep in a cool room. If you are lying awake in bed, listening to the litany of worries your brain is churning through, get up, go into a different room, and do an activity, then return to bed when you’re ready. “You wouldn’t sit at the dinner table waiting to get hungry, so why lay in bed waiting to get tired,” he told a TED attendee who’d asked for advice. Meditate to calm your nervous system and your mind. Don’t default to sleeping pills, which are “blunt instruments that do not produce naturalistic sleep,” he said. Eventually, he said, he may be able to offer an “affordable, portable” brain-stimulating device that would use transcranial direct-current stimulation to help people have deeper sleep.