Curated Insights 2019.11.08

Learning from Costco's Jim Sinegal

Here’s a way you can help fight Alzheimer’s

We don’t have the scientific tools we need to stop Alzheimer’s. There hasn’t been a new drug for it approved in more than 15 years. That’s in part because it’s so hard to run clinical trials for this disease; the average clinical study for Alzheimer’s takes 4 to 8 years, versus just 1.5 years for a typical study of cardiovascular disease, and is also much more expensive to run.

For one thing, it’s difficult to identify qualified people early enough in the disease’s progression who are willing to participate. People might experience symptoms but not realize they have the disease, and simply not bother to see a doctor. Many doctors have only a limited time with each patient, and they don’t make it a priority to talk about early Alzheimer’s—especially if the person isn’t showing any symptoms.

But suppose the patient makes it to a doctor and the subject of Alzheimer’s does come up. There’s still no cheap, effective way to diagnose the disease. The definitive tests are expensive or invasive—one of them requires a spinal tap, which involves using a needle to puncture your spinal cord—and the doctor may not order them. If she does, her patient might not want to take them. Many people don’t want to find out if they have the disease earlier, because there’s no way to treat it.

As a result, we found that 80 percent of trials don’t meet their recruitment goals on time, which greatly increases the cost of running a trial for pharmaceutical companies. And of all the patients in the healthcare system who could be eligible to participate in a clinical trial on Alzheimer’s, only 1 percent actually do.

Curated Insights 2019.11.01

GrubHub shareholder letter (October 2019)

A common fallacy in this business is that an avalanche of volume, food or otherwise, will drive logistics costs down materially. Bottom line is that you need to pay someone enough money to drive to the restaurant, pick up food and drive it to a diner. That takes time and drivers need to be appropriately paid for their time or they will find another opportunity. At some point, delivery drones and robots may reduce the cost of fulfillment, but it will be a long time before the capital costs and ongoing operating expenses are less than the cost of paying someone for 30-45 minutes of their time. Delivery/logistics is valuable to us because it increases potential restaurant inventory and order volume, not because it improves per order economics.

Earlier, we talked about the great progress we are making with enterprise brands. We love working with large enterprise brands because they help drive new diners to our platform and keep diners from going to other platforms. That said, the biggest enterprise brands don’t need Grubhub to bring them new diners in the same way independents and small chains do because they spend billions a year on developing their own brands. What they need most is a driver to take the food to their diners. And, as we just noted, that isn’t cheap, or particularly scalable, so the unit economics and long term profit outlook for our business would look very different if a majority of our business was coming from large enterprise brands.

Life of pie: A closer look at the Domino’s Pizza system

The key to operating a successful Domino’s master franchise is to have the Domino’s brand stand out against all the other pizza options that are available in the marketplace. In other words, the brand has to be put to work to generate demand, which can only be achieved with significant marketing spend. Tv is still quite important for Domino’s and generally requires a significant advertising budget. That budget has to be levered on a good number of restaurants in order to make sure the marketing expenses stay at a reasonable level per store.

Every new market that’s entered starts more or less from scratch, with limited consumer awareness and entrenched behavior that benefits the incumbents. This is why it is so difficult for a new Domino’s market to get to a scale that makes economic sense. Once you manage to reach that scale that the flywheel can start spinning, because at that point the business can self-generate its growth through reinvestment in marketing.

It appears that the entire Domino’s franchise has come under a bit of pressure from aggregators like Takeaway, Uber Eats, Grubhub and Doordash, which are oftentimes operating at a loss. Since the aggregators are providing access to technology platforms that many small operators would not be able to afford or operate on their own, they’ve essentially levelled the playing field for pizza restaurants again. In my opinion this has decreased Domino’s Pizza’s advantage in the mobile ordering space. Domino’s Pizza Inc.’s CEO conceded recently that the aggregators are indeed having an effect on their same store sales growth (item below). For now I have no strong conviction on Domino’s but it is a business with some fascinating developments.

Schwab kills commissions to feed its flywheel of scale

“ we did not expect such a swift reaction in the sense that we thought that we come out with IBKR Lite as an additional offering and that we go on for a while, and will attract some customers and then eventually, other people will start reducing and maybe all go to zero. So this — this very swift reaction was a surprise to us.” – Thomas Peterffy, Founder and Chairman, Interactive Brokers Group (IBKR), 3Q 2019 Earnings Call

We believe Schwab’s business stands to benefit the most because of the relatively small impact to its revenue and income and the broad, efficient set of high quality service it offers to clients. While the commission cuts mean Schwab offers an even more compelling value to its customers for its existing suite of high quality services, a disadvantaged competitor like TD Ameritrade is trying to figure out how to charge for its “premium” services for customers, effectively raising prices for service in other ways and depressing its value proposition.

Decades of experience indicates the companies offering higher value propositions win more customers. By continuing to pursue aggressive reinvestment in both client service and technological efficiency, Schwab can continue to leverage its growing scale to further improve upon the value proposition it provides clients while continuing to drive down its expense (efficiency) ratio. We believe the gap in differentiation will only get wider now that the smaller competitors are much weakened financially, which is why it made sense for Schwab to be so aggressive in cutting commissions both in 2017 and again October 2019.

An Elastic technical review

Elastic isn’t building a cloud side and a on-prem side to their platform like MDB is. It’s all Elastic Stack in the Elastic Cloud, just hosted at whatever cloud provider the customer desires, and managed by the finest experts one could find — thems that wrote it! There isn’t tooling appearing in Elastic Cloud that isn’t in core platform, unlike MDB with their Stitch serverless platform. However, the downside is that their Elastic Stack releases must bundle the proprietary modules side-by-side with the open-source products.

One striking difference as I walked through the product line, is the number of use cases it solves that DO NOT INVOLVE CODE. MDB is for developers only, to embed into their application stack. Elastic is for that, but also for non-developers to use without needing any custom development. IT can hook up Beats for monitoring infrastructure or network traffic. Enterprise users can feed in datasets with Logstash, for staff to query, visualize, or apply ML in Kibana. I expect this trend to continue, as it really opens up the applicability as to who can use the product line.

Best of all, Elastic is making exciting moves that are moving their company beyond being a do-it-yourself tool provider.


Third Point’s Q3 letter: EssilorLuxottica thesis

Our analysis of potential merger synergies points to over €1 billion in additional profit through efficiencies and revenue growth, almost double the Company’s current targets. In the near‐term, this will be driven by cross‐selling to wholesale customers, insourcing lens procurement, and supply chain efficiencies. The longer‐term opportunity to disrupt the industry value chain is even more appealing: combining lens and frame to shrink raw material need and waste, reducing shipping costs by merging prescription labs with global distribution hubs, and providing a true omni‐channel sales offering. These initiatives will transform the way glasses are sold, significantly improving the customer experience.


Ensemble Capital client call transcript: Mastercard update

While you might hear about how merchants pay 2% or more in credit card fees, Visa and Mastercard are only collecting about 1/20th of that fee, with the banks, the ones taking the credit risk, earning the bulk of the fee.


Ensemble Capital client call transcript: Tiffany & Co update

Tiffany is one of just a few global American luxury brands and the casual observer cannot tell a Tiffany diamond engagement ring from one purchased elsewhere. There’s no room on a diamond for logo placement, after all.

As a company, Tiffany is older than Cartier (founded in 1847), Louis Vuitton (founded in 1854), and Burberry (founded in 1856). This durability matters in luxury because it communicates a brand’s ability to endure all kinds of major socioeconomic changes and remain relevant over successive generations. It also communicates a certain timelessness of core products that remain in fashion despite intermittent fads and trends.

The advertising industry has a problem: People hate ads

“It’s harder to reach audiences, the cost of marketing is going up, the number of channels has exponentially proliferated and the cost to cover all of those channels has proliferated,” Jay Pattisall, the lead author of the report, said in an interview. “It’s a continual pressure for marketers — we’re no longer just creating advertising campaigns three or four times a year and running them across a few networks and print.”

That includes automation and machine learning technologies, which Forrester expects will transform 80 percent of agency jobs by 2030. In July, JPMorgan Chase announced a deal with the ad tech company Persado that would use artificial intelligence to write marketing copy.

Steven Moy, the chief executive of the Barbarian agency, said that multiyear contracts had shortened, with budgets tightening and performance metrics becoming more stringent.

For the first time ever next year, Facebook, Google, YouTube and other online platforms are expected to soak up the majority of advertising dollars, according to WARC.

Last year, 78 percent of members of the Association of National Advertisers had an in-house agency, up from 58 percent in 2013 and 42 percent in 2008.

Curated Insights 2019.10.25

The cloud kitchen brews a storm for local restaurants

The mere prospect of Amazon using cloud kitchens to provide cuisine catering to every taste — and delivering these meals through services such as Deliveroo — should be enough to give any restaurateur heartburn.

For restaurant owners who ignore the shift, the latest development in the gig economy spells big trouble. Ingrained habits and the cost of delivery, particularly in the west, means that it will take several years for restaurants to feel the pinch. But as cloud kitchen companies proliferate, and the cost of delivery declines, consumers will eventually find they can have their favourite meals delivered within 30 minutes at the same price, or conceivably lower, than a restaurant now charges.

The large chain restaurants that operate pick-up locations will be insulated from many of these services, as will the high-end restaurants that offer memorable experiences. But the local trattoria, taqueria, curry shop and sushi bar will be pressed to stay in business.


‘Cloud kitchens’ is an oxymoron

Let me tell you from the world of media: Relying on other platforms to own your customers on your behalf and wait for “traffic” is a losing proposition, and one that I expect the vast majority of restaurant entrepreneurs to grok pretty quickly.

Instead, it’s the meal delivery companies themselves that will take advantage of this infrastructure, an admission that actually says something provocative about their business models: that they are essentially inter-changeable, and the only way to get margin leverage in the industry is to market and sell their own private-label brands.

All of which takes us back to those misplaced investor expectations. Cloud kitchens is an interesting concept, and I have no doubt that we will see these sorts of business models for kitchens sprout up across urban cities as an option for some restaurant owners. I’m also sure that there will be at least one digital-only brand that becomes successful and is mentioned in every virtual restaurant article going forward as proof that this model is going to upend the restaurant industry.

But the reality is that none of the players here — not the cloud kitchen owners themselves, not the restaurant owners and not the meal delivery platforms — are going to transform their margin structures with this approach. Cloud kitchens is just adding more competition to one of the most competitive industries in the world, and that isn’t a path to leverage.

A different view on Apple and China

Cook then alluded to “The Man in the Arena” passage from U.S. President Theodore Roosevelt’s “Citizenship in a Republic” speech:

“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”

There is no playbook for Apple management to follow when it comes to leading a trillion dollar company with a billion customers around the world. Cook’s decision to engage Apple will mean that there will be more controversies such as HKmap.live. Apple may not be completely ready for such controversies, but the company will likely be willing to confront them. Such a stance shouldn’t take anything away from Apple’s steadfast pursuit to leave the world a better place.

Trade Desk can double: TAM analysis and valuation

TTD’s position looks even stronger if you consider that Amazon actually let Trade Desk bid on its CTV advertising inventories. The other credible competitors are Adobe and MediaMath. I consider Adobe to be the bigger threat just from a sheer resource perspective, and I would note that Adobe is an “independent” that doesn’t own content/ad inventory, unlike Google or Amazon. This lack of conflict of interest gave TTD an edge over other platforms, and it might also give Adobe an edge.

AC Milan and Elliott: the hedge fund trying to crack Italian football

Top European teams are reliant on income from the Champions League. Around €2bn was shared between participating clubs last season. But to regularly qualify, AC Milan must overcome intense domestic competition from the likes of Juventus, Inter and Roma. 

Some argue that Elliott is exacerbating the tension between winning now and building for the future. A person close to club operations says Elliott had set up a “weird power struggle” by elevating familiar figures like Mr Maldini and Mr Boban, while also hiring people underneath them who advocate a modern “Moneyball” approach of using statistics to locate undervalued players.

Curated Insights 2019.10.11

Three big things: The most important forces shaping the world

Lower births are a global phenomenon, particularly in the developed world. And while America ages and population growth slows, the rest of the world’s major economies turn into a Florida retirement community and population growth in many cases is on track to turn negative.

When people talk about what nation will own the next century they point to leadership in AI and Machine Learning, where China looks so competitive. But it’s staggeringly hard to grow an economy when you lose a fifth of your working-age population in a single generation. China could invent something as big as the next internet, but when mixed with its demographics have an economy that muddles along. Europe, Japan, and South Korea are the same or worse.

Demographics will slow America’s economy, but they’re a five-alarm fire for other countries. So even assuming equal levels of productivity growth, the U.S. is head and shoulders better off than other developed nations, just given its demographics alone. America could drop the ball on technology while China/Europe/Japan make all the right moves, and America could still remain a much larger and more powerful economy.

TechCrunch founder Michael Arrington recently wrote: “I thought Twitter was driving us apart, but I’m slowly starting to think half of you always hated the other half but never knew it until Twitter.” This is a good point that highlights something easy to overlook: 1) everyone belongs to a tribe, 2) those tribes sometimes fundamentally disagree with one another, 3) that’s fine if those tribes keep their distance, 4) the internet increasingly assures that they don’t. Opening your mind to different perspectives is good and necessary. But when fundamental, unshakable views that used to be contained within tribes expose themselves to different tribes, people become shocked to learn that what’s sacred to them isn’t always a universal truth. The range of political opinions has always been extreme, but what we’ve seen over the last decade is what happens when the warm blanket of ideological ignorance is removed.

The best economic news no one wants to talk about

So, let’s play a game of wish-casting. Imagine a world where wage growth was truly stagnant only for workers in high-wage industries, such as medicine and consulting. Imagine a labor market where earnings growth for low-wage workers, such as those who work in retail and restaurants, had doubled in the past five years. Imagine an economy where wages for the poorest Americans were rising twice as fast as hourly earnings for high-wage earners. It turns out that all three of those things are happening right now.

One reason you haven’t heard this economic narrative may be that it’s inconvenient for members of both political parties to talk about, especially at a time when economic analysis has, like everything else, become a proxy for political orientation. For Democrats, the idea that low-income workers could be benefiting from a 2019 economy feels dangerously close to giving the president credit for something. This isn’t just poor motivated reasoning; it also attributes way too much power to the American president, who exerts very little control over the domestic economy. Meanwhile, corporate-friendly outlets, such as The Wall Street Journal’s editorial pages, have reported on this phenomenon. But they’ve used it as an opportunity to take a shot at “the slow-growth Obama years” rather than a way to argue for the extraordinary benefits of tight labor markets for the poor, much less for the virtues of minimum-wage laws.

Democrats don’t want to talk about low-income wage growth, because it feels too close to saying, “Good things can happen while Trump is president”; and Republicans don’t want to talk about the reason behind it, because it’s dangerously close to saying, “Our singular fixation with corporate-tax rates is foolish and Keynes was right.”

But good things can happen while Trump is president, and Keynes was right. “Tighter labor markets sure are good for workers who work in low-wage industries,” Bunker told me. “This recovery has not been spectacular. But if we let the labor market get stronger for a long time, you will see these results.”

Charles Schwab and the new broker wars

Schwab now derives more than half of its revenue from net interest income, and the company estimates that it will lose $75 million to $150 million in revenue for every quarter-point cut by the Federal Reserve. If we get four more cuts over the next 12 months, Schwab could lose $600 million, about 6% of its estimated $10.6 billion total.

“People underestimate how much the economics of Schwab’s business comes from investing client cash,” says Steven Chubak, an analyst with Wolfe Research. “Rising rates were a very good story for them, but rates may now be going in the other direction, and that will create headwinds,” says Devin Ryan, an analyst with JMP Securities.

Schwab can withstand the revenue loss. It is one of the most broadly diversified brokerages, including asset-management, custodial, and back-office services for institutional investors. Based in San Francisco, the firm oversees $3.7 trillion in client assets, including $1.55 trillion custodied by registered investment advisor firms, or RIAs. Schwab is the largest RIA custodian in the country. The company sponsors mutual funds and exchange-traded funds. Its Intelligent Portfolios service—automated managed accounts of ETFs—has grown into the largest robo-advisor with $30 billion in assets.

The big profit center for Schwab is now its bank. With more than $276 billion in assets, Schwab Bank is larger than Ally Financial, KeyCorp, and Fifth Third Bancorp, according to S&P Global Market Intelligence. Schwab Bank recently crossed a regulatory threshold, subjecting it to stiffer federal stress-test, capital, and liquidity requirements.

As rates increased in recent years, Schwab Bank became the tail that wags the company dog. Net interest revenue from the bank amounted to $5.8 billion, or 57% of Schwab’s total revenue of $10.1 billion in 2018, up 36% year over year. Management and administrative fees were 32% of revenue in 2018, with trading and related revenue rounding out the pie.

Schwab’s revenue base now looks well balanced between RIA sources (such as custodial fees) and retail brokerage, Chubak says. The company’s low-cost ETFs and robo-advisory service are marketplace winners. Schwab recently rolled out a premium subscription advisory service offering “unlimited guidance” for $30 a month and a one-time planning fee of $300. Schwab CEO Bettinger said on a recent call with analysts that the premium subscription service “seems to have really taken off in terms of client interest and response.”

Schwab’s platform for RIAs is considered one of the strongest suites of tools and software in the industry. And it is benefiting as advisors break away from Wall Street brokerage houses. The trend has been going on for a decade, but it may be gaining momentum. Bettinger said recently that the breakaway RIA trend began “to pick up a bit again in the second quarter.” Schwab recently launched an upgraded version of its portfolio-management software to compete more effectively.

“Schwab’s competitive strength is their enormous stronghold on the advisor community,” says Thomas Peterffy, chairman of Interactive Brokers. “They have cultivated that for years.” The RIA industry is also consolidating into firms with 50 to 100 advisors, says Chip Roame, managing partner of Tiburon Strategic Advisors, a financial consulting firm. That’s good news for Schwab, since larger firms with more trading, analytics, and custodial requirements are likely to bring assets to the firm.

The tech stock that Apple, AMD, and Nvidia can’t do without

TSMC’s client list includes the world’s top technology companies, such as Apple (AAPL), Qualcomm (QCOM), Huawei Technologies, Nvidia (NVDA), and Advanced Micro Devices (AMD). They all rely on TSMC to make the most demanding chips used in smartphones, servers, artificial intelligence applications, and networking devices.

JPMorgan estimates that TSMC accounts for about 50% of the world’s foundry revenues and 80% to 90% of the industry’s profits.

TSMC has consolidated its market share in recent years because its foundries were the first to offer 7-nanometer chip production at significant volume. Smaller chips offer greater performance and improved power efficiency. The entire chip industry is rapidly trying to get to a 7nm (and lower) manufacturing process, but most manufacturers have yet to make the transition. Intel (INTC), which fabricates most of its own chips, is unlikely to have 7nm products before 2021.

Curated Insights 2019.10.04

There are no secrets

The biggest sign that an industry’s experts are not truly experts is when the industry has a large variance in its popular opinions. For example, if some people believe that you should do X and another group believe that you should not do X, then that field is likely not well understood. I am not saying that there are no experts in investing or diet/nutrition, just that a large variance suggests that the experts know less than what we might initially perceive.

Besides variance of opinion, the other thing to look out for are “simple” or “easy” solutions to these complex problems. Humans have been trying to solve certain kinds of problems (i.e. investing, health, etc.) for thousands of years, so you should be skeptical of anyone who claims to have a simple solution. Yes, some people will have useful tips, but no one person will have all the answers. And remember, what worked for them may not work for you.

BlackRock, Tencent tie-up is a match made in Wall Street

Tencent’s LiCaiTong wealth management platform already has 800 billion yuan ($112 billion) in aggregated assets, making the social media company a major financial institution in its own right. And let’s not forget the trillions of yuan that sloshes through the Weixin Pay system every year.

Southeast Asia’s internet economy to top $100 billion this year

Southeast Asia’s internet economy is on track to exceed $100 billion this year before tripling by 2025, becoming one of the world’s fastest-growing arenas for online commerce thanks to a youthful population increasingly comfortable with smartphones.

The value of online transactions in areas from internet retail to car-hailing should reach $300 billion by 2025, fueled by an existing population of 360 million online users, according to a research report by Google, Temasek Holdings Pte and Bain & Co. The region, home to ride-hailing Grab and Alibaba Group Holding Ltd.’s e-commerce site Lazada, includes four countries — Thailand, Philippines, Indonesia and Malaysia — in the top 10 globally in terms of time spent by users online, the study showed.

If you aren’t rich by 45, you might as well give up

For the rich and poor alike, the economists found that “the bulk of earnings growth” happens in the first 10 years of work, typically between the ages of 25 and 35. During the next decade of their career, men can expect smaller raises overall.

After 45, those in the bottom 90 percent of lifetime earners see their earnings decline as a group, in part because people often start cutting back their hours around that time, especially if they do manual labor for a living. Meanwhile, even 1 percenters only see relatively minor pay bumps after middle age.

Curated Insights 2019.09.27

Why these two innovations in artificial intelligence are so important: Eye on A.I.

The first item was news that a Hong Kong-based biotechnology startup, InSilico Medicine, working with researchers from the University of Toronto, had used machine learning to create a potential new drug to prevent tissue scarring. What’s eye-popping here is the timescale: just 46 days from molecular design to animal testing in mice. Considering that, on average, it takes more than a decade and costs $350 million to $2.7 billion to bring a new drug to market, depending on which study one believes, the potential impact on the pharmaceutical industry is huge.

What’s also interesting here is that InSilico used reinforcement learning, an A.I. technique that hasn’t yet impacted business much. Reinforcement learning is notable because it doesn’t require the vast pools of structured, historical data that other A.I. methods do. Here researchers used reinforcement learning to rapidly design 30,000 new molecules and then narrow them down to six, which were synthesized and further tested in the lab. Look for more A.I. breakthroughs like this to start upending the balance of power between biotech startups and Big Pharma.

The second piece of underappreciated news is that researchers at DeepMind, the London A.I. shop owned by Google parent Alphabet, and Imperial College London, successfully used a deep neural network to find more precise answers to quantum mechanical problems. That’s basically the physics that underpins all of chemistry.

To date, the only element for which we can completely solve the underlying quantum equations is the simplest, hydrogen, which has just one proton and one electron. For every other element, we rely on approximations. Get better approximations, and you potentially get new chemistry – and that means new materials. Think room temperature superconductors or new kinds of batteries that will vastly extend the range of electric vehicles. DeepMind’s A.I.-powered approximations were in some cases almost an order of magnitude better than previous methods. If you’re Dow or DuPont, or Formosa Plastics or LG Chem, that sort of advantage could be worth billions.

Why prescription drugs cost so much more in America

All over the world, drugmakers are granted time-limited monopolies — in the form of patents — to encourage innovation. But America is one of the only countries that does not combine this carrot with the stick of price controls. The US government’s refusal to negotiate prices has contributed to spiralling healthcare costs which, said billionaire investor Warren Buffett last year, act “as a hungry tapeworm on the American economy”. Medical bills are the primary reason why Americans go bankrupt. Employers foot much of the bill for the majority of health-insurance plans for working-age adults, creating a huge cost for business.

Other drugs are more innovative — and their development undeniably expensive. According to Tufts University, the average is $2.6bn per drug, up 145 per cent in the past 10 years. Most drug candidates fail; those that do make it to later stages must go through expensive clinical trials. In support of the drug companies’ argument, one 2015 study found that for every extra $2.5bn a company made in sales, it produced one extra drug.

Robot pilot that can grab the flight controls gets its plane licence

A recent conversion of US military F-16 fighter jets into drones cost more than a million dollars each. ROBOpilot can be inserted into any aircraft and just as easily removed afterwards to return it to human-controlled operation.

“It looks like an impressive achievement in terms of robotics,” says Louise Dennis at the University of Liverpool. “Unlike an autopilot which has direct access to the controls and sensors, the robot is in the place of a human pilot and has to physically work the controls and reads the dials.” The makers suggest that ROBOpilot will be useful for tasks including transporting cargo, “entry into hazardous environments”, and intelligence, surveillance and reconnaissance missions.

Entrepreneurs hope microbes hold the key to a food revolution
A taxonomy of moats

Curated Insights 2019.09.20

The financial Turing test

Imagine we could simulate the universe where each time you are born to different set of parents with a different genetic makeup. Sometimes you are born a man. Sometimes you are born a woman. Sometimes black. Sometimes white. Sometimes smart. Sometimes not. Etcetera etcetera. What would you do to have the highest probability of becoming financially secure regardless of your background?

If you wanted to re-state this question more simply, it is: How do you get rich without getting lucky?


Product-user fit comes before product-market fit

The jump from product-user fit to product-market fit is no trivial leap. Skipping what to focus on during the product-user fit stage and prematurely racing to spark the market adoption can actually decelerate your path to product-market fit. Forcing growth on a product that isn’t yet ready for broader adoption will not ultimately convert to a market of highly retained, happy users. And if you don’t listen to the early power users closely enough, you may never discover the insights that get you to a world-class product.

Power users are the biggest sign of product-user fit. Making the leap from product-user fit to product-market fit is about listening to these users to evolve your product to attract more users. When exploring products that have only been in market for a short amount of time, the behavior of power users is often more interesting and important than any aggregate metrics. If the goal is to “make something people want,” then continuously talking to and observing early power users is the only way to really understand what drives both user retention and non-user activation.

5 reasons to consider buying Berkshire Hathaway

First, we think Berkshire’s broad diversification provides the company with additional opportunities and helps to minimize losses during market and/or economic downturns. Berkshire remains a broadly diversified conglomerate run on a completely decentralized basis, with a collection of moaty businesses operating in industries ranging from property-casualty insurance to railroad transportation, utilities and pipelines, and manufacturing, service, and retailing. The economic moats of these operating subsidiaries are built primarily on cost advantage, efficient scale, and intangible assets, with some of these businesses being uniquely advantaged as well by their ability to essentially operate as private companies under the Berkshire umbrella. The operating subsidiaries also benefit from being part of the parent company’s strong balance sheet, diverse income statement, and larger consolidated tax return.

Berkshire’s unique business model has historically allowed the company to–without incurring taxes or much in the way of other costs–move large amounts of capital from businesses that have limited incremental investment opportunities into other subsidiaries that potentially have more advantageous investment options (or put the capital to work in publicly traded securities). The managers of Berkshire’s operating subsidiaries are encouraged to make decisions based on the long-term health and success of the business, rather than adhering to the short-termism that tends to prevail among many publicly traded companies. Another big advantage that comes from operating under the Berkshire umbrella is the benefit that comes with diversification not only within the company’s insurance operations, but also within the organization as a whole. In most periods, it is not unusual to see weakness in one aspect of Berkshire’s operations being offset by the results from another or from the rest of the organization.


We can be weird, or it can be public

WeWork seems to be facing the traditional tradeoff: Stay private, keep control, but lose access to billions of dollars of funding, or go public, raise unlimited money, and have to act normal. If it does either of those things, that will mark a sort of end of an era. At the height of the unicorn boom, big tech companies could stay private without giving up the benefits of being public, or they could go public without taking on the burdens of being public. Now they might have to make hard choices again.

Shopify is now a major player in e-commerce. Here’s how it happened, according to the COO

Over the years, we’ve also realized as we grow bigger, we have incredible economy of scale. If you were to aggregate all our U.S. stores [customers’ sales volume] we would be the third-largest online retailer in the U.S. Amazon is first, eBay second, and Shopify is a very close third. What that means is when we go to the payment companies, when we go to the shipping companies or go to anyone, we negotiate on behalf of more than 800,000 merchants. Instead of keeping the economies of scale for ourselves, we distribute [the benefits] to the small businesses. I think that’s why we have been really successful.


The foodoo economics of meal delivery

The newbies, born more recently, have turned a once-tidy business into a food fight. They include listed firms such as Meituan of China and Delivery Hero of Germany, Uber Eats (part of Uber), Ele.me (owned by China’s Alibaba), and privately held DoorDash, based in San Francisco, and Deliveroo, from London. For most of them, delivery is their core business, so they share their cut of the bill with riders as well as restaurants. This substantially broadens the market to restaurants offering everything from steak to Hawaiian poké bowls. But margins suffer. Funded largely by venture capital, they have thrown subsidies at customers, forcing their veteran rivals onto the defensive. To catch up, the veterans are investing in advertising and delivery networks—at a big cost. This week Grubhub and Just Eat reported slumping earnings, and Takeaway mounting losses, as they spent heavily to fend off the upstarts.

The only mouthwatering aspect of the delivery business is its potential size. According to Bernstein, a brokerage, almost a third of the global restaurant industry is made up of home delivery, takeaway and drive-throughs, which could be worth $1trn by 2023. In 2018 delivery amounted to $161bn, leaving plenty of room for online firms to expand; the seven largest increased revenues by an average of 58%. Their businesses support the trend of 20- and 30-somethings to live alone or in shared accommodation, with less time and inclination to cook. In China, by far the biggest market for food delivery, one-third of people told a survey that they would be prepared to rent a flat without a kitchen because of the convenience of delivery. Delivery also fits neatly with the gig-economy zeitgeist, alongside ride-hailing firms such as Uber, Lyft and China’s Didi.

Moreover, potential growth may be overstated. Subsidies make true demand hard to gauge. When delivery charges and service fees eventually rise, which they will have to if profits are to materialise, some customers may flee. In the meantime, cheap money lets firms undercut rivals but distorts incentives. The war of attrition could get even worse if giants like Amazon muscle in, as it has tried to do by buying a stake in Deliveroo (the deal is stalled at present because of antitrust concerns). Alibaba, Amazon’s Chinese counterpart, uses Ele.me as a loss leader helping drive traffic to its profitable e-commerce sites.

Untangling the threads: Stitch Fix is a bargain

There have been numerous ecommerce 2.0 flameouts over the past decade (e.g. Gilt Groupe, Fab.com, Birchbox, Shoedazzle, Beachmint, One Kings Lane). Venture capitalists flocked to these businesses due to large addressable markets and strong top-line growth. To be fair, there have been some big winners (e.g. Wayfair) which can justify the VC game. But as Bill Gurley points out, innovations around pricing or distribution — think flash sales and subscriptions in a box — don’t represent core differentiation or sustainable competitive advantages. Additionally, these startups had access to hundreds of millions of VC funding and therefore weren’t forced to prove out the unit economics before scaling rapidly.

Are Airbnb investors destroying Europe’s cultural capitals?

The definitive story of how a controversial Florida businessman blew up MoviePass and burned hundreds of millions

Farnsworth’s pitch to MoviePass: $25 million for 51% of the company, two seats on the five-member board, and a promise to drop the monthly subscription price, temporarily, from $50 to $9.95, with the goal of hitting 100,000 subscribers. If all went well, the next step would be taking MoviePass public. But Farnsworth’s plan worried Spikes; to him, $10 a month was too low. At that price MoviePass would start losing money when a subscriber used the service more than once a month.

In the US, the average price for a movie ticket is about $9; if a customer ordered a ticket every day for a month (the maximum the MoviePass plan allowed), it would cost MoviePass about $270, of which the subscriber’s fee would cover just $10. But in July 2017, the MoviePass board agreed to the deal. And on August 15, the price drop went into effect. Thanks to word-of-mouth buzz and press attention, within two days subscriptions jumped from about 20,000 to 100,000. MoviePass had transformed from a scrappy startup trying to keep the lights on to a disrupter in the making.

But Spikes saw a looming disaster. The company was overwhelmed by its overnight success and couldn’t keep up with demand. A quarter-million new subscribers were signing up every month, and MoviePass customer-service lines were flooded with complaints from people who had been waiting weeks for their cards. MoviePass had lowballed the number of cards it would need after the price drop. It got to a point where the vendor making the MoviePass cards didn’t have enough plastic and had to call on its competitors to fulfill all the card orders. “We all knew we were selling something we couldn’t deliver on,” one former staffer said.

Pat Dorsey: Never put any moat on a pedestal

The same way you evaluate any other business, which is trying to think about the present value of future cash flows. This is an area where the world has changed pretty significantly over the past couple of decades because, 30 years ago, most investments were done via the balance sheet. They were investments in buildings, in factories, in railroads, in locomotives and all those came out of the balance sheet. Today, a lot of investment happens out of the income statement. If you are a software company, and you are acquiring new customers, who might have a nine to 10-year lifespan with the business, that comes out of sales and marketing, and so that depresses your current margins.

But it seems insensible to me to argue that I should not invest in a customer who could be with me for 10 years and who will pay me 3% more every year as I raise prices. Why is that not just as valuable an investment as a machine that will wear out in 10 years? One is an appreciating asset and the other is a depreciating asset. The former — the customer — comes by way of investing through the income statement and depresses current margins. As for buying the machine, it is just a capital expenditure. If you have a business that is re-investing heavily today, a software company or an Amazon for example, you have to think about the incremental unit economics. How much does it cost to acquire each customer and how much value do they deliver over some span of time, and then try to think about what does this business look like at steady state, say in a five or 10-year timeframe. You know what margins it will have once the investment slows down and then you discount those cash flows back to the present.

So far, Uber and Lyft have competed very heavily on price. That was evident in both of their IPO filings, they have been trying to undercut each other on price, which is not the sign of a healthy competitive dynamic that’s going to result in great return for shareholders. Maybe that will change, I don’t know. But, when I see two big companies trying to basically undercut each other on price and, it’s not really clear who is going to win, I’d rather just stay on the sidelines and watch. One of the most important things for an investor to do is to maximise return on time. By analysing Uber and Lyft, we probably aren’t going to get a lot of advantage, because everybody and their mother is trying to have an opinion on these things, and it’s just not clear how the competitive dynamics will pan out long term. So we’ve spent literally zero time on them!

A lot of it comes down to the unit economics of the business. Boeing and Airbus need to absorb a lot of fixed costs. Building an aircraft factory, investing and designing a new aircraft, requires a lot of very high fixed costs, and so they need to absorb that. And so, each incremental plane sold is very important to both companies. So they need to take market share from each other. Whereas for Visa and Mastercard, their fixed cost for the payment networks, those costs were sunk decades ago. Their network is there. It exists. So there’s no incentive to compete on price, because they don’t have the same economics of cost absorption.

When to sell and when a moat is weakening are really two different questions. But I would say, the biggest signal that a moat is weakening is the lack of pricing power. If a business historically had been able to raise prices and is no longer able to raise prices, that generally indicates that its competitive advantage is weakening or disappearing.

Howard Stern is getting ripped off

Take a look at Joe Rogan, who currently has the most popular talk show podcast with over 200 million downloads per month. This number comes from Joe himself¹, but let’s assume he was exaggerating and it’s only 100 million downloads per month.

Assuming he sells ads at a low $18 CPM (cost per thousand listeners) and sells out his ad spots, he’s making approximately $64mm in annual revenue. If he’s on the higher end, at $50 CPM, he could be making as much as $240mm per year². The only factor that would change this is how many free ads Joe gives to companies that he has a personal equity stake in (like Onnit, the supplement brand he co-owns).

That means that Joe makes somewhere between $64-$240 million per year in revenue from his podcast advertising alone—and that’s handicapping his audience by half what he claims to have. That number also doesn’t include any additional revenue generated from his wildly popular YouTube channel, which has over 6 million subscribers.

Based on existing advertising revenues alone, Joe Rogan could easily be worth over a billion dollars, even if he doesn’t realize it. If estimates are correct, he owns a business that produces somewhere in the neighborhood of $60-$235 million/year in profit and is likely growing at 30–50% annually (assuming his audience is growing alongside the podcast ecosystem)³. If it were publicly traded, his podcasting business could easily fetch a valuation in the billions.

Even the small stresses of daily life can hurt your health, but attitude can make a difference

When people talk about harmful stress — the kind that can affect health — they usually point to big, life-changing events, such as the death of a loved one. A growing body of research suggests that minor, everyday stress — caused by flight delays, traffic jams, cellphones that run out of battery during an important call, etc. — can harm health, too, and even shorten life spans.

Curated Insights 2019.09.06

Where the opportunities are in regulated marketplaces: Managed marketplaces

The licensing of workers was more critical in a “pre-internet” world, since licenses established consumer trust by signaling the skills or knowledge required to perform a job. But today, digital platforms can mitigate the need for (some) licensing by establishing trust and ensuring quality through other means — such as user reviews, platform requirements, and other mechanisms like pre-vetting and guarantees.

“Managed marketplaces” models in particular can be helpful in establishing user trust, because they intermediate parts of the service delivery, adding value by taking on functions like identifying high-quality providers, standardizing prices, and automating matching between demand and supply. As scrutiny around safety for marketplaces continues to rise, the importance of trusted labor becomes even more significant. In childcare, for instance, people don’t want to just see a list of all possible caregivers — they want to know with certainty that the providers they’re hiring are trustworthy and qualified, and a managed marketplace can capitalize on this user need by thoroughly vetting all supply.

Managed marketplaces can greatly mitigate the need for licensing because users trust the marketplace itself, particularly on the highly managed side of the spectrum. Such platforms can enable high-quality, but unlicensed, suppliers to offer services alongside licensed providers — and in doing so, promote entrepreneurship and alleviate supply constraints.


The Big Short’s Michael Burry explains why index funds are like subprime CDOs

The dirty secret of passive index funds — whether open-end, closed-end, or ETF — is the distribution of daily dollar value traded among the securities within the indexes they mimic. In the Russell 2000 Index, for instance, the vast majority of stocks are lower volume, lower value-traded stocks. Today I counted 1,049 stocks that traded less than $5 million in value during the day. That is over half, and almost half of those — 456 stocks — traded less than $1 million during the day. Yet through indexation and passive investing, hundreds of billions are linked to stocks like this. The S&P 500 is no different — the index contains the world’s largest stocks, but still, 266 stocks — over half — traded under $150 million today. That sounds like a lot, but trillions of dollars in assets globally are indexed to these stocks. The theater keeps getting more crowded, but the exit door is the same as it always was. All this gets worse as you get into even less liquid equity and bond markets globally.

This structured asset play is the same story again and again — so easy to sell, such a self-fulfilling prophecy as the technical machinery kicks in. All those money managers market lower fees for indexed, passive products, but they are not fools — they make up for it in scale. Potentially making it worse will be the impossibility of unwinding the derivatives and naked buy/sell strategies used to help so many of these funds pseudo-match flows and prices each and every day. This fundamental concept is the same one that resulted in the market meltdowns in 2008. However, I just don’t know what the timeline will be. Like most bubbles, the longer it goes on, the worse the crash will be.


Debunking the silly “passive is a bubble” myth

So index funds hold less than 15% of shares in public companies. And according to former Vanguard CEO Bill McNabb, indexing in stocks and bonds globally represents less than 5% of global assets.

When you buy an index fund of the total stock market, you are literally buying the stock market in proportion to the shares held by all active investors. If you sum up the collective holdings of active managers, what you basically get is a market-cap-weighted index. Index fund investors are simply buying what the active investors have laid out for them.

Charley Ellis wrote in his book, The Index Revolution, that indexing accounts for less than 5% of trading, with the remaining 95% or so done by active investors. This will always be the case, no matter the amount of money flowing into index funds.

When an index fund investor sells, they’re technically selling their holdings in direct proportion to their weighting in the index. So there is little market impact involved. Again, index fund investors are simply owning stocks in the proportion that all active investors own stocks. Plus, index funds never lever up your holdings. They never receive a margin call. They don’t put 30% of your holdings in Valeant Pharmaceuticals. And no index fund has ever closed up shop to spend more time with their family.

Why the Periodic Table of Elements Is More Important Than Ever

How Amazon’s shipping empire is challenging UPS and FedEx

Amazon now delivers nearly half of its orders, compared with less than 15% in 2017, according to estimates from research firm Rakuten Intelligence. It is now handling an estimated 4.8 million packages every day in the U.S. … The U.S. Postal Service, once the primary carrier of Amazon parcels, delivers about half the share of packages than it did two years ago.

Asahi’s voracious thirst sees it take crown as king of M&A in Asia

At a news conference in Tokyo this month, Mr Koji said the company would focus on strengthening its three core markets in Japan, Europe and Australia: “That will be our priority and we’ll subsequently consider whether we will do further merger and acquisition deals.”

Suntory, known for its Yamazaki whisky, bought US spirits maker Beam for $16bn in 2014, creating the world’s third-largest spirits maker. Before that, Kirin had made a disastrous foray into Brazil with a $3.9bn acquisition of family-owned Schincariol in 2011.

Asahi went on a buying spree of its own with a $1.3bn acquisition of New Zealand’s Independent Liquor in 2011 and other smaller deals in Australia, China and Malaysia. In the decade before 2016, it spent $3.9bn on 24 outbound deals, according to Dealogic, but none had any serious impact on its balance sheet. Their geographical reach was limited, with its overseas business making up less than 15 per cent of revenues.

Deep dive into the General Electric-Markopolos case – Here: The Baker Hughes accounting

Admittedly, GE has never been at the forefront of conservative accounting application. Looking into the history of the company we can find a couple of examples of quite aggressive representations of its economic situation. But with regard to the Baker Hughes accounting we cannot find anything wrong (but of course, it could be that we missed something). Moreover, the Markopolos report does not come even close of what is necessary to assess the accounting treatment here. We do not want to judge to harshly on the report (with regard to the Baker Hughes accounting) because at least the economics are correct – but also disclosed by GE – but all in all the Markopolos report really seems to be a bit light in accounting from our subjective point of view.

The Amazon is not Earth’s lungs

The Amazon produces about 6 percent of the oxygen currently being made by photosynthetic organisms alive on the planet today. But surprisingly, this is not where most of our oxygen comes from. In fact, from a broader Earth-system perspective, in which the biosphere not only creates but also consumes free oxygen, the Amazon’s contribution to our planet’s unusual abundance of the stuff is more or less zero. This is not a pedantic detail. Geology provides a strange picture of how the world works that helps illuminate just how bizarre and unprecedented the ongoing human experiment on the planet really is. Contrary to almost every popular account, Earth maintains an unusual surfeit of free oxygen—an incredibly reactive gas that does not want to be in the atmosphere—largely due not to living, breathing trees, but to the existence, underground, of fossil fuels.

After this unthinkable planetary immolation, the concentration of oxygen in the atmosphere dropped from 20.9 percent to 20.4 percent. CO2 rose from 400 parts per million to 900—less, even, than it does in the worst-case scenarios for fossil-fuel emissions by 2100. By burning every living thing on Earth. “Virtually no change,” he said. “Generations of humans would live out their lives, breathing the air around them, probably struggling to find food, but not worried about their next breath.”

Why Indonesia is shifting its capital From Jakarta

As well as bursting at its seams, the city is sinking. Two-fifths of Jakarta lies below sea level and parts are dropping at a rate of 20 centimeters (8 inches) a year. That’s mostly down to the constant drawing up of well water from its swampy foundations. Stultifying traffic congestion and polluted air are a daily reality for Jakarta’s 10 million inhabitants. The gridlock costs an estimated 100 trillion rupiah ($7 billion) a year in lost productivity for the greater Jakarta area, known as Jabodetabek, encompassing 30 million people.

Jakarta will keep growing. The population is on course to reach 35.6 million by 2030, helping it topple Tokyo as the world’s most populous city. Since the greater metropolitan area generates almost a fifth of Indonesia’s GDP, Jakarta will continue to be the country’s main commercial hub. There’s a $43 billion plan to sort out the traffic, including a Mass Rapid Transit rail line that opened in 2019. As for Jakarta’s submergence problem, the president is planning a giant wall to keep big waves out.

Better is fragile — different is king

Most of us grew up believing that, to compete, we need to be better than the competition. We need better skills, better players, better résumés. But what happens when your best is no longer good enough? What happens when that amazing software application you just spent beaucoup bucks developing is blindsided by an even better program? One that’s less expensive, to boot?

Better is fragile. It can be trampled in a nanosecond. Attempting to be better puts companies on a hampster wheel, running faster and faster—and in the same direction as everyone else—to keep up. Better is weak.

Different is king. When you can differentiate yourself in the market, you step off the hamster wheel, never to return. You only look back to witness the frenzy your brand is causing in the hamster cage you left behind.

Here’s your choice: Spend a lot of time and money in pursuit of better. Or find what makes you different, and then do it on purpose.


A silent interlude

Warren Buffett hasn’t been reading five newspapers every day for seven decades for no reason. The trick is to find the right balance between exposure to the news while honing the ability to distinguish between news and noise.


Running your trading as a business

Imagine that you are pitching your trading business to a venture capitalist. How will you convince the VC that this is a business worth investing in?

Reasonable investing philosophies

Personal finance > investing, at all income levels, because a good saver who doesn’t invest will be fine but a great investor mired in debt and overspending can be wiped out.

Curated Insights 2019.08.23

The WeWork IPO

Given this vision, WeWork’s massive losses are, at least in theory, justifiable. The implication of creating a company that absorbs all of the fixed costs in order to offer a variable cost service to other companies is massive amounts of up-front investment. Just as Amazon needed to first build out data centers and buy servers before it could sell storage and compute, WeWork needs to build out offices spaces before it can sell desktops or conference rooms. In other words, it would be strange if WeWork were not losing lots of money, particularly given its expansion rate.

What is useful is considering these two graphics together: over 300 locations — more than half — are in the money-losing part of the second graph, which helps explain why WeWork’s expenses are nearly double its revenue; should the company stop opening locations, it seems reasonable to expect that gap to close rapidly. Still, it is doubtful that WeWork will slow the rate with which is opens locations given the company’s view of its total addressable market.

The sheer scale of this ambition again calls back to AWS. It was in 2013 that Amazon’s management first stated that AWS could end up being the company’s biggest business; at that time AWS provided a mere 4% of Amazon’s revenue (but 33% of the profit). In 2018, though, AWS had grown by over 1000% and was up to 11% of Amazon’s revenue (and 59% of the profit), and that share is very much expected to grow, even as AWS faces a competitor in Microsoft Azure that is growing even faster, in large part because existing enterprises are moving to the cloud, not just startups.

WeWork, meanwhile, using its expansive definition of its addressable market, claims that it has realized only 0.2% of their total opportunity globally, and 0.6% of their opportunity in their ten largest cities. To be fair, one may be skeptical that existing enterprises in particular will be hesitant to turn over management of their existing offices to WeWork, which would dramatically curtail the opportunity; on the other hand, large enterprises now make up 40% of WeWork’s revenue (and rising), and more importantly, WeWork doesn’t have any significant competition.

In short, there is a case that WeWork is both a symptom of software-eating-the-world, as well as an enabler and driver of the same, which would mean the company would still have access to the capital it needs even in a recession. Investors would just have to accept the fact they will have absolutely no impact on how it is used, and that, beyond the sky-high valuation and the real concerns about a duration mismatch in a recession, is a very good reason to stay away.

Pershing Square on Berkshire Hathaway

Berkshire’s primary asset is the world’s largest insurance business, which we estimate represents nearly half of Berkshire’s intrinsic value. In its primary insurance segment, Berkshire focuses on the reinsurance and auto insurance segments. In reinsurance, Berkshire’s strong competitive advantages are derived from its enormous capital base, efficient underwriting (a quick yes or no), ineffable trustworthiness, and its focus on long-term economics rather than short-term accounting profits, all of which allows the company to often be the only insurer capable of and willing to insure extremely large and/or unusual, bespoke insurance policies. We believe that Berkshire’s reinsurance business, operating primarily through National Indemnity and General Re, is uniquely positioned to serve its clients’ needs to protect against the increasing frequency and growing severity of catastrophic losses. In auto insurance, Berkshire subsidiary GEICO operates a low-cost direct sales model which provides car owners with lower prices than competitors that rely on a traditional agent-based sales approach. GEICO’s low cost, high quality service model has enabled it to consistently gain market share for decades. The enduring competitive advantages of Berkshire’s insurance businesses have allowed it to consistently grow its float (the net premiums received held on Berkshire’s balance sheet that will be used to pay for expected losses in the often distant future) at a higher rate and a lower cost than its peers. While Mr. Buffett is best known as a great investor, he should perhaps also be considered the world’s greatest insurance company architect and CEO because the returns Berkshire has achieved on investment would not be nearly as good without the material benefits it has realized by financing these investments with lowcost insurance float.

For more than the last decade, Berkshire has grown its float at an 8% compounded annual growth rate while achieving a negative 2% average cost of float due to its profitable insurance underwriting, while incurring an underwriting loss in only one out of the last 15 years. These are extraordinary results particularly when compared with the substantial majority of insurance companies which lose money in their insurance operations and are only profitable after including investment returns. Furthermore, we believe that Berkshire’s cost of float will remain stable or even decline as its fastest growing insurance businesses (GEICO and BH Primary) have a lower cost of float than the company’s overall average. Since the end of 2007, we estimate that Berkshire has averaged a nearly 7% annual rate of return on its insurance investment portfolio while holding an average of 20% of its portfolio in cash. Berkshire has been able to produce investment returns that significantly exceed its insurance company peers as the combination of the company’s long-duration float and significant shareholders’ equity allow it to invest the substantial majority of its insurance assets in publicly traded equities, while its peers are limited to invest primarily in fixed-income securities. We believe these structural competitive advantages of Berkshire’s insurance business are enduring and will likely further expand. Berkshire also owns a collection of high-quality, non-insurance businesses, which include market-leading industrial businesses, the largest of which are the Burlington Northern Santa Fe railroad and Precision Castparts, an aerospace metal parts manufacturer. While Berkshire’s non-insurance portfolio is comprised of highly diversified businesses that have been acquired during the last 50 or so years, we estimate that the portfolio derives more than 50% of its earnings from its largest three businesses: Burlington Northern (>30%), Precision Castparts (~10%), and regulated utilities (~10%).

While we have utilized a number of different approaches to our valuation of Berkshire, we believe it is perhaps easiest to understand the company’s attractive valuation by estimating Berkshire’s underlying economic earnings power, and comparing the company’s price-earnings multiple to other businesses of similar quality and earnings growth rate. Using this approach, we believe that Berkshire currently trades at only 14 times our estimate of next 12 months’ economic earnings per share (excluding the amortization of acquired intangibles), assuming a normalized rate of return of 7% on its insurance investment portfolio. While generating a 7% return on such a large amount of investment assets is not a given—particularly in an extraordinarily low-rate environment—we believe that Berkshire’s ability to invest the substantial majority of its insurance assets in equity and equity-like instruments and hold them for the long term makes this a reasonable assumption. Based on these assumptions, we believe that Berkshire’s valuation is extremely low compared to businesses of similar quality and growth characteristics.

WeWTF

The last round $47 billion “valuation” is an illusion. SoftBank invested at this valuation with a “pref,” meaning their money is the first money out, limiting the downside. The suckers, idiots, CNBC viewers, great Americans, and people trying to feel young again who buy on the first trade — or after — don’t have this downside protection. Similar to the DJIA, last-round private valuations are harmful metrics that create the illusion of prosperity. The bankers (JPM and Goldman) stand to register $122 million in fees flinging feces at retail investors visiting the unicorn zoo. Any equity analyst who endorses this stock above a $10 billion valuation is lying, stupid, or both.


The dating business is IAC’s best asset — and its greatest challenge

Match is among IAC’s greatest hits. The stock has nearly doubled this year alone, thanks largely to soaring Tinder membership. IAC sold a portion of Match in a 2015 IPO at $12. The stock is now $85, and IAC’s Match stake is worth close to $19 billion. It accounts for more than 90% of IAC’s current $21 billion market value.

This month, Levin and IAC disclosed a solution to the Match problem. The company is considering distributing Match shares to its shareholders in a tax-free transaction. And IAC is thinking about a similar handoff of its 84% stake in ANGI Homeservices (ANGI). That operation is a $4.3 billion market-cap business that IAC created in 2017 by acquiring publicly traded Angie’s List and merging it with IAC-owned HomeAdvisor.


How big stars maximise their take from tours

Historically, tours were loss-leaders used to promote albums. As revenues from recorded music have collapsed and productions have become increasingly elaborate to draw the crowds, ticket prices have risen steeply. The cost of a concert ticket in America increased by 190% between 1996 and 2018, compared with 59% for overall consumer prices. But as the continued success of scalpers demonstrates, they are still far below the market-clearing price.

How aggressively cute toys for adults became a $686 million business

Funko Pops are now available from 25,000 retail brands worldwide, from Walmart to Amazon to Hot Topic and even, somewhat bizarrely, Foot Locker. In 2018, the company’s net sales increased 33 percent to $686.1 million, with figurines accounting for 82 percent of all sales. After the company released its Q2 earnings report in early August, declaring that sales up are 38 percent compared to this time last year, CEO Brian Mariotti called his company “recession proof.”

Collectors like Jack make up 36 percent of Funko’s customers, while 31 percent are “occasional buyers.” Wilkinson says Funko Pops appeal to both markets because of the “science of cute” behind the figurines’ design.

Funko now has more than 1,000 licensed properties, from the Avengers to the Golden Girls, Fortnite to Flash Gordon, Stranger Things to The Office. “Evergreen and classic” properties like Harry Potter, Star Wars, and Disney make up nearly half of all Funko Pop sales, but the company is seemingly constantly procuring new, unexpected licenses, from drag queens to food mascots to NASCAR drivers.

A May 2019 investor presentation from the company boasts that a Pop can be designed and submitted to a licensor in 24 hours, molded into a prototype in 45 days, and “sourced from Asian facilities while maintaining quality control” in just 15 days. Funko also prides itself on its low production costs — each new figure costs between $5,000 and $7,500 to develop.

Is it possible, then, that Funko will run out of things to Pop? At present, the company’s profits continue to climb, from $98 million gross profit in 2015 (when Funko had just 205 active properties) to $258 million in 2018. History has shown us that collectibles tend to decline in popularity, and it is possible that Funko Pops could go the way of the Beanie Baby. Yet at present, there are more than enough fans keeping the company in business.

To encourage collectors, Funko uses many tried-and-tested market tricks, like releasing toys exclusive to certain locations (Mr. Rogers is exclusive to Barnes & Noble) and producing limited-edition runs (only 480 holographic Darth Mauls were released at San Diego Comic-Con in 2012). Yet the company doesn’t just rely on people like Jack and Tristan. A third of all customers are only occasional buyers, and the customer base appears to be a diverse set of people with a diverse range of fandoms. In 2018, no single property made up more than 6 percent of purchases; Pops related to new theatrical releases encompassed 20 percent of sales, TV show-related Pops accounted for 16 percent, and gaming Pops made up 17 percent. There is a roughly equal gender split in customers (51 percent women to 49 percent men), and last year, international sales grew 57 percent.

Interestingly, Funko’s average customer is 35 years old — two years younger than Jack, who says his date recovered from seeing his spare room. “The rest of the night went very well and we went on several more dates,” he said. Although it ultimately didn’t work out with her, Jack says his “crazy room of Funko Pops” didn’t have “too much influence on it either way.”


Move over Lego: The next big collectable toy powerhouse is here

Collectibles are a $200 billion market on their own, and video games are on pace to be a $300 billion industry by 2025. And Funko sits right in the middle of it all.

Funko is very good at what it does; its revenue and fanbase is proof of that. But when Microsoft reached out about a video game collaboration, there were all sorts of new questions on Funko and Microsoft’s part because Funko wasn’t just an aesthetic anymore; it had to be interactive for the first time. And interactive is tricky. It forces designers to decide, how does a Funko walk? How does a Funko fight? Can a Funko bleed? (No, by the way, they can’t).


The real story of Supreme

Twenty-five years later, as fads (like televised street luge) have fallen by the wayside, Supreme remains a skate brand—a purveyor of all the hard and soft goods one needs for the sport. But it is something much more than that, too. Since its beginning, in 1994, Supreme has slowly worked its way to the very center of culture and fashion. Or more accurately, culture and fashion have reconfigured themselves around Supreme. Supreme’s clothing and accessories sell out instantly, and the brand has become a fashion-world collaborator of the highest caliber with projects now under way with designers high (Comme des Garçons, Undercover) and low (Hanes, Champion). Though the particulars of the privately held company’s business are undisclosed, a $500 million investment in 2017 from the multinational private equity firm the Carlyle Group, for a 50 percent stake, put Supreme’s valuation at $1 billion.

The formula for success—for building a brand that lasts for 25 years—sounds simple enough: Create a high-quality product that will last a long time, sell it for an accessible price, and make people desperately want to buy it. But executing such a plan is far trickier. And in figuring out how to thrive according to strict adherence to its own highly specific principles and logic, Supreme has, deliberately or not, re-arranged the alignment of the entire fashion industry.

Powerful as Supreme has become as a trendsetter, the company is still fiercely committed to its own novel approach. Supreme didn’t launch a website until 2006. It was purposefully late to Instagram, too. Outside of Japanese fashion magazines and downtown NYC wheat-paste poster campaigns, Supreme’s only real marketing efforts are made in the skate world. Conveniently, marketing to skaters is likely the best way for Supreme to market to the fashion world. In other words, the fact that Supreme doesn’t pander to the fashion industry only makes its allure more powerful.

ETF fear mongering myths

Even if every ETF investor wanted to sell (which would never happen), remember that ETFs only own approximately 6% of the stock market and 1% of the bond market.

Curated Insights 2019.08.16

The arc of collaboration

As the ecosystem of specialized SaaS apps and workflows continues to mature, messaging becomes a place of last resort. When things are running smoothly, work happens in the apps built to produce them. And collaboration happens within them. Going to slack is increasingly a channel of last resort, for when there’s no established workflow of what to do. And as these functional apps evolve, there are fewer and fewer exceptions that need Slack. In fact, a sign of a maturing company is one that progressively removes the need to use Slack for more and more situations.

And core Dropbox is not a solution to this. People store their documents in it. But they had to use email and other messaging apps to tell their co-workers which document to check out and what they needed help with. Dropbox understands this concern. It’s what’s driven their numerous forays into owning the workflows and communication channels themselves. With Carousel, Mailbox, and their new desktop apps all working to own that. However, there are constraints to owning the workflow when your fundamental atomic unit is documents. And they never quite owned the communication channels.

Slack is not air traffic control that coordinates everything. It’s 911 for when everything falls apart. Every slack message about a new document your feedback is wanted on or coordinating about what a design should look like is a failing of process or tools. Slack is exception handling. When there’s no other way to make sure someone sees and update, or knows context, Slack is the 911 that can be used.

And as Figma expands into plugins, the ecosystem will continue to solve for more and more of the needs and exceptions. Over time, our workflows align with our functional flows. And collaboration is no exception. And Figma is not alone. More and more apps in all categories understand that collaboration should and must be built in as a first party if they want to best serve their customers. Notion, Airtable, etc all understand this. The feedback loops of collaboration get so short that they become part of the productivity loop.

Disruption: Finding the right balance in confinement care

Unlike 28 Days, Pantang Plus has 150 confinement therapists (aged between 25 and 60) working directly with the start-up. The company had to recruit a workforce of that size after they were challenged to do so. “During MaGIC’s accelerator programme in 2016, we could only handle four therapists at a time. But after that, we were tasked to take in 100 of them. So by word of mouth, we managed to recruit 102 therapists,” says Zamzana, adding that Pantang Plus also received a RM30,000 grant to kick off its business.

When orders started pouring in, the company needed to process the transactions quickly. It was difficult as it had to accommodate massage bookings, process quotations, confirm orders and send out therapists. After enlisting Hisamudin, a former systems engineer who had sold his media start-up, she managed to expedite the processes. The duo were coached to focus on a certain segment and they chose the affluent and urban market.

According to Hisamudin, by tapping this particular segment, they get fewer customers but each of them is more lucrative. The company managed to grow its business from 20 bookings in 2016 (which work out to about RM43,347 in sales) to 156 bookings (RM418,540) last year. Since its debut, the company has paid out about RM280,000 to therapists.

Before the online platform was set up, there was a lot of back and forth with the customers and building trust was not difficult, says Zamzana. But now that a lot of the processes are automated, she has noticed that customers are more hesitant and apprehensive about the services it offers. “So, I created a standard operating procedure (SOP) where we meet with customers for personalised consultation sessions so we can manage their expectations,” she says.

There is also an SOP for customers to protect the therapists. “There have been cases where they were mistreated, paid unfairly or were told to do all sorts of things beyond their job scope. The SOP lays out the conditions that govern the packages that are subscribed to. So, I take full responsibility if the customer is not satisfied or if the therapist is mistreated,” says Zamzana.

Hisamudin says the company is constantly improving the platform to automate the back-end process for both the customer and therapist. “We also plan to automate the payment gateway so we don’t have to check whether we have received payments from customers, which can be tedious,” he adds.

WeWork’s S-1: some quick observations

In connection with this offering, Rebekah and Adam are dedicating additional resources to amplify the positive global impact of our organisation. This effort is designed to enable us to scale our social and global impact as the Company grows. Rebekah and Adam Neumann have pledged $1 billion to fund charitable causes. To fulfil this pledge, Rebekah and Adam will contribute cash and equity to charitable causes within the 10 years following this offering. Their first contribution aids in the conservation of over 20 million acres of intact tropical forest, including the region pictured on the final page of this prospectus. To evidence their commitment to charitable causes and to ensure this commitment is meaningful, if Adam and Rebekah have not contributed at least $1 billion to charitable causes as of the ten-year anniversary of the closing date of this offering, holders of all of the Company’s high-vote stock will only be entitled to ten votes per share instead of twenty votes per share.

Adam currently has a line of credit of up to $500 million with UBS AG, Stamford Branch, JPMorgan Chase Bank, N.A. and Credit Suisse AG, New York Branch, of which approximately $380 million principal amount was outstanding as of July 31, 2019. The line of credit is secured by a pledge of approximately [blank] shares of our Class B common stock beneficially owned by Adam. In addition, JPMorgan Chase Bank, N.A. has made loans and extended credit to Adam totalling $97.5 million across a variety of lending products, including mortgages secured by personal property. None of these other lending products are secured by a pledge of any of Adam’s shares of capital stock in the Company.

Asset managers with $74 trillion on brink of historic shakeout

In this new environment, the beneficiaries have been the world’s largest asset managers, who are wielding far more influence and increasingly attracting a larger share of investor money. They’ve been able to take advantage of their size to keep overall expenses down and help make up for lower fees. Crucially, they’re also the most likely to be offering both passive investments as well as actively managed funds. That means the biggest firms are just getting bigger: The two largest U.S. indexing titans—BlackRock Inc. and Vanguard—oversee combined assets of around $12 trillion this year, up from less than $8 trillion just five years ago.

Fidelity Investments once boasted the world’s largest mutual fund. But the Fidelity Magellan Fund that stock-picking star Lynch propelled from a $20 million offering into a multibillion-dollar behemoth is not even in the world’s top 25 mutual funds today, according to Morningstar. In a sign of the times, only three of the top 10 funds worldwide are actively managed funds, Morningstar data show.

Europe’s fund industry has remained fragmented, in part, because it’s dominated by divisions of banks and the link hasn’t been an advantage as the financial firms focused less on building their fund units and more on averting crisis after crisis.

The booming, ethically dubious business of food delivery

In 2020, more than half of restaurant spending is projected to be “off premise”—not inside a restaurant. In other words, spending on deliveries, drive-throughs, and takeaway meals will soon overtake dining inside restaurants, for the first time on record. According to the investment group Cowen and Company, off-premise spending will account for as much as 80 percent of the industry’s growth in the next five years.


How the supermarket helped America win the Cold War

Between 1946 and 1954 in the U.S., the share of food bought in supermarkets rose from 28 percent to 48 percent. By 1963, that number had risen to nearly 70 percent. A&P had so much market power that the Department of Justice went after it for anticompetitive practices. This was an interesting development, considering that the U.S. Government played such a significant role in the creation of supermarkets in the first place.

RV Capital’s view on Variable Interest Entities

The VIE structure is incredibly favourable from a Chinese perspective. Control of the companies remains in China. The contractual right to cashflow is mainly theoretical as most companies reinvest most of their earnings (which makes sense given the opportunities for growth). Finally, it aligns with the government’s legitimate aim to foster a competitive and vigorous economy that the costs of said competition are borne in part by foreign capital whilst the benefits accrue exclusively to its citizens. Why would China ever do anything to risk the VIE structure when anything that superseded it could only possibly be less favourable?


Tenure voting and rethinking what’s fair in corporate governance

Tenure-based voting would allow all shareholders to have an equal opportunity to earn a greater say in a company’s governance. All longer-term investors — with the definition of “longer term” agreed upon by the company and its shareholders — would earn more rights to weigh in on strategy and management, while shorter-term investors would simply vote with their feet by selling their shares if they aren’t aligned with that strategy. In adopting a tenure-based voting system, a company and its shareholders would need to determine the time periods associated with higher-vote stock. For example, all shares could start with one vote per share as of the acquisition date of the shares, and after, say, a two-year hold period, accrete to 1.5 votes per share, with perhaps additional votes per share for each additional holding period. If an investor were to sell her shares, the new holder of the shares would start at one vote/one share and begin a new holding period. The rules could be tailored to achieve whatever goals the shareholders have in mind, probably requiring a majority of shareholders to approve the initial plan (or any substantive modifications).