Curated Insights 2020.01.10

The art of (not) selling

You are given the choice between two sums of money: one million dollars or a penny that will double every day for 30 days. Which should you choose?

Here are a couple hints. The penny that doubles daily would be worth $1.28 after the first week. After the second week, it would be worth $163.84.

You will probably reason that the penny would be worth more than the one million dollars. (Why, otherwise, all the theatrics?) By just how much, though, might surprise you.

It turns out that after doubling 30 times, the penny would be worth $10,737,418.24!

This is a terrific exercise because it highlights the not-so-obvious power of compound returns (in this case, the penny compounds at 100% for 30 periods).

I say not-so-obvious because you would have been better off taking the one million dollars until the 27th day. But in those final four days, the value of the penny increases from less than $700,000 to more than $10.7 million. Patience and a long-term perspective are required to give the power of compounding an opportunity to do its magic.

Most do not naturally grasp the concept of compound interest. It has been called the eighth wonder of the world (first by Albert Einstein, supposedly) for good reason. Most of us have to learn to appreciate it. And even once learned, we have to remind ourselves periodically of its wonder.

From this riddle, we learn the importance of holding on so that we allow our investments to compound uninterrupted for long enough that the compounding effects we saw in days 27 to 30 have an opportunity to play out in our portfolios.

What is a mutual fund worth?

In the early 1950s, 4.2% of the U.S. population participated in the stock market, almost entirely through directly held stocks. These investors held undiversified portfolios—a median of two stocks. Half held one stock. Only 538,000 investors—0.35% of the population—held more than ten stocks.

Curated Insights 2020.01.03

Food delivery: Delivering growth, but can they deliver profits?

From the first half of 2017 to the first half of 2019, the total food sales (gross merchandise value (“GMV”)) of listed food delivery platforms in the Western Hemisphere (Uber Eats, Just Eat, Takeaway.com, Delivery Hero, Grubhub) has grown from around US$6.5bn to around US$18bn. In China, the scale is incredible, with Meituan Dianping’s GMV expected to grow from around US$24bn in the 2017 financial year (“FY”) to around US$55bn this year, reaching an annualised run-rate by the end of the year of close to 10bn separate food orders. Further, Alibaba’s Ele.me, which is China’s #2 food delivery platform, will likely enable around US$30bn of transactions this year.

So far Meituan Dianping is the only delivery-led company (delivery makes up approximately 65% of orders) to have turned a modest profit helped by favourable market conditions such as a consolidated market, scale far beyond its Western peers (Chinese orders per capita is approximately 5x vs the US) and easing competitive pressures from competitor Ele.me. This raises questions around whether the model is sustainable in the West.

Our unit economics calculations in various markets suggest that food delivery could theoretically be profitable, provided markets consolidate and rationalise. On average, delivery platforms should make positive gross profits (revenue less delivery costs per order) managing the delivery for independent restaurants e.g. Deliveroo reported a gross margin of greater than 20% in FY17 and FY18[vii]. The bigger question is whether the marketing and promotional costs needed to acquire new customers and incentivise restaurants and riders will begin to fall. Just like the marketplace businesses before them, when the market matures and consolidates to one or two platforms, most of these costs should subside and delivery could yield modest profits. Meituan Dianping is a good example of this, moving from a lossmaking position to slightly profitable in recent quarters as the market consolidated and competitive pressures from Ele.me abated.

Furthermore, most investors and commentators are also ignoring several other key risks. First, food delivery companies, like other tech companies, are the subject of increased scrutiny from regulators for exploiting their market positions. There is a real risk that the unit economics get worse, as regulators force the platforms to cut the commissions they charge independent restaurants and pay riders more. Second, large restaurant chains (e.g. McDonalds) receive very favourable terms from the delivery platforms due to the boost they give to the frequency with which customers use the delivery app. This hurts the economics for the delivery players as they likely lose money on each McDonald’s order. Finally, the business model is untested through the cycle. We often find ourselves wondering if consumers would really be willing to pay $5 to have a $10 Big Mac meal delivered during a recession.

Why Americans are always running out of time

Electric stoves made food prep faster. Automatic washers and dryers cut the time needed to clean a load of clothes. Refrigerators meant that housewives and the help didn’t have to worry about buying fresh food every other day.

Each of these innovations could have saved hours of labor. But none of them did. At first, these new machines compensated for the decline in home servants. (They helped cause that decline, as well.) Then housework expanded to fill the available hours. In 1920, full-time housewives spent 51 hours a week on housework, according to Juliet Schor, an economist and the author of The Overworked American. In the 1950s, they worked 52 hours a week. In the 1960s, they worked 53 hours. Half a century of labor-saving technology does not appear to have saved the typical housewife even one minute of labor.

2020 startup themes

Ad companies are governed by a rule as durable as gravity: they must make their products worse over time. Corporations must produce profit, and the fastest path to increase revenue is at the cost of user experience. Amazon and Google used to feel powerful and sleek. Now they’re like Costco on Black Friday. Noisy, tacky and ad-riddled. And more profitable! (For now.)

This increase in revenue comes at the cost of long-term customer satisfaction, but nobody knows how to really measure that, so investors don’t care. Now Instagram has too many ads and finding a genuine phone charger on Amazon requires a degree in investigative journalism.

Are concert tickets too cheap? Ticketmaster thinks so

The average ticket price for the top-100 world-wide tours rose to $96.17 in 2019, according to music-industry trade publication Pollstar, and has increased 23% in the past five years. Since 1996, the average price for a top-100 tour ticket in North America has climbed more than 250%, according to Pollstar statistics recently cited by Bloomberg News. Though big-name artists command higher prices, “the vast majority of shows are very reasonably priced for fans,” Berchtold said, pointing to amphitheater lawn seats priced in the $30 range. Live Nation said in its Liberty investor presentation that ticket prices for its amphitheaters average $48.

Georgetown University finance professor Jim Angel agrees with Ticketmaster that concert tickets are cheaper than they could be. Concert tickets have historically been underpriced, he said, in part to build fan buzz and loyalty while keeping the artist from looking greedy. “It’s sort of like how investment bankers underprice initial public offerings,” he said. “They want to make sure that the investors have a good experience and that there’s no unsold stock left at the end of the offering.”


Apple ink supplier in Japan makes mark with iPhone 11 Pro colors

In 1972, the company formed a technical alliance with a U.S. ink producer that boasted advanced screen printing technology, which allows for printing on a wide variety of materials. The partnership helped Seiko Advance enhance its own screen printing techniques — still the core of its expertise. Even so, Kabe recalled that the visit to Apple revealed a “very different world.” Suppliers were expected to meet hundreds of criteria. “At that time,” he said, “we found that we couldn’t meet Apple’s high standards.”

After four years of trial and error, the company finally began supplying black ink for iPhones. Now Apple accounts for nearly 40% of its sales, while it also supplies major global smartphone competitors like Samsung Electronics and Huawei. Its inks are mainly used for high-end phones. Inks for appliances, sign boards and vending machines account for the rest. Although the company declined to provide numbers, it said sales are growing, and that becoming an Apple supplier was a major boost.

Seiko Advance has a cleanroom in its factory. Hiraguri says it is the only ink company in the world that has one. This gives it a competitive edge, as controlling temperature and humidity keeps the ink under stable conditions and helps ensure consistent quality.

Skilled workers are equally important. Seiko Advance has 30 experts who specialize in color compounds. They produce 150 colors per day and check them one by one, manually.

Can the American casket monopoly be disrupted?

According to the Casket & Funeral Supply Association of America (CFSA), there were more than 700 casket companies in 1950; by the early 2000s, that figure had been whittled down to 147. Today, Batesville and Matthews dominate the market, making up for more than 8 of every 10 casket sales in the US.

Some estimates suggest that the final price of a casket is anywhere from 300% to 500% more than the cost of making it. In recent years, much cheaper alternatives have become available. Amazon, Walmart, and Costco all sell caskets at around $1k — less than half the average price of caskets from Batesville or Matthews. Yet, even these juggernaut corporations have struggled to chip away at the casket monopoly. Why? Because Batesville and Matthews have strong relationships where casket buying happens: in funeral homes.

The main deterrent for casket competitors is that they aren’t selling caskets where consumers buy them. According to a 2019 IBISWorld report, 82% of caskets are purchased through funeral homes, who capitalize on mourning families by selling them the most expensive products they carry.

We’ve just had the best decade in human history. Seriously

The next time you hear Sir David Attenborough say: ‘Anyone who thinks that you can have infinite growth on a planet with finite resources is either a madman or an economist’, ask him this: ‘But what if economic growth means using less stuff, not more?’ For example, a normal drink can today contains 13 grams of aluminium, much of it recycled. In 1959, it contained 85 grams. Substituting the former for the latter is a contribution to economic growth, but it reduces the resources consumed per drink.

As for Britain, our consumption of ‘stuff’ probably peaked around the turn of the century — an achievement that has gone almost entirely unnoticed. But the evidence is there. In 2011 Chris Goodall, an investor in electric vehicles, published research showing that the UK was now using not just relatively less ‘stuff’ every year, but absolutely less. Events have since vindicated his thesis. The quantity of all resources consumed per person in Britain (domestic extraction of biomass, metals, minerals and fossil fuels, plus imports minus exports) fell by a third between 2000 and 2017, from 12.5 tonnes to 8.5 tonnes. That’s a faster decline than the increase in the number of people, so it means fewer resources consumed overall.

Extreme aging

Japan now has over 70,000 people who are more than 100 years old.

In 1975 social security and healthcare spending commanded 22 percent of the country’s tax revenues; by 2017 the figure, driven up by elderly care and pensions, had risen to 55 percent. By the early 2020s the figure is set to hit 60 percent. To look at it in another way, every other public service in Japan — education, transport, infrastructure, defense, the environment, the arts–could rely on almost 80 percent of tax revenue in 1975, but the increase in elderly-related spending means that only 40 percent is left for other national public expenditures. In budgetary terms, ageing is eating Japan.


Rank-and-file workers get bigger raises

Pay for the bottom 25% of wage earners rose 4.5% in November from a year earlier, according to the Federal Reserve Bank of Atlanta. Wages for the top 25% of earners rose 2.9%. Similarly, the Atlanta Fed found wages for low-skilled workers have accelerated since early 2018, and last month matched the pace of high-skill workers for the first time since 2010.

Hedge funds record best year since 2013 but still trail market

After failing to capture much of 2019’s strong rally in stocks and bonds, the hedge fund industry has delivered an overall return of 8.5 per cent this year, according to data from HFR. Although it is the best performance in six years, it is still well behind the S&P 500’s 29.1 per cent gain this year. The US bond market, measured by a Bloomberg Barclays index, returned 14.5 per cent. 

The relative underperformance raises further questions about hedge funds’ ability to make money in all market conditions: they lagged this year’s bull market but also fared worse than the market during 2018’s sell-off, despite having the ability to bet on falling prices.

Building a rocket is hard. But building a parachute is boggling

Parachutes were so precious to the Apollo program that only three people in the nation were qualified to hand-pack the parachutes for the Apollo 15 capsule: Norma Cretal, Jimmy Calunga and Buzz Corey, who in 1971 — the year of that mission — all lived in Ventura County. Their expertise was so vital, they were not allowed to ride in the same car together for fear that a single auto accident could cripple the space program.


Top speed is overrated

I can drive my Prius from NY to Syracuse faster than I can fly there. Even though a plane has been engineered to have a much higher top speed, the door to door costs of travel (security theatre, parking, checking in, the rest of the last mile once I land) aren’t impacted at all by the top speed of the chosen form of transport.

Top speed is easy to measure and fun to work on. But for most of the people you work with, there are dozens of factors that matter more than the easily measured versions of top speed that are talked about.


Does happiness in your 50s signal the end of ambition?

“This is about realizing that we’re going to die one day and being more selective in who we spend time with [and] fully accepting that we’ll never achieve many things,” says Arthur Stone, professor of psychology, economics, and health policy and management at the University of Southern California. He adds that these realizations tend to leave people with smaller but more enriching social circles, a predilection toward happiness over hassle and a higher likelihood of general contentment.