Curated Insights 2020.02.07

“25-year-olds should not pay a 31.3x Shiller PE to buy their grandparent’s equities”

“Let’s start with what I’d tell a 25-year-old to not do with investment capital,” answered the CIO. He’d been asked how our youth should invest for 10-15yrs. “I’d tell them to not blindly follow their parents and grandparents as they pay ever higher multiples for a shrinking pool of equity assets,” he continued. In 1982 when Baby Boomers were coming of age, they paid a 6.6x Shiller price-to-earnings ratio for the S&P 500. By 1990 when the median Baby Boomer was 35-years-old, they had bid the Shiller PE to 16.5x. That same year, Baby Boomers owned 33% of all US real estate assets by value. Fast forward to 2020, the median Millennial is 31-years-old and they own just 4% of US real estate assets. If they scrape together a few bucks after paying down student loans, they must pay a 31.3x Shiller PE multiple to buy the S&P 500. “To win a game, play to your strengths, exploit your opponent’s weakness,” said the CIO. “As people age their creativity slips away. Their imagination withers. Their risk appetite fades. Their ambition dwindles. Their drive slides. And this leaves them incapable of reimagining the world, let alone building that future,” he said. “But as people age, they do accumulate capital. And recognizing that this is their only remaining competitive advantage, they unsurprisingly lobby for policies that enhance its value.” Baby Boomers are the wealthiest cohort in all human history. They’ve shifted the game’s rules to entrench their interests. Which has both limited competition for their companies and artificially shrunk the pool of investable equity assets. “There’s too much capital in the world today relative to too few equity assets. 25-year-olds should not pay a 31.3x Shiller PE to buy their grandparent’s equities. They should play to their strengths and fight to build new companies that unseat established ones. Creating new equity assets to ease the acute shortage.”


Underutilized fixed assets

Underutilized fixed assets are the topic of this essay. But all the other variants, such as underutilized variable assets, are important to understand as well. Food delivery is a great example of this. Many people often express disbelief that food delivery startups, have been able to get as many restaurants to sign up for them while charging large take rates (sometimes north of 30% now) from the merchants. “How do these restaurants afford it?” these skeptics ask. What these skeptics fail to understand, is that restaurants do not view deliveries the same way they view customers dining in. There are many factors that restaurants are constrained on including, ingredients, labor, kitchen capacity, and dining space.

For walk-in diners, the primary constraint is dining space. There is an immovable cap on how many tables a restaurant has, and thus how many turns they can do a night. This real estate space is a fully utilized fixed asset. So a startup bringing new diners to a restaurant is entering a zero sum game, especially during peak hours when a restaurant knows they can likely fill all their tables. If a restaurant accepts a diner from a startup and pays them a take rate, this replaces a diner that would have walked in for free. This is the reason why restaurants often don’t list their prime hours on sites like OpenTable. They know they can fill their limited number of tables, so why pay OpenTable a fee for it?

But delivery is different. Real estate space is not relevant to delivery orders. Instead the two main constraints for restaurant delivery are labor and kitchen capacity. Kitchen capacity is an underutilized fixed asset. Most kitchens can handle more orders than they handle each day, but never need to because there’s not enough space in the restaurant for more diners. Like all underutilized fixed assets, restaurant owners are very happy to have their kitchens handle more orders if makes sense.

The other constraint is labor. Restaurants may have some underutilized labor, depending on how busy they are. However, if they have any significant number of delivery orders, they likely would need to have their workers do more shifts, or hire new workers. So labor is an underutilized fixed asset up to some point, but then primarily a variable asset for restaurants.

So when a startup brings new delivery orders to a restaurant, their main question is whether the delivery will be profitable net of the variable costs like ingredients and labor of the restaurant. Other factors like real estate costs are already fixed and so not factored in by restaurants. If these delivery orders are profitable, restaurants are happy to do any and all incremental orders–and will happily pay a higher take rate in return for bringing them the customer. And if the startup brings more customers than they have workers to handle–they’re overjoyed to hire new workers, as long as the economics make sense.

Variable assets are great because they can scale well. However, they are far less preferable to underutilized fixed assets for a number of reasons. Their primary weakness is that they can be copied by competitors. Underutilized fixed assets when discovered are have a huge amount of stored value. The first company to properly use them can increase their value significantly. However, after they’ve burned through this arbitrage, future competitors must find a new way to get advantaged distribution fast. This isn’t true for variable assets as we can see in food delivery. The field is increasingly competitive with Grubhub, Uber Eats, and Doordash all competing in increasingly costly battles.

Why market timing can be so appealing

Why is this so unimpressive? Because I would expect a strategy that literally knows the future to outperform by more than 40 basis points (0.4%) a year! The fact that it doesn’t just goes to show how silly the pursuit of market timing can be.

What does this mean for you? It means that you shouldn’t worry about getting the absolute lowest price when making equity purchases. In fact, you are very likely (95% of the time) not going to get the best price when you buy into the market.

But the good news is that this won’t matter all that much in the long run. Why? Because, for markets with a long-term positive trend, the timing decisions you make with your excess cash won’t be that important.

As you can see, DCA purchases at higher average prices compared to the Absolute-Bottom strategy. More importantly though, the divergences between the average prices are largest during bear markets (i.e. 1974, 2008), but start to converge during bull markets.

This tells us that timing decisions only have a significant impact once in a while (i.e. during big bear markets), so we shouldn’t spend any time worrying about them. Because you will likely lose more by waiting in cash than what you would gain if you did successfully time the market. Choose wisely.

YouTube is a $15 billion-a-year business, Google reveals for the first time

On an annual basis, Google says YouTube generated $15 billion last year and contributed roughly 10 percent to all Google revenue. Those figures make YouTube’s ad business nearly one fifth the size of Facebook’s, and more than six times larger than all of Amazon-owned Twitch.

Separately, Google says YouTube has more than 20 million subscribers across its Premium (ad-free YouTube) and Music Premium offerings, as well as more than 2 million subscribers to its paid TV service. Alphabet says revenues from those products are bundled into the “other” category, which made $5.3 billion last quarter and also includes hardware like Pixel phone and Google Home speakers. That makes it hard to gauge the specific performance of any one product bundled under that category.

U.S. consumers spend more time in TikTok than Amazon Prime Video: App Annie

TikTok saw explosive growth in the U.S. in 2019, growing 375 percent year-over-year in terms of time spent on the platform. U.S. consumers spent some 85 million hours on TikTok in 2019, up from 15 million during the same time last year


CTV’s “walled garden risk” and implications for Trade Desk

The negative take is that Amazon sees potential fragmentation coming to the CTV industry (not just Amazon Fire, Roku, Apple TV, Android TV but also players like Xbox, Samsung, Playstation, Comcast…etc). In case viewership fail to aggregate at the CTV platform level, Amazon wants to be able to aggregate them at the SSP level.

As Amazon Publisher Services (APS) signs up more CTV platforms, this aggregation of eyeballs gives it negotiating leverage over ad buying platforms like TTD.

The article also indicates that Amazon’s SSP is best used with Amazon’s DSP. Whether Amazon extend that optimization to its partnership with TTD remains to be seen. Again, Amazon has the leverage here.

The positive take (for TTD) is if Amazon’s SSP could be used on say Xbox or Playstation, that further shifts CTV industry away from walled garden approach. Also, APS actually allows ad buying from Trade Desk, so the more platforms APS hooks up with, the more TTD benefits.


Worldline to buy Ingenico for $8.6B in major payments consolidation play

The deal underscores two big themes in fintech, and specifically payments. The first is that the shift in payments and spending habits to more digital platforms has meant an increasing amount of fragmentation in the payments space, with each player getting a cut of the transaction: this means that a company doing business in this area needs economy of scale in order to make decent returns. The deal will give both companies a lot more economy of scale.

The second is a bigger theme of consolidation among larger players in part to better compete with the long tail of smaller and more fleet-of-foot fintech companies that have found a lot of traction in this new wave of commerce. While Stripe, Adyen, Google, Apple, Amazon and many of the others may not individually do enough competitive damage against Worldline or Ingenico, their collective presence could.

“Together we create the European World-Class leader in digital payments,” said Grapinet in a statement. “I am convinced that the combination of our respective remarkable talents [SIC] pools, joint capabilities and state-of-the art offers will procure our combined Company an outstanding value proposition to pursue an exceptional growth benefitting to all our clients, banks and merchants alike and to all our business partners. This is a landmark transaction for the industrial consolidation of European payments, highly value creative for all our stakeholders and for the shareholders of both companies, and which ambitions to reinforce the role of Europe within the global digital payment ecosystem.”

Why it only costs $10k to ‘own’ a Chick-fil-A franchise

At $4.2m per store, Chick-fil-A’s average revenue is the highest of any fast-food chain in America, dwarfing both direct competitors (KFC; $1.2m) and bigger brands (McDonald’s; $2.8m). That’s especially impressive considering that all Chick-fil-A restaurants are closed on Sunday.

Based on these figures, Chick-fil-A’s 15% royalty alone (not including its 50% cut of profits) might work out to around $600k per store, per year. (And remember: It still owns the property and equipment.)


Creating a competitive shaving market

According to the research firm Euromonitor, Gillette held 47 percent of the US men’s razor market in 2018, with Edgewell’s brands, which include Schick and Wilkinson Sword, combining for 13.6 percent of the industry. The Harry’s brand, which started selling online but now has a large presence in both Target and Walmart stores, had just a 2.6 percent share at the time, according to Euromonitor. Dollar Shave Club owned 8.5 percent of the US market in 2018, according to Euromonitor, and is owned by Unilever, following a $1 billion acquisition in 2016.

So the FTC thinks that stopping a merger of the number two and four brands in a market is good for competition? I think it is bad for competition and keeping Harry’s and Schick separated will just allow Unilever and P&G to dominate this market going forward. I don’t understand what the FTC is thinking or doing with this case in the least.

Ditch your car: Ridesharing is more cost effective

Can ride-sharing really replace cars? The numbers say if you drive less than 10,000 miles, maybe. However, ride-sharing is a better option for low-mileage users as compared to driving according to this analysis. There are different ways to value your time, which could impact how you value ride-sharing versus driving. But you have more freedom with a car, and don’t have to worry about other passengers, the driver, or not being in control of the vehicle.

Overall, the driving experience is pretty subjective. From a quantitative viewpoint, it’s sometimes cheaper to get a ride share. Qualitatively, it all depends on what you value.

Curated Insights 2020.01.24

The man who’s spending $1 billion to own every pop song

What Mercuriadis is doing with Hipgnosis isn’t so much innovative as it is opportunistic. With a fertile contact list from his decades as an artist manager, the ability to raise at least another billion from investors, and a healthy amount of hubris, he located an opening in the music industry and is going all-in on exploiting it. Ultimately, his goal with Hipgnosis — which went public on the London Stock Exchange in June 2018 — is to own 15% to 20% of the overall publishing market. “Everyone that writes songs today can be confident that the financial community understands that as these songs become proven, they are predictable and reliable,” Mercuriadis says.

When Spotify launched in 2008, Mercuriadis became intrigued by streaming music. Central to Spotify’s user experience was the ability to create personalized playlists by culling songs from all genres and artists. The start-to-finish thread of a full album was becoming less important to streaming adopters. In decades past, he observed, the majority of artists wrote their own songs. Kurt Cobain wrote all the lyrics and much of the music for Nirvana’s 1991 album, Nevermind. Contrast that with Adele, who worked with 10 different songwriters for her 2015 smash, 25. “It became clear to me that the power was shifting from the artist to the songwriter,” Mercuriadis says. “But the songwriters weren’t in a position to reap the benefits.”

With Hipgnosis Songs Fund, Mercuriadis bypassed all of them. Songwriters are able to generate revenue from three sources: mechanical royalties (the sale or legal download of a song), performance royalties (paid every time a song is heard in public, whether it’s a live performance, on TV, or in a movie; played in a bar or restaurant; or streamed), and synch fees (song licensing for use in movies, video games, and commercials). Mechanical royalties are the only stream with a set rate; performance and synch royalties are negotiated percentages. Synchs are often more lucrative for the songwriter, since they generally split 50% for the writer and the artist, with the label taking its cut from the artist’s piece of the pie. Synch is where Hipgnosis Song Fund could make them money, as Mercuriadis explained to the 177 hedge fund and private investors he pitched between 2015 and 2018.

Today, the business operates like a cross between an investment fund and a talent management agency. While Mercuriadis brokers the catalog deals, each of his 19 employees is responsible for monetization opportunities for a portfolio of songs. He plans to at least double the number of people working for him this year. “I want to get rid of the word ‘publishing,’” he says. (His preferred description: “song management.”) “Major publishers have small staffs working with hundreds of thousands of songs. We’re shooting for thousands of songs and having synch managers who are each responsible for a much smaller amount,” he says. “We’ll make a lot more money than anyone else.”

Pincus acknowledges that Hipgnosis may have other deals in the works that would offset the high prices he’s paying — and indeed, Mercuriadis is working on diversifying beyond songwriter catalogs. The company just purchased the masters of UK band the Kaiser Chiefs, which gives it complete ownership of the recordings. Purchasing producers’ rights is another new point of emphasis. Mercuriadis bought Jeff Bhasker’s inventory (the Grammy’s 2016 Producer of the Year behind “Uptown Funk”), along with the entire 1,855-song output from Brendan O’Brien, best known for his work with Pearl Jam. There are also the merchandising possibilities: Mercuriadis’ yet-to-be-announced mega-deal with that iconic female artist reportedly includes, in addition to the thousands of songs the artist has written, the use of her image and likeness. This deal will cost Mercuriadis well into the nine figures but has the potential for him to eventually sell more T-shirts than the Gap.

Outdoor advertising market poised to eclipse newspapers

The so-called “out of home” segment accounts for about 6.5 per cent of the $600bn global advertising market but stands out as the only traditional media that continues to grow as others give ground to Google and Facebook.

In 2020 advertisers will spend $40.6bn on outdoor posters and “street furniture”, about $4bn more than on newspapers, according to estimates from GroupM, the media buying agency. By 2024 GroupM expects outdoor advertising to exceed spending on newspapers and magazines combined, having expanded at an annual rate of between 2.5 and 4 per cent.

There’s a link between hiking the minimum wage and declining suicide rates, researchers say

State-level increases of $1 in minimum wage corresponded with a 3.4 percent to 5.9 percent decrease in the suicide rates of people with a high school diploma or less in that age group. Emory University researchers analyzed monthly data from all 50 states and the District of Columbia between 1990 and 2015.


As jobs cap 10 years of gains, women are workforce majority

Women overtook men to hold the majority of U.S. jobs for the first time in a decade, while employers added positions for a record 10th straight year, pointing to a growing and dynamic economy heading into 2020.

The number of women on nonfarm payrolls exceeded men in December for the first time since mid-2010, the Labor Department said Friday. Women held 50.04% of jobs last month, surpassing men on payrolls by 109,000.

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.

Curated Insights 2019.12.27

How Gen X, millennials and Gen Z became the low-inflation generations

Overall, 6 in 10 working-age Americans haven’t even seen inflation above 4 percent. A quarter of them haven’t even seen a sustained stretch above 3 percent.

This is how much money Mariah Carey’s “All I Want For Christmas Is You” is raking in

This time of year, it’s hard to go a day without hearing Mariah Carey’s “All I Want For Christmas Is You,” whether it’s playing in a store, in an Uber or on your holiday playlist. … The singer has earned more than $60 million in royalties from the song.

Curated Insights 2019.12.14

How to read: Lots of inputs and a strong filter

College tuition at $25,000 a year comes out to roughly $100 per lecture. Good books – sometimes written by the same professor – can be purchased for fifteen bucks and can offer multiple times as much life-changing insight.

The conflict between these two – most books don’t need to be read to the end, but some books can change your life – means you need two things to get a lot out of reading: Lots of inputs and a strong filter.

If you only pick up books you know with certainty you’re going to like you’ll confine yourself to reading the same authors on the same topics. It gives fresh oxygen to confirmation bias and limits your ability to connect the dots between different fields and different cultures. It’s better to have a low bar in what books you’re willing to try, and even the faintest tickle of interest should be enough to make the cut. Kindle samples are free so excuses are minimal.

Once you’ve flooded your desk with inputs comes the filter. It should be ruthless, taking no prisoners and offering no mercy. Similar to dating, a book you’re not into after 10 minutes of attention has little chance of a happy ending. Slam it shut and move on. You’re not a failure if you quit a book after three pages anymore than if you reject the proposition of a 10-hour date with someone you just met who annoys you. Lots of fish in the sea.


The bus ticket theory of genius

The paths that lead to new ideas tend to look unpromising. If they looked promising, other people would already have explored them. How do the people who do great work discover these paths that others overlook? The popular story is that they simply have better vision: because they’re so talented, they see paths that others miss. But if you look at the way great discoveries are made, that’s not what happens. Darwin didn’t pay closer attention to individual species than other people because he saw that this would lead to great discoveries, and they didn’t. He was just really, really interested in such things.

Two-thirds of Americans do not feel the benefits of Wall St rally

A poll of likely voters for the Financial Times and the Peter G Peterson Foundation found 61 per cent of Americans said stock market movements had little or no effect on their financial wellbeing. Thirty-nine per cent said stock market performance had a “very strong” or “somewhat strong” impact.

The survey suggested most Americans are not aware of market movements, with just 40 per cent of respondents correctly saying the stock market had increased in value in 2019. Forty-two per cent of likely voters said the market was at “about the same” levels as at the start of the year, while 18 per cent believed it had decreased.

Curated Insights 2019.11.29

With Tiffany, LVMH grows in jewelry. And Tiffany gets another chance to shine

“We expect to bring Tiffany time and capital, which are two things that are not too easy to get when you report quarterly to the stock market,” LVMH finance chief Jean-Jacques Guiony told analysts during a call Monday morning, after the deal was announced.

LVMH’s plans for Tiffany have three main parts: Increasing the brand’s value, improving its retail network and expanding its product offerings. LVMH hasn’t yet said how many of Tiffany’s 300 stores it may close. But LVMH is famous for finding the top retail locations in major markets, and for shuttering stores that don’t perform.

Tiffany has come under pressure as French luxury brand Cartier has been investing more in targeting younger shoppers. Cartier parent company Richemont’s jewelry business, which is headquartered in Switzerland, has an operating margin of about twice that of Tiffany.

Based on how he has handled a slew of other luxury brand acquisitions, including of Italian jewelry house Bulgari, LVMH CEO Bernard Arnault is expected to help Tiffany grow outside of the Americas, a market that represents about 41% of the jewelry company’s sales today.


​Charles Schwab stock could surge after a TD Ameritrade deal

“Schwab is the new breed of brokerage firm,” says Chip Roame, managing partner at Tiburon Strategic Advisors. Along with its 12.2 million brokerage accounts, Schwab is the largest custodian for registered investment advisors, or RIAs; a major sponsor of exchange-traded funds; and one of the industry’s biggest robo-advisors (offering managed portfolios of ETFs). Its banking division brings in 70% of the firm’s revenue from interest income (though it is under pressure as interest rates have come down). Customers are flocking, lured by the free equity-trading regime that Schwab helped instigate. The company added 363,000 brokerage accounts in the third quarter, up 6% year over year. Buying TD “makes huge strategic sense,” says Roame. TD would double Schwab’s brokerage accounts, add $1.3 trillion in assets, bring in custody service for 7,000 RIAs, and provide a thriving active-trader platform.


Why did PayPal pay $4 billion for a coupon browser extension?

Honey’s surprisingly reassuring privacy policy pledges that it won’t track “your search engine history, emails, or your browsing on any site that is not a retail (shopping or service) website.” That’s because it doesn’t need your data to make a profit. Just like Rakuten, Honey makes money by charging retailers a small percentage of sales made with the coupons it finds. But why would stores pay to let consumers buy their stuff for less? For the same reason they pay credit card companies and payment processors like PayPal: to make your experience as smooth as possible, and to do everything to prevent you from abandoning your shopping cart, even if that means offering you a lower price.

Kodali says one compelling aspect of Honey is its mobile app, where consumers can add items from different retailers to their cart and pay for them all at once. “That has been something that nobody in retail has solved,” she says. “That’s the only thing that I could imagine could take on a $4 billion evaluation.” Instead of shopping on Amazon, you can use Honey to buy from all your favorite stores at the same time, and automatically apply any available coupons. It’s a valuable service that could help differentiate PayPal from everyone else.

A fall in house prices would not devastate Germany’s economy

The first is that far fewer Germans own their own home. While more than three quarters of Spaniards are owner-occupiers, the figure here is just over half, according to Eurostat data.

A second factor here is that, if prices do crash, homeowners with mortgages are also less likely to be as exposed to increases in interest rates. While Spanish mortgages tended to be pegged to Euribor (which tends to reflect movements in rates set by the European Central Bank), Germans tend to go for fixed rate deals — insulating them just in case the ECB does ever manage to raise borrowing costs.

A bursting of a bubble here is also less pernicious as far as the jobs market goes, as it is not the case that almost 15 per cent of workers here are tied up in the construction industry, as was the case in Spain before the crash. The proportion is much smaller, so German unemployment is not about to soar to 25 per cent, as Spain’s did, should the market crash.

How quants and QE shook the cult of the stockpicker

The fees such funds can charge have been hit. The average performance fee for equity hedge funds, a loose proxy for stock pickers, has dropped from 19.1 per cent at the start of 2008 to 16.4 per cent in the second quarter of this year, according to data group HFR. That fall is roughly in line with the average for all hedge funds, but much steeper than for event-driven funds, the other strategy that focuses on stocks.

Curated Insights 2019.11.22

The new dot com bubble is here: it’s called online advertising

The benchmarks that advertising companies use – intended to measure the number of clicks, sales and downloads that occur after an ad is viewed – are fundamentally misleading. None of these benchmarks distinguish between the selection effect (clicks, purchases and downloads that are happening anyway) and the advertising effect (clicks, purchases and downloads that would not have happened without ads).

It gets worse: the brightest minds of this generation are creating algorithms which only increase the effects of selection. Consider the following: if Amazon buys clicks from Facebook and Google, the advertising platforms’ algorithms will seek out Amazon clickers. And who is most likely to click on Amazon? Presumably Amazon’s regular customers. In that case the algorithms are generating clicks, but not necessarily extra clicks.

I had never really thought about this. Algorithmic targeting may be technologically ingenious, but if you’re targeting the wrong thing then it’s of no use to advertisers. Most advertising platforms can’t tell clients whether their algorithms are just putting fully-automated teenagers in the waiting area (increasing the selection effect) or whether they’re bringing in people who wouldn’t have come in otherwise (increasing the advertising effect).

What powered such a great decade for stocks? This formula explains it all

Shockingly, a vast majority of the gains over the past decade can be explained almost exclusively by improving fundamentals. Earnings growth and dividends explain nearly 97% of the annual returns for the 2010s. So the change in valuations have played a minor role in explaining the gains during this cycle.

The 1980s and 1990s both experienced a massive repricing in terms of valuations outpacing the underlying corporate fundamentals. The 2000s saw a correction in terms of both fundamentals and sentiment because of the strong performance in those prior decades.

The mining of media (or the “streaming wars” are just a battle)

Today, however, the marginal cost of distributing content to an incremental consumer is approximately zero. And the consequence here is profound. Under this model, the unit economics of all viewers/subscribers improve as you add more viewers/subscribers (e.g. a $100MM show costs $100MM irrespective of how many users you have, but the per user cost goes down). This doesn’t mean giving away said service for free or at an artificially low price solve for profitability. However, it does mean that the more people who have your service, the less you require from each subscriber to generate a profit. And if you have a guaranteed business model – say, selling another iPhone, Showtime subscription, ad impression, datapoint, or two-year wireless subscriptions – there are incentives to maximize your userbase (more people you can upsell to) and the amortization of fixed costs (the higher your unit contribution).

Alibaba aims to deliver with $16bn courier venture

When it set up Cainiao six years ago, Alibaba was an asset-light company, spending only Rmb2.5bn that year. The logistics arm was a joint venture alongside a group of Chinese courier firms, a retailer, and a property company. In 2016, a group of private investors poured in a further Rmb10bn.

The original plan was to use Alibaba’s data in partnership with the networks of the courier companies. “We established Cainiao because we hope to use the power of our infrastructure, and the power of our data, to help these delivery companies, to provide better service to consumers,” said Jiang Fan, president of Tmall and Taobao.

But today, Alibaba is moving, like Amazon, to build out its own delivery platform, acquiring stakes in delivery companies, running a network of warehouses and installing 40,000 lockers across China so that customers can pick up their parcels.

In part, it has been forced to improve delivery by its rival JD.com, which has offered same day delivery in some Chinese cities for years. By contrast, shoppers have complained that items bought from Alibaba’s Tmall and Taobao platforms could be stuck in transit for days and battered by the time they arrived at your door.

The beauty of Singles Day

In fact, Estée Lauder broke its 2018 sales record a mere 25 minutes after pre-sales for the e-commerce festival started, and was the first brand in the history of 11.11 to reach one billion RMB in pre-orders alone. Meanwhile, the beauty brand that landed at the top of the list by midnight on November 12 was L’Oréal Paris, which surpassed Estée Lauder along with L’Oréal Group-owned Lancôme in the final 11.11 beauty ranking. These two brands, along with fourth-place Olay, also achieved over 1 billion RMB GMV in sales.


Why Nike quit Amazon, but doubles down on Tmall

Nike may have chosen to forgo its partnership with Amazon, but working with local e-tailers has become vital for consumer brands in China. 100% of activewear brands now sell on Tmall, and 82% sell on rival JD.com. As traffic to Baidu continues to decline and consumers begin their purchase journey on Tmall, the ecosystem is increasingly important as a content and marketing platform. According to Gartner L2’s most recent data, 96% of index activewear brands include video on Tmall, and 65% feature celebrity content on the platform. 83% of tracked activewear brands feature a “brand zone” at the top of search results, where brands put marketing messages front-and-center to crowd out third-party sellers.

Balsa shortage threatens wind power rollout

Better known for its use in model aircraft, table-tennis bats and surfboards, balsa is a key component of many wind turbine blade cores because it is both strong and lightweight. Prices have almost doubled in the past 12 months and suppliers are warning that the balsa shortage threatens a bottleneck in new wind farm developments next year. The wood is grown almost exclusively in Ecuador, Indonesia and Papua New Guinea. Producers in the Latin American country have benefited from the shortage, saying prices are likely to keep rising next year.

BlueMountain: the hedge fund that lost its way

As it outlined its conviction to investors last December, BlueMountain said the shares could be worth $60 because the market was overestimating the utility’s wild fire liabilities. BlueMountain’s opening $200m bet on PG&E had been at an average share price of close to $46. Last November, it added another 3.7m shares at an average share price of about $24, regulatory filings show. Late last month PG&E shares slumped to a record low of below $4 after the company cut off power to almost 3m Californians in an attempt to avoid the risk of more wild fires. Analysts at Citigroup have warned that the stock may become worthless.

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.