Curated Insights 2018.08.10

Climbing the wall of worry: Disruptive innovation could add fuel to this bull market

This explanation of the flattening yield curve seemingly suggests that “this time is different,” but this time is not different in the context of disruptive innovation. During the 50 years ended 1929, the last time that three or more general purpose technology platforms were evolving simultaneously, the yield curve was inverted more than half of the time.1 The disruptive innovations of that time – the internal combustion engine, telephone, and electricity – stimulated rapid real growth at low rates of inflation. Through booms and busts in an era without the Federal Reserve and with minimal government intervention, US real GDP growth averaged 3.7% and inflation 1.1%, while short rates averaged roughly 4.8% and long rates roughly 3.8%.2 The yield curve was inverted. So, this time is not different, but investors do have to extend their time horizons to understand the impact of profound technological breakthroughs on the economy.

They all fall down

$1 invested in Disney in 1970 is now worth $197. $1 invested in the S&P 500 is worth $125, for comparison. The 19,500% return in Disney had plenty of bumps in the road. The stock lost 10% on a single day 11 times, including a 29% loss on October 19, 1987. Disney gained 11.5% for 48 years. But of course, there is a huge difference between 11.5% for 48 years and 11.5% every year for 48 years.

These returns were earned only by those able to withstand a massive amount of pain. Disney experienced 13 separate bear markets over the last 48 years, including an 86% crash during the 1973-74 bear market. The S&P 500 experienced just four over the same time.

Nobody could have known in real-time what the future held for this company, or whether its best days were behind it, but these would have been very real questions during every decline along the way. Disney hit an all-time high in January 1973, and wouldn’t see those levels again until 1986. It made a high in April 2000 and then didn’t get back there until February 2011.

Spotify’s playlist for global domination

This has been Ek’s plan all along: to get the music industry so dependent on Spotify that even the doubters can’t live without it. “We need this company to be robust,” Borchetta says of Spotify. “It’s important to the ecosystem of the whole business that they are successful.”

The Spotify team realized that they needed a mobile product that could be accessed by everyone, not just paying subscribers. And they needed it quickly. They had already been negotiating with labels about licensing rights for a free mobile version, but the deals weren’t done. Nor were engineers ready with a product. The sudden crisis sparked company-wide urgency. When the licensing deals were finally signed, in December 2013, “we literally just pushed the button on the same day to get it out there,” says Soderstrom of the new app. There was no time for rigorous testing. “If it had taken another six months, it might have been too late to recover.” The strategy worked: At the end of 2013, Spotify had 36 million users and 8 million paying subscribers; by January 2015, it announced 60 million and 15 million, respectively. Forty-two percent of time spent on Spotify was now via phones and 10% on tablets, the first time mobile listening surpassed desktop.

The new free tier has been a top priority for more than a year. It reflects how important it is for the company to keep acquiring new customers (and turn them into paying ones), but it also has its own commercial element. “Billions of people listen to radio, and most of that today isn’t monetized very efficiently,” Ek says as we chat on the couch in his Stockholm office. “Commercial radio, that’s conservatively a $50 billion industry globally. The U.S. radio industry is $17 billion, close to the size of the whole global recorded music industry, which is $23 billion. And what do people listen to? Primarily music.” Ninety percent of Spotify’s current revenues come from subscriptions, but if the free product expands, so can Spotify’s radiolike advertising business. As Ek notes, with typical understatement, “We still have a lot of room to grow.”

Ek didn’t see the value at first—”Oh, this is going to be a disaster,” he recalls thinking about one playlist innovation—but playlisting did more than increase Spotify’s consumer appeal. It turned Spotify into a user’s personal DJ. The company told investors in its prospectus, filed last February, that “we now program approximately 31% of all listening on Spotify” via playlists, which has created powerful new brands within Spotify such as Rap Caviar and ¡Viva Latino!. There are now Rap Caviar and ¡Viva Latino! concert series, pointing the way toward an even broader role for the company within the music business, where it’s generating live event and merchandising revenue without having to pay record labels.

He’s succeeded in the [music] business because he’s extremely patient and not high on his own supply, meaning he has not been susceptible to the vices that ruin people in entertainment. Ek’s personality has opened the door to a different kind of relationship with musical artists from what prevailed in the era of cocaine-snorting, thieving record execs. So far, Ek has been focused on changing how creators get paid; in streaming, an artist is compensated every time a song is played, creating lifetime revenue (albeit a fraction of a penny at a time), whereas in the old model they got paid (sometimes) after selling a CD or download. But that’s only the beginning. “Spotify’s first eight to 10 years were focused on consumers,” says R&D chief Soderstrom. “The next eight to 10 will be focused on artists.”

Spotify for Artists is the most visible example of this new directive. The service, which launched in its current form in 2016, allows musicians to access data on who is listening to their work on the platform and to personalize their presence to enhance engagement. Iconic rock band Metallica, which once helped sue Napster out of existence, used this data on tour to customize its setlists based on what local fans listen to most. Smaller artists have used it to identify where to tour, and to activate their superfans. “Whatever your genre is, you can find an audience,” says Spotify chief marketing officer Seth Farbman.

Ek has been talking a lot this year about Spotify’s mission to get 1 million artists to make a living off the platform, but he doesn’t mean there will be 1 million Lady Gagas or Bruno Marses. Financial analysts often compare Spotify to Netflix—a comparison Ek pushes back against—but Ek’s vision of the future looks more like YouTube: a meeting spot for creators and fans, in groups both large and small, and Spotify benefits when transactions happen in this “marketplace.” Ek says: “In that model, it’s almost like you’re managing an economy.”

“The major-label system was built out for the 5,000 biggest artists in the world,” Carter notes. “If we’re going to [enable] a million artists to make a living, that’s going to require an entirely different ecosystem.” In this world, “an artist might be happy making $50,000 a year, supplementing income from other work to help pay their mortgage, raise their kids, by doing what they love. I’m just as committed to that kind of artist. How do we make it so there are a lot more winners,” Carter says, “to redefine what it means to be a winner?”


The definitive timeline of Spotify’s critic-defying journey to rule music

May 2013: Spotify makes its first acquisition: Tunigo, which already helped users find, create and share new music and playlists on Spotify. Turned out to be a good one! It still underpins the company’s editorial playlist strategy to this day.

March 2014: Spotify acquires The Echo Nest, a startup that specializes in using machine learning to make recommendations and predict the type of music users will want to listen to, generating playlists from that data as well as helping advertisers reach those music fans. This also was a great acquisition! It underpins the algorithmically generated playlists such as Discover Weekly.

Is a change goin’ to come?

Last year, according to the IFPI, global revenues for recorded music (as opposed to live performance) grew 8.1 per cent to $17.3bn, driven by digital revenue’s 19.1-per-cent increase to $9.4bn. Of this digital revenue, streaming did the heavy lifting, as the $6.6bn from subscriptions and advertising constituted a 41-per-cent increase from the previous year. In what perhaps will be seen as a watershed moment, digital revenues accounted for the highest proportion of total recorded revenues for the first time ever, at 54 per cent. In nominal terms, music-industry revenues are still 32 per cent below its 1999 peak. Convert the dollars from Prince’s favourite year to today’s, and you’ll find artists, labels, publishers and the like are earning 54 per cent less than they used to.

Despite the launch of advertising channel Vevo, which Mr Morris led, musicians are still getting nickel-and-dimed by Alphabet’s platform and its competitors. Last year, video streaming accounted for a mammoth 55 per cent of all music listened to online, according to the IFPI. In turn, it only contributed 15 per cent of the revenues that Spotify and friends did.

FAANGs are more solo acts than a tech supergroup

The five biggest stocks in the S&P 500 have accounted for an average of 12.3 percent of the index since 1990, the earliest year for which numbers available. By comparison, the index’s allocation to the five FAANGs is 12.8 percent.

There are lots of surprises. First, not all FAANGs are growth stocks, as measured by historical earnings and revenue growth and predicted earnings growth. Apple, for example, scores a negative 0.1 for growth. Google’s growth score is a modest 0.4.

Second, they’re not all wildly expensive, based on stock price relative to book value, earnings, cash flow and other measures. Apple is slightly more expensive than average, with a value score of 0.05. Google and Facebook score a negative 0.45 and 0.39 for value, respectively — not cheap but far from the richest.

Third, some are higher quality than others, as measured by profitability, leverage and stability of operating results, and not in the order investors might think. Apple has a reputation for sky-high profits and reliable revenue, and yet it scores 0.15 for quality. Meanwhile, Netflix spends lavishly on programming and has negative cash flow, and its quality score is 0.63 — second only to Google’s score of 0.68.

Nor is it likely that the FAANGs will ever have much in common because their attributes are constantly changing. Apple, for example, was a much different bet five years ago, scoring high for growth and low for quality and momentum. The probability that all five stocks will be similarly situated at any given time is exceedingly low.

Elon Musk has some fun with Tesla

Now Tesla does have debt: It has three different convertible bonds, but it also has $1.8 billion of straight bonds that it issued last August to quite receptive investors. Those bonds have sold off since issuance and are rated Caa1 at Moody’s, which, again, are not auspicious signs for adding like 20 times as much debt. And my general assumption about Tesla bonds is that they operate on sort of a Netflix theory, in which bondholders get their security not from the company’s cash flows but from the knowledge that there’s a whole lot of equity value beneath them. If you issue billions more dollars of bonds to get rid of that equity, then why would anyone buy the bonds? FT Alphaville notes that the pressure of public markets, for Tesla, “surely pales in comparison to the pressure to maintain bank/ bond covenants and make interest payments.” “Even if say $40 billion could be financed in the high yield market,” note analysts at Barclays, “the annual interest bill would consume $2.7 billion in cash.”

The eight best predictors of the stock market

• The Philosophical Economics blog’s indicator is based on the percentage of household financial assets—stocks, bonds and cash—that is allocated to stocks. This proportion tends to be highest at market tops and lowest at market bottoms. According to data collected by Ned Davis Research from the Federal Reserve, this percentage currently looks to be at 56.3%, more than 10 percentage points higher than its historical average of 45.3%. At the top of the bull market in 2007, it stood at 56.8%. This metric has an R-square of 0.61.

• The Q ratio, with an R-squared of 46%. This ratio—which is calculated by dividing market value by the replacement cost of assets—was the outgrowth of research conducted by the late James Tobin, the 1981 Nobel laureate in economics.

• The price/sales ratio, with an R-squared of 44%, is calculated by dividing the S&P 500’s price by total per-share sales of its 500 component companies.

• The Buffett indicator was the next-highest, with an R-squared of 39%. This indicator, which is the ratio of the total value of equities in the U.S. to gross domestic product, is so named because Berkshire Hathaway Inc.’s Warren Buffett suggested in 2001 that is it “probably the best single measure of where valuations stand at any given moment.”

• CAPE, the cyclically adjusted price/earnings ratio, came next in the ranking, with an R-squared of 35%. This is also known as the Shiller P/E, after Robert Shiller, the Yale finance professor and 2012 Nobel laureate in economics, who made it famous in his 1990s book “Irrational Exuberance.” The CAPE is similar to the traditional P/E except the denominator is based on 10-year average inflation-adjusted earnings instead of focusing on trailing one-year earnings.

• Dividend yield, the percentage that dividends represent of the S&P 500 index, sports an R-squared of 26%.

• Traditional price/earnings ratio has an R-squared of 24%.

• Price/book ratio—calculated by dividing the S&P 500’s price by total per-share book value of its 500 component companies—has an R-squared of 21%.

It’s not terribly hard to find a measure that shows an overvalued market. Then, use a long time period to show the market has performed below average during your defined overvalued period. That’s easy. The difficulty is timing the market. For example, during the housing bubble, what I found interesting was how many people were right, that housing was indeed in a bubble. Lots of people realized it. Also, lots of people thought it would burst in 2004. Then in 2005. Then in 2006. They were right, but their timing was way off. Even if you know the market is overpriced, that doesn’t tell you much about how to invest today.


Hot chart: The A-D Line is roaring higher

You have two options as an investor: you could listen to the media or you could listen to the market. They’ve been pushing the notion lately that only a handful of Tech stocks are leading the way for the market, suggesting a weakening breadth environment. In the real world, however, we are participating in a united rally among Tech stocks as a group.

In fact, the Equally-Weighted Technology Index went out just 0.4% away from another all-time weekly closing high, just shy of it’s record high set last month. This is the Equally-Weighted Index, not the Cap-weighted index that the bears are suggesting is pointing to weakening breadth because the big names are such a large portion. If it was true that only a handful of names are going up and market breadth is deteriorating, the Equally-weighted index, which takes the extra-large market capitalization stocks completely out of the equation, would not be behaving this way.

So when someone tells you that breadth is weakening and only a handful of names are driving the market’s gains, you know they haven’t done the work themselves. They’re just regurgitating what they read or overhead somewhere, which happens a lot.

Natural maniacs

A problem happens when you think someone is brilliantly different but not well-behaved, when in fact they’re not well-behaved because they’re brilliantly different. That’s not an excuse to be a jerk, or worse, because you’re smart. But no one should be shocked when people who think about the world in unique ways you like also think about the world in unique ways you don’t like.

There is a thin line between bold and reckless, and you only know which is which with hindsight. And the reason there’s a difference between getting rich and staying rich is because the same traits needed to become rich, like swinging for the fences and optimism, are different from the traits needed to stay rich, like room for error and paranoia. Same thing with personalities and management styles.

“You gotta challenge all assumptions. If you don’t, what is doctrine on day one becomes dogma forever after,” John Boyd once said.

These maxims are always true

In 1962, Warren Buffett began buying stock in Berkshire Hathaway after noticing a pattern in the price direction of its stock whenever the company closed a mill. Eventually, Buffett acknowledged that the textile business was waning and the company’s financial situation was not going to improve. In 1964, Stanton made an oral tender offer of $11​1⁄2 per share for the company to buy back Buffett’s shares. Buffett agreed to the deal. A few weeks later, Warren Buffett received the tender offer in writing, but the tender offer was for only $11​3⁄8. Buffett later admitted that this lower, undercutting offer made him angry.[12] Instead of selling at the slightly lower price, Buffett decided to buy more of the stock to take control of the company and fire Stanton (which he did). However, this put Buffett in a situation where he was now majority owner of a textile business that was failing.

Being stubborn can cost you money. Buffett has talked about that at length over the years. But what is interesting is Buffett operated Berkshire from 1962 to 1985 and made millions of dollars without doing any publicity. No mass media. No hype. Can you imagine that today?

You know what gets you more customers? Execution. Delighting them. Focusing on them.

Scorched earth: the world battles extreme weather

Lloyds, the London-based insurance market, estimates that as much as $123bn in global gross domestic product in cities could be at risk from the impact of a warming planet, including windstorms and floods.

Meanwhile a 2015 study by the journal Nature found that due to climate change, global incomes were likely to be one-fifth lower in 2100 than they would be with a stable climate. And later this year the UN will issue a landmark report that quantifies the impact of 1.5C of warming, compared with 2C. Leaked copies suggest that the world will pass the 1.5-degree warming target by about 2040.

Curated Insights 2018.08.03

Once in a lifetime, if you’re lucky

Apple did it the old fashioned and the new fashioned way – great products, great marketing, incredible innovation, brilliant people, global supply chain, incessant improvements and updates, buybacks and dividends, R&D and M&A, domestic hiring and international outsourcing, wild creativity and diligent bean-counting. They had it all and used it all. It’s an amazing story. Many of us were able to be along for the ride.


Business lessons from Rob Hayes (First Round Capital)

It is a red flag for me if the founders have 20 slides in their deck on their product and are not getting into issues like distribution, team or other parts of the business. There have been very few products that cause people to beat a path to the door of the business on their own [like Google or Facebook]. Successful companies almost always have operators running them who know how to market, sell, manage an income statement and hire.


Why do the biggest companies keep getting bigger? It’s how they spend on tech

The result is our modern economy, and the problem with such an economy is that income inequality between firms is similar to income inequality between individuals: A select few monopolize the gains, while many fall increasingly behind.

The measure of how firms spend, which Mr. Bessen calls “IT intensity,” is relevant not just in the U.S. but across 25 other countries as well, says Sara Calligaris, an economist at the Organization for Economic Cooperation and Development. When you compare the top-performing firms in any sector to their lesser competition, there’s a gap in productivity growth that continues to widen, she says. The result is, if not quite a “winner take all” economy, then at least a “winner take most” one.

What we see now is “a slowdown in what we call the ‘diffusion machine,’” says Dr. Calligaris. One explanation for how this came to be is that things have just gotten too complicated. The technologies we rely on now are massive and inextricably linked to the engineers, workers, systems and business models built around them, says Mr. Bessen. While in the past it might have been possible to license, steal or copy someone else’s technology, these days that technology can’t be separated from the systems of which it’s a part.

This seemingly insurmountable competitive advantage that comes with big companies’ IT intensity may explain the present-day mania for mergers and acquisitions, says Mr. Bessen. It may be difficult or impossible to obtain critical technologies any other way.

Everything bad about Facebook is bad for the same reason

Facebook didn’t intend for any of this to happen. It just wanted to connect people. But there is a thread running from Perkins’ death to religious violence in Myanmar and the company’s half-assed attempts at combating fake news. Facebook really is evil. Not on purpose. In the banal kind of way.

Underlying all of Facebook’s screw-ups is a bumbling obliviousness to real humans. The company’s singular focus on “connecting people” has allowed it to conquer the world, making possible the creation of a vast network of human relationships, a source of insights and eyeballs that makes advertisers and investors drool.

But the imperative to “connect people” lacks the one ingredient essential for being a good citizen: Treating individual human beings as sacrosanct. To Facebook, the world is not made up of individuals, but of connections between them.

The solution is not for Facebook to become the morality police of the internet, deciding whether each and every individual post, video, and photo should be allowed. Yet it cannot fall back on its line of being a neutral platform, equally suited to both love and hate. Arendt said that reality is always demanding the attention of our thoughts. We are always becoming aware of new facts about the world; these need to be considered and incorporated into our worldview. But she acknowledged that constantly giving into this demand would be exhausting. The difference with Eichmann was that he never gave in, because his thinking was entirely separated from reality.

The solution, then, is for Facebook to change its mindset. Until now, even Facebook’s positive steps—like taking down posts inciting violence, or temporarily banning the conspiracy theorist Alex Jones—have come not as the result of soul-searching, but of intense public pressure and PR fallout. Facebook only does the right thing when it’s forced to. Instead, it needs to be willing to sacrifice the goal of total connectedness and growth when this goal has a human cost; to create a decision-making process that requires Facebook leaders to check their instinctive technological optimism against the realities of human life.

Thinking about Facebook

If you accept that assumption, 35% EBIT margins on $97 billion in sales would equal $34 billion in operating income. Inversely, that implies more than $60 billion in expenses (COGS + OpEx). This suggests that Facebook’s run rate expenses will more than triple from 2017 to 2022. Over that same period, these assumptions would result in cumulative revenue growth of around 140%.

Let me give you one example to show just how much money we’re talking about here (over $40 billion in annual expenses). It’s assumed that Facebook will need to hire many people for its safety and security efforts. If it adds an additional 20,000 employees and pays them $200,000 each (not a bad salary!), that would cost them $4 billion a year. For some context, Facebook announced back in October that it planned on hiring an additional 10,000 safety and security personnel by the end of 2018. I’ve tried to give them plenty of room, and this still only covers roughly 10% of the incremental costs we need to account for to push operating margins to the mid-30s.

Here’s my point: I have a tough time understanding how Facebook can possibly need to spend this much money. It seems to me that this is largely a choice, not a necessity.


Apple’s stock buybacks continue to break records

No company has bought back more shares since 2012 than Apple. It has repurchased almost $220 billion of its own stock since it announced in March 2012 that it would start to buy back shares. That is roughly equivalent to the market value of Verizon Communications. Over that period, the number of Apple’s shares outstanding has dropped by just over a quarter.

Waymo’s self-driving cars are near: Meet the teen who rides one every day

Tasha Keeney, an analyst at ARK Invest, says that Waymo could choose to offer an autonomous ride-hailing service today at around 70 cents a mile—a quarter of the cost for Uber passengers in San Francisco. Over time, she says, robotaxis should get even cheaper—down to 35 cents a mile by 2020, especially if Waymo’s technology proves sturdy enough to need few human safety monitors overseeing the autonomous vehicles remotely. “You could see software-like margins,” Keeney says.

Bill Nygren market commentary | 2Q18

A closer look reveals that Gartner stock fell when management opted to substantially increase selling and marketing expenses to pursue accelerated organic growth, which in turn decreased the company’s reported earnings. The way GAAP (generally accepted accounting principles) works, because the future benefit of a marketing expense is uncertain, the cost is immediately expensed. But at a company like Gartner, these marketing expenses could easily be seen as long-term investments in company growth. That’s because a Gartner customer tends to remain with the company for a long time—a little more than six years, on average. So we adjusted the sales and marketing expenses to reflect a six-year life, just like GAAP would treat the purchase of a machine that was expected to last six years. With that one adjustment, Gartner’s expected EPS increased by almost $3. Using our adjusted earnings, which we believe reflect a more realistic view of those intangible assets, Gartner appears to be priced as just an ordinary company.

Ferrari slumps after CEO says Marchionne target is ‘aspirational’

Ferrari is banking on Camilleri getting up to speed quickly to press ahead with Marchionne’s plan. While Marchionne was planning to retire from Fiat Chrysler in 2019, he was meant to stay on at Ferrari for another five years. His succession plan was not as advanced at the Maranello-based company as it was at FCA.


WeWork is just one facet of SoftBank’s bet on real estate

If the market opportunity is big, SoftBank will typically make investments in regionally dominant companies operating in that sector. After all, if worldwide dominance is difficult to obtain for any one company, SoftBank is so big that it can take positions in the regional leaders, creating an index of companies that collectively hold a majority of market share in an emerging industry.

Heineken inks $3.1 billion deal to grow in hot China market

The deal will help Heineken gain a tighter foothold in a crowded field by leveraging China Resources Beer’s extensive distribution network, while also sharing in the returns of China’s beer market leader. China is now the second-largest premium beer market globally, and is forecast to be the biggest contributor to premium volume growth in the next five years.

Under the deal, Heineken’s operations in the country will be combined with those of China Resources Beer, and the Dutch brewer will license its brand to the Chinese partner on a long-term basis, according to company statements Friday. China Resources Beer’s parent company will acquire Heineken shares worth about 464 million euros ($538 million). Heineken will also make its global distribution channels available to China Resources’ brands including Snow, according to the statement.

Branded Worlds: how technology recentralized entertainment

There are two answers to the first question: cost and time. Maybe it’s a lot easier to shoot and edit movies/TV than it used to be, but sets, locations, actors, scripts — those are all expensive and difficult. Better amateur work is still far from professional. And while it’s true we’re seeing interesting new visual modes of storytelling, e.g. on Twitch and YouTube, it’s very rarely narrative fiction, and it’s still distributed and monetized via Twitch and YouTube, gatekeepers who implicitly (and sometimes explicitly) shape what’s popular.

More importantly, though, democratizing the means of production does not increase demand. A 10x increase in the number of TV shows, however accessible they may be, does not 10x the time any person spends watching television. For a time the “long tail” theory, that you could make a lot of money from niche audiences as long as your total accessible market grew large enough, was in vogue. This was essentially a mathematical claim, that audience demand was “fat-tailed” rather than “thin-tailed.”

China is building a very 21st century empire—one where trade and debt lead the way, not armadas and boots on the ground. If President Xi Jinping’s ambitions become a reality, Beijing will cement its position at the center of a new world economic order spanning more than half the globe. Already, China has extended its influence far beyond that of the Tang Dynasty’s golden age more than a millennium ago.
It used to be the case that active portfolio management was the default investment style. Over time, and with the help of academic finance, we have come to realize that there are other factors at work. The most obvious of which is the market factor or beta. It is this insight that underlies the rise in index investing. A trend which by all accounts is still in place.

Curated Insights 2018.06.03

How will GDPR affect digital marketers?

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

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

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

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

For Google, all roads lead back to search

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

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

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

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

Marchionne’s finale entails expanding Jeep, shrinking Fiat

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

Buffett proposed $3 billion Uber investment but deal crumbled

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

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


Airbnb founders go it alone in China after refusing merger offer

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

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

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

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

Curated Insights 2018.05.20

The spectacular power of Big Lens

There is a good chance, meanwhile, that your frames are made by Luxottica, an Italian company with an unparalleled combination of factories, designer labels and retail outlets. Luxottica pioneered the use of luxury brands in the optical business, and one of the many powerful functions of names such as Ray-Ban (which is owned by Luxottica) or Vogue (which is owned by Luxottica) or Prada (whose glasses are made by Luxottica) or Oliver Peoples (which is owned by Luxottica) or high-street outlets such as LensCrafters, the largest optical retailer in the US (which is owned by Luxottica), or John Lewis Opticians in the UK (which is run by Luxottica), or Sunglass Hut (which is owned by Luxottica) is to make the marketplace feel more varied than it actually is.

Now they are becoming one. On 1 March, regulators in the EU and the US gave permission for the world’s largest optical companies to form a single corporation, which will be known as EssilorLuxottica. The new firm will not technically be a monopoly: Essilor currently has around 45% of the prescription lenses market, and Luxottica 25% of the frames. But in seven centuries of spectacles, there has never been anything like it. The new entity will be worth around $50bn (£37bn), sell close to a billion pairs of lenses and frames every year, and have a workforce of more than 140,000 people. EssilorLuxottica intends to dominate what its executives call “the visual experience” for decades to come.

For a long time, scientists thought myopia was primarily determined by our genes. But about 10 years ago, it became clear that the way children were growing up was harming their eyesight, too. The effect is starkest in east Asia, where myopia has always been more common, but the rate of increase has been uniform, more or less, across the world. In the 1950s, between 10% and 20% of Chinese people were shortsighted. Now, among teenagers and young adults, the proportion is more like 90%. In Seoul, 95% of 19-year-old men are myopic, many of them severely, and at risk of blindness later in life.

Del Vecchio paid $645m (£476m) for Ray-Ban. During the negotiations, he promised to protect thousands of jobs at four factories in the US and Ireland. Three months later, he closed the plants and shifted production to China and Italy. Over the next year and a half, Luxottica withdrew Ray-Ban from 13,000 retail outlets, hiked their prices and radically improved the quality: increasing the layers of lacquer on a pair of Wayfarers from two to 31. In 2004, to the disbelief of many of his subordinates, del Vecchio decided that Ray-Ban, which had been invented for American pilots in the 1930s, should branch out from sunglasses into optical lenses, too. “A lot of us were sceptical. Really? Ray. Ban. Banning rays from the sun?” the former manager said. “But he was right.” Ray-Ban is now the most valuable optical brand in the world. It generates more than $2bn (£1.5bn) in sales for Luxottica each year, and is thought to account for as much as 40% of its profits.

The Moat Map

Facebook has completely internalized its network and commoditized its content supplier base, and has no motivation to, for example, share its advertising proceeds. Google similarly has internalized its network effects and commoditized its supplier base; however, given that its supply is from 3rd parties, the company does have more of a motivation to sustain those third parties (this helps explain, for example, why Google’s off-sites advertising products have always been far superior to Facebook’s).

Netflix and Amazon’s network effects are partially internalized and partially externalized, and similarly, both have differentiated suppliers that remain very much subordinate to the Amazon and Netflix customer relationship.

Apple and Microsoft, meanwhile, have the most differentiated suppliers on their platform, which makes sense given that both depend on largely externalized network effects. “Must-have” apps ultimately accrue to the platform’s benefit.

Apple’s developer ecosystem is plenty strong enough to allow the company’s product chops to come to the fore. I continue to believe, though, that Apple’s moat could be even deeper had the company considered the above Moat Map: the network effects of a platform like iOS are mostly externalized, which means that highly differentiated suppliers are the best means to deepen the moat; unfortunately Apple for too long didn’t allow for suitable business models.

Uber’s suppliers are completely commoditized. This might seem like a good thing! The problem, though, is that Uber’s network effects are completely externalized: drivers come on to the platform to serve riders, which in turn makes the network more attractive to riders. This leaves Uber outside the Moat Map. The result is that Uber’s position is very difficult to defend; it is easier to imagine a successful company that has internalized large parts of its network (by owning its own fleet, for example), or done more to differentiate its suppliers. The company may very well succeed thanks to the power from owning the customer relationship, but it will be a slog.

How much would you pay to keep using Google?

Part of the problem is that GDP as a measure only takes into account goods and services that people pay money for. Internet firms like Google and Facebook do not charge consumers for access, which means that national-income statistics will underestimate how much consumers have benefitted from their rise.

Survey respondents said that they would have to be paid $3,600 to give up internet maps for a year, and $8,400 to give up e-mail. Search engines appear to be especially valuable: consumers surveyed said that they would have to be paid $17,500 to forgo their use for a year.


There is another

Spotify has better technology, merchandising (like discovery playlists), and brand. Unlike Apple Music, being a pure-play (as opposed to being owned by a tech giant) gives Spotify more cred among purists, young people, and influencers. The instinct / T Algorithm cocktail has resulted in a firm with 170M users, 75M of whom are premium subscribers. The firm registered €1B this quarter, representing 37% growth. Spotify accounted for 36% of premium music subscribers globally.

What takes Spotify to $300B, and true horseman status? They launch video, and become the most successful streaming entertainment firm, full stop. Netflix’s legacy is on the second most important screen, TV. Spotify was raised on the most important – mobile. Netflix needs to become Spotify before Spotify becomes Netflix. Nobody has cracked social and TV, and as half of young people no longer watch cable TV, if Spotify were to launch video and captured any reasonable share and engagement via unique playlists, then cable and Netflix would begin ceding market cap to Spotify.


Subscriptions for the 1%

The problem with these minuscule conversion rates is that it dramatically raises the cost of acquiring a customer (CAC). When only 1% of people convert, it concentrates all of that sales and marketing spend on a very small sliver of customers. That forces subscription prices to rise so that the CAC:LTV ratios make rational sense. Before you know it, what once might have been $1 a month by 20% of a site’s audience is now $20 a month for the 1%.

There is a class of exceptions around Netflix, Spotify, and Amazon Prime. Spotify, for instance, had 170 million monthly actives in the first quarter this year, and 75 million of those are paid, for an implied conversion of 44%. What’s unique about these products — and why they shouldn’t be used as an example — is that they own the entirety of a content domain. Netflix owns video and Spotify owns music in a way that the New York Times can never hope to own news or your podcast app developer can never hope to own the audio content market.

The Apple Services machine

It is this hardware dependency that makes it impossible to look at Apple Services as a stand-alone business. The Services narrative isn’t compelling if it excludes Apple hardware from the equation. Apple’s future isn’t about selling services. Rather, it’s about developing tools for people. These tools will consist of a combination of hardware, software, and services.

Apple currently has more than 270 million paid subscriptions across its services, up over 100 million year-over-year. Apple is in a good position to benefit from growing momentum for video streaming services including Netflix, HBO, and Hulu. It is not a stretch to claim that Apple will one day have 500 million paid subscriptions across its services. Apple isn’t becoming a services company. Instead, Apple is building a leading paid content distribution platform.

Tencent Holdings Ltd. delivered two major milestones when it reported its earnings Wednesday: record quarterly profits and more than one billion monthly active users on its WeChat platform. The social media and gaming giant, which has been leery of barraging its users with ads, also declared it had raised the maximum number of ads that customers see on WeChat Moments from one a day to two. The app has become China’s most popular messaging service and is integral to driving everything from gaming and payments to advertising for Tencent.

MoviePass: the unicorn that jumped into Wall Street too soon

“The growth-at-all-costs strategy is being funded these days by the venture community, not the public market. The last time we saw the public markets fund a growth-at-all-costs strategy was the 1999 internet bubble, and we all know how that ended.”

The prospect of steep declines in a company’s valuations once it hits the public markets is one reason why U.S. companies are waiting longer to go public. Overall, U.S. companies that have gone public this year have done so at an average market capitalization of $1.1 billion, according to Thomson Reuters data, a 44 percent increase from the average market cap during the height of the dot com craze in 1999. At the same time, companies are now going public 6.5 years after receiving their first venture capital backing on average, more than double the three years between initial funding and going public in 1999.

Cerebras: The AI of cheetahs and hyenas

The specialist starts out with a technology optimized for one specific task. Take the graphics-processing unit. As its name denotes, this was a specialist technology focused on a single task–processing graphics for display. And for the task of graphics, graphics-processing units are phenomenal. Nvidia built a great company on graphics-processing. But over time, the makers of graphics-processing units, AMD and Nvidia, have tried to bring their graphics devices to markets with different requirements, to continue the analogy to hunt things that aren’t gazelle. In these markets, what was once a benefit, finely tuned technology for graphics (or gazelle-hunting), is now a burden. If you hunt up close like a leopard and never have to run fast, having your nose smooshed into your face is not an advantage and may well be a disadvantage. When you hunt things you were no longer designed to hunt, the very things that made you optimized and specialized are no longer assets.

Intel is the classic example of a generalist. For more than 30 years the x86 CPU they pioneered was the answer to every compute problem. And they gobbled up everything and built an amazing company. But then there emerged compute problems that specialists were better at, and were big enough to support specialist companies—such as cell phones, graphics and we believe AI. In each of these domains specialist architectures dominate.

We are specialists, designing technology for a much more focused purpose than the big companies burdened with multiple markets to serve and legacy architectures to carry forward. Specialists are always better at their target task. They do not carry the burden of trying to do many different things well, nor the architectural deadweight of optimizations for other markets. We focus and are dedicated to a single purpose. The question of whether we—and every other specialist– will be successful rests on whether the market is large enough to support that specialist approach. Whether, in other words, there are enough gazelle to pursue. In every market large enough, specialists win. It is in collections of many modest markets, that the generalist wins. We believe that the AI compute market will be one of the largest markets in all of infrastructure. It will be the domain of specialists.


This $2 billion AI startup aims to teach factory robots to think

What sets Preferred Networks apart from the hundreds of other AI startups is its ties to Japan’s manufacturing might. Deep learning algorithms depend on data and the startup is plugging into some of the rarest anywhere. Its deals with Toyota and Fanuc Corp., the world’s biggest maker of industrial robots, give it access to the world’s top factories. While Google used its search engine to become an AI superpower, and Facebook Inc. mined its social network, Preferred Networks has an opportunity to analyze and potentially improve how just about everything is made.

At an expo in Japan a few months later, another demo showed how the tech might one day be used to turn factory robots into something closer to skilled craftsmen. Programming a Fanuc bin-picking robot to grab items out of a tangled mass might take a human engineer several days. Nishikawa and Okanohara showed that machines could teach themselves overnight. Working together, a team of eight could master the task in an hour. If thousands — or millions — were linked together, the learning would be exponentially faster. “It takes 10 years to train a skilled machinist, and that knowledge can’t just be downloaded to another person” Fanuc’s Inaba explained. “But once you have a robot expert, you can multiply it infinitely.”

China buys up flying schools as pilot demand rises

In September Ryanair axed 20,000 flights due to a rostering mess-up made worse by pilot shortages. This forced the low-cost carrier to reverse a longstanding policy and recognise trade unions and agree new pay deals — a move that it said would cost it €100m ($120m) a year from 2019.

China is on course to overtake the US as the world’s largest air travel market by 2022, according to the International Air Transport Association.

US aircraft maker Boeing predicts China will need 110,000 new pilots in the years through to 2035, and its airlines are expected to purchase 7,000 commercial aircraft over the next two decades.

China’s aviation market grew by 13 per cent last year, with 549m passengers taking to the skies, double the number who flew in 2010. Growth is being driven by the rising middle class, an expansion of routes by Chinese airlines and the easing of visa restrictions by foreign governments keen to attract Chinese tourists.

California will require solar power for new homes

Long a leader and trendsetter in its clean-energy goals, California took a giant step on Wednesday, becoming the first state to require all new homes to have solar power.

The new requirement, to take effect in two years, brings solar power into the mainstream in a way it has never been until now. It will add thousands of dollars to the cost of home when a shortage of affordable housing is one of California’s most pressing issues.

Just half a percent

If you save $5,000 a year for 40 years and make only 8% (the “small” mistake), you’ll retire with about $1.46 million. But if you earn 8.5% instead, you’ll retire with nearly $1.7 million. The additional $230,000 or so may not seem like enough to change your life, but that additional portfolio value is worth more than all of the money you invested over the years. Result: You retire with 16% more.

Your gains don’t stop there. Assume you continue earning either 8% or 8.5% while you withdraw 4% of your portfolio each year and that you live for 25 years after retirement. If your lifetime return is 8%, your total retirement withdrawals are just shy of $2.5 million. If your lifetime return is 8.5% instead, you withdraw about $3.1 million. That’s an extra $600,000 for your “golden years,” a bonus of three times the total dollars you originally saved.

Your heirs will also have plenty of reasons to be grateful for your 0.5% boost in return. If your lifetime return was 8%, your estate will be worth about $3.9 million. If you earned 8.5% instead, your estate is worth more than $5.1 million.

Keep your investment costs low.
Slowly increasing your savings rate over time.
Consistently saving while treating investment contributions like a periodic bill payment.
Bettering your career prospects to increase your income over time.
Avoiding behavioral investment mistakes which can act as a counterweight to the benefits of compounding.

Curated Insights 2018.04.22

Disneyflix is coming. And Netflix should be scared.

But in film, as in television, Disney relies on middlemen to deliver its content—and middlemen always take a cut. To buy a ticket to see a Disney film in theaters, you pay an exhibitor that keeps about 40 percent of the ticket price. What if Disney bypassed the middlemen and put a highly anticipated film like Black Panther on its streaming service the same day it opened in theaters—or made the film exclusive to subscribers? In the short term, sacrificing all those onetime ticket buyers might seem financially ruinous. But the lifetime value of subscriptions—which renew automatically until actively canceled—quickly becomes profound. If the film’s debut encouraged just over 4 million people to sign up for an annual subscription to a $10-a-month Disneyflix product—about the same number of subscribers that Netflix added the quarter it debuted its original series House of Cards—Disney would earn a net revenue of nearly $500 million in just the first year. Black Panther was a massive hit as a theatrical release; it could have been even bigger had it been used to transform onetime moviegoers into multiyear Disneyflix subscribers.

The math might make this seem like an easy call for Disney, but let’s not underplay how radical this move would be, and how seismic the effects on the existing entertainment industry. In recent years, the theatrical-release business has been carried by blockbusters—and Disney has been perhaps the most reliable producer of those. From 2010 to 2017, films earning more than $100 million have grown from 48 percent to 64 percent of the domestic box office, according to the research firm MoffettNathanson—and Disney has made the year’s top-grossing film in six of the past seven years. If Disney moves its films, en masse, to a proprietary streaming platform, it would smash movie theaters’ precious window of exclusivity and leach away crucial revenue. Exhibitors such as AMC and Regal may find themselves on an accelerated path to bankruptcy or desperate consolidation.

In this vision, Disneyflix wouldn’t just be Netflix with Star Wars movies—it would be Amazon for Star Wars pillowcases and Groupon for rides on Star Wars roller coasters and Kayak for the Star Wars suite at Disney hotels. That’s a product that could rival Netflix and create the kind of profits Disney has enjoyed during its unprecedented century of dominance. The company just has to destroy its own businesses—and the U.S. entertainment landscape—to build it.

Zillow, aggregation, and integration

To quickly summarize, I wrote that Aggregators as a whole share three characteristics:

  • A direct relationship with users
  • Zero marginal costs to serve those users
  • Demand-driven multi-sided networks that result in decreasing acquisition costs

This allows Aggregators to leverage an initial user experience advantage with a relatively small number of users into power over some number of suppliers, which come onto the platform on the Aggregator’s terms, enhancing the user experience and attracting more users, setting off a virtuous cycle of an ever-increasing user base leading to ever-increasing power over suppliers.

Not all Aggregators are the same, though; they vary based on the cost of supply:

  • Level 1 Aggregators have to acquire their supply and win by leveraging their user base into superior buying power (i.e. Netflix).
  • Level 2 Aggregators do not own their supply but incur significant marginal costs in scaling supply (i.e. Airbnb or Uber).
  • Level 3 Aggregators have zero supply costs (i.e. App Stores or social networks)

Remember, Zillow is in nearly every respect already an Aggregator: it is by far the number one place people go when they want to look for a new house, and at a minimum the starting point for research when they want to sell one. They own the customer relationship! What has always been missing is the integration with the purchase itself — until last week. Zillow is making a play to be a true Aggregator — one that transforms its industry by integrating the customer relationship with the most important transaction in its respective value chain — by becoming directly involved in the buying and selling of houses.

Here, though, Zillow’s status as an almost-Aggregator looms large: we now have years’ worth of evidence that realtors will do what it takes to ensure their listings appear on Zillow, because Zillow controls end users. It very well may be the case that realtors will find themselves with no choice but to continue giving Zillow the money the company needs to disrupt their industry.


Facebook to put 1.5 billion users out of reach of new EU privacy law

If a new European law restricting what companies can do with people’s online data went into effect tomorrow, almost 1.9 billion Facebook Inc users around the world would be protected by it. The online social network is making changes that ensure the number will be much smaller.

The change affects more than 70 percent of Facebook’s 2 billion-plus members. As of December, Facebook had 239 million users in the United States and Canada, 370 million in Europe and 1.52 billion users elsewhere.

In practice, the change means the 1.5 billion affected users will not be able to file complaints with Ireland’s Data Protection Commissioner or in Irish courts. Instead they will be governed by more lenient U.S. privacy laws, said Michael Veale, a technology policy researcher at University College London. Facebook will have more leeway in how it handles data about those users, Veale said. Certain types of data such as browsing history, for instance, are considered personal data under EU law but are not as protected in the United States, he said.


Why all my books are now free (aka a lesson in Amazon money laundering)

One reader forwarded this article on Amazon Money Laundering written by Brian Krebs. He argues that serious money laundering is going on with stolen credit cards: “Reames said he suspects someone has been buying the book using stolen credit and/or debit cards, and pocketing the 60 percent that Amazon gives to authors. At $555 a pop, it would only take approximately 70 sales over three months to rack up the earnings that Amazon said he made.”

My guess is eventually you’ll see the government step in, fine the crap out of Amazon, which will then be followed by a multi-billion dollar class-action lawsuit.

The iPhone X generated 5X more profit than the combined profit of 600+ Android OEMs during Q4 2017

The iPhone X alone generated 21% of total industry revenue and 35% of total industry profits during the quarter and its share is likely to grow as it advances further into its life cycle. Additionally, the longer shelf life of all iPhones ensured that Apple still has eight out of top ten smartphones, including its three-year-old models, generating the most profits compared to current competing smartphones from other OEMs.

Apple remained the most profitable brand, capturing 86% of the total handset market profits. Further splitting profits by model, the top 10 models captured 90% of the total handset profits.

Car dealerships face conundrum: Get big or get out

Dealers say they need to as much as triple revenue in the next half-decade to offset shrinking margins and increasing competition from companies that didn’t exist a decade ago…These developments have helped fuel consolidation of the 16,800 U.S. dealerships into the hands of fewer owners. The top 50 dealer groups are poised to book more than $175 billion in revenue this year, compared to $144 billion when Mr. Buffett’s Berkshire Hathaway Inc. entered the sector four years ago.

Your future home might be powered by car batteries

By allowing car batteries to serve as a residential power source, Nissan says its vehicle-to-home service cuts utility bills by about $40 per month. Still, only about 7,000 car owners have adopted the system in the six years since it started, a tiny number compared with the 81,500 Leaf EVs that Nissan has sold so far in the country.

A small test this winter showed how hard it is just to get people to charge their cars at the right time. (Selling power back to the grid is a separate can of worms.) Nissan and the utility convinced 45 of their own employees to install home chargers and try monitoring electricity demand on weekends, using a smartphone app. Even though volunteers got free shopping points on Amazon as a reward for buying power when there was glut, only about 10 percent succeeded.

It’s a slow beginning, but Nuvve Chief Executive Officer Gregory Poilasne says vehicle-to-grid systems could eventually speed up the adoption of electric vehicles once people realize their batteries can earn them money. Poilasne says his clients make more than $1,000 per car each year by trading power to the spot market.


Blockchain is about to revolutionize the shipping industry

Should they succeed, documentation that takes days will eventually be done in minutes, much of it without the need for human input. The cost of moving goods across continents could drop dramatically, adding fresh impetus to relocate manufacturing or source materials and goods from overseas.

“This would be the biggest innovation in the industry since the containerization. It basically brings more transparency and efficiency. The container shipping lines are coming out of their shells and playing catch-up in technology.”

In 2014, Maersk followed a refrigerated container filled with roses and avocados from Kenya to the Netherlands. The company found that almost 30 people and organizations were involved in processing the box on its journey to Europe. The shipment took about 34 days to get from the farm to the retailers, including 10 days waiting for documents to be processed. One of the critical documents went missing, only to be found later amid a pile of paper.

Chinese money floods U.S. biotech as Beijing chases new cures

Venture-capital funds based in China poured $1.4 billion into private U.S. biotechnology firms in the three months ending March 31, accounting for about 40 percent of the $3.7 billion that the companies raised in the period overall, according to data provider PitchBook. At the same time a year earlier, Chinese funds invested $125.5 million, only about seven percent of the total.

China once lagged other countries in drug spending despite its large population, but outlays have expanded over the past decade. In 2012, China surpassed Japan to become the second-largest global drug market behind the U.S., according to a report from health-technology firm Iqvia, formerly known as QuintilesIMS. It could spend as much as $170 billion by 2021, compared to $116.7 billion in 2016, the firm said.

Selling drugs in China is also getting easier. Western companies usually waited for approval elsewhere before starting clinical trials in China because of the country’s cumbersome rules. But those restrictions have been relaxed, leading U.S. companies to view China as a more important market, and making Chinese investors hungry for to share in the returns from new therapies.

Technique to beam HD video with 99 percent less power could sharpen the eyes of smart homes

Backscatter is a way of sending a signal that requires very little power, because what’s actually transmitting the power is not the device that’s transmitting the data. A signal is sent out from one source, say a router or phone, and another antenna essentially reflects that signal, but modifies it. By having it blink on and off you could indicate 1s and 0s, for instance.

Assembly and rendering of the video is accomplished on the receiving end, for example on a phone or monitor, where power is more plentiful. In the end, a full-color HD signal at 60FPS can be sent with less than a watt of power, and a more modest but still very useful signal — say, 720p at 10FPS — can be sent for under 80 microwatts. That’s a huge reduction in power draw, mainly achieved by eliminating the entire analog to digital converter and on-chip compression. At those levels, you can essentially pull all the power you need straight out of the air.

Casualties of your own success

I valeted at a hotel in college. We parked 10,000 cars a month. And we banged one of them up every month, like clockwork. Management found this atrocious. Every few weeks we’d be scolded for our recklessness. But one accident in 10,000 parks is actually pretty good. If you drive twice a day, it’ll take you 14 years to park 10,000 times. One bent fender every 14 years is a driving record your insurance company won’t bat an eye at. The only reason we seemed reckless is because we parked so many cars. Size (or volume) put a negative spotlight on us that being less busy with the same parking skills would have masked. Big companies deal with this too. Chipotle sells half a billion burritos a year. You, at home, washing everything in bleach, could never make one carnitas burrito a day for half a billion days (1.4 million years) and expect to avoid a foodborne illness.

One is that everything moves in cycles. You can’t extrapolate the benefits of growth because growth comes attached with downsides that go from annoying at one size to catastrophic at another. Rising valuations that come with investment growth is the clearest example, but it’s everywhere: Headcount, media attention, AUM, and influence have downsides that can eventually grow faster than their benefits. Remembering that volatility is attracted to outlier growth puts many things about business and investing in context.

The second is size is associated with success, success is associated with hubris, and hubris is the beginning of the end of success. Some of the most enduring animals aren’t apex predators, but they’re very good at evasion, camouflage, and armour. They’re paranoid. I always come back to the time Charlie Rose asked Michael Moritz how Sequoia Capital has thrived for three decades, and he said, “We’ve always been afraid of going out of business.” Paranoia in the face of success is extremely hard but in hindsight it’s the closest thing to a secret weapon that exists.

Debt recycling

By investing a total of $55,097.13 I was able to purchase 3 properties over a 5 year period, with a combined value of just over $1,000,000. Two years later I sold one of the properties, using the proceeds to reduce the leverage of the remaining portfolio. I was able to recover my $55,000 of cash contributions, and still be left with equity worth over $473,000. At that point I could have sold a second property and used to proceeds to fully pay off the mortgage on the remaining property. This could have provided me with rent/mortgage free accommodation for the rest of my life, or alternatively contributed $26,000 in annual free cash flow towards covering my own lifestyle costs.


Why ‘sleep on it’ is the most useful advice for learning — and also the most neglected

Walker relates problem solving to the REM phase of sleep, demonstrating that it is in this critical stage of unconsciousness that we form novel connections between individual chunks of knowledge. REM sleep is where our ideas crystallise and recombine into new, creative thoughts.

The premise of adaptive timetabling does not fit will with a standardised model that runs on a fixed clock. Sleep does not lend itself to the measurement paradigms of today’s education system. Education is mired in empiricist dogma, hell-bent on measuring whatever it can, and then assigning importance only to what has been measured. It should be evident that the nature of problem solving, so much of which is rooted in unconscious thought, is holistic and beyond the blunt tools of written assessment. Any timed exam that seeks to capture students’ problem solving skills within a fixed period is, by the findings of neuroscience, a contradiction in terms.

Curated Insights 2018.04.15

Mark Zuckerberg: “We do not sell data to advertisers”

There is a very common misconception that we sell data to advertisers, and we do not sell data to advertisers. What we allow is for advertisers to tell us who they want to reach and then we do the placement. So, if an advertiser comes to us and says, ‘Alright, I’m a ski shop and I want to sell skis to women,’ then we might have some sense because people shared skiing related content or said they were interested in that. They shared whether they’re a woman. And then we can show the ads to the right people without that data ever changing hands and going to the advertiser. That’s a very fundamental part of how our model works and something that is often misunderstood.


Sen. Harris puts Zuckerberg between a rock and a hard place for not disclosing data misuse

So to sum up: in 2015, it became clear to Facebook and certainly to senior leadership that the data of 87 million people had been sold against the company’s terms. Whether or not to inform those users seems like a fundamental question, yet Zuckerberg claimed to have no recollection of any discussion thereof. That hardly seems possible — especially since he later said that they had in fact had that discussion, and that the decision was made on bad information. But he doesn’t remember when this discussion, which he does or doesn’t remember, did or didn’t take place!


Google and Facebook can’t help publishers because they’re built to defeat publishers

Here’s the problem: No matter how hard Google and Facebook try to help publishers, they will do more to hurt them, because that’s the way they’re supposed to work. They’re built to eviscerate publishers.

Publishers create and aggregate information and present it to users in return for their attention, which they sell to advertisers. And that’s exactly what Google and Facebook do, too: Except they do a much better job of that. That’s why the two companies own the majority of digital ad dollars, and an even bigger chunk of digital advertising growth. (Yes, those numbers can change — but if anyone displaces Google or Facebook, it will be another tech company.)

Amazon’s next mission: Using Alexa to help you pay friends

Mr. Bezos gave employees a mandate last year to push financial services as a key initiative, according to a person briefed on the matter. The company also restructured internally to add its digital wallet, Amazon Pay, to its team that focuses on Alexa as part of plans to make voice commands the next wave of commerce, according to other people familiar with the company’s plans.

If Amazon can move more transactions to its own rails or get better deals from card companies, it could save more than an estimated $250 million in interchange fees each year, Bain & Co. consultants say.


Is Amazon bad for the Postal Service? Or its savior?

An independent body, the Postal Regulatory Commission, oversees the rates that the Postal Service charges for its products. By law, the agreements it cuts with corporate customers like Amazon must cover their “attributable costs” that directly result from their use of the postal network.

While the Postal Service is subject to Freedom of Information Act requests, there is an exemption in the federal law that allows it to avoid releasing particulars of its deals with private businesses like Amazon.


Amazon is not a bubble

Thanks to its significant time-lag between selling an item and paying a supplier (estimated at 80 days by Morningstar) Amazon has been able to self-fund its growth almost entirely from cash from operations over its 25-year corporate history. In fact they last tapped the equity markets for funding in 2003, and in the last quarter of 2017 reported $6.5bn of free cash flow.

Ensemble Capital Q1 2018: Netflix

In the US, it has more subscribers than all of the cable TV companies combined, and it has a penetration rate of about 40% of all US households. And it’s still growing. Based on its massive global subscriber base, Netflix is now the 2nd largest pay TV service in the world behind just China Radio & TV. Yet Netflix is still growing subscribers at a 20% clip.

None other than the “Cable Cowboy”, John Malone, the business genius who pioneered the development of cable TV, shares our view on this topic. Talking to CNBC last year, Malone said that the most important question in the TV industry is “Can Netflix get enough scale that nobody really can challenge them?” and then went on to say that in his opinion the traditional pay TV companies no longer have any chance of overtaking Netflix. When the interviewer asked if the pay TV industry could band together to create their own Netflix-like service as Malone had been urging for years, he simply replied “It’s way too late.”


Apple now runs on 100% green energy, and here’s how it got there

At the moment, this conversation involves a healthy dose of education. “What we say is that we’ll be there with you,” Jackson recounts. “We’ll help you scout deals, we’ll help you evaluate whether they’re real, we’ll help you know what to negotiate for, because most of these folks, they’re trying to make a part, and so what we can do for them is be sort of their in-house consulting firm.” But she adds that there will likely come a time where Apple will require suppliers to run their businesses on clean energy as a condition of a business relationship.


[Invest Like the Best] Pat Dorsey Return – The Moat Portfolio

Chegg is a company we own right now where the historical data looks awful and it’s because they just sold a business, and the performance of this asset intensive textbook rental, that’s what’s in the historical data. The performance of the asset light, super high incremental margin study business is buried in the segment results…

The legacy business for Chegg is textbook rental…of course, this is a business that’s fairly easily replicable, there are very low barriers to entry and so Amazon and Barnes and Noble essentially crushed them in the textbook rental business. The founders were fired by the venture capitalists who poured $220mn into the business, a new CEO was brought in, and he realized that the only asset Chegg had at that point was a brand. They had 60%, maybe 70% unaided name recognition on college campuses…so, they invested in a bunch of other businesses and the one that’s worked out really well for them is essentially building a digital library of step-by-step answers to end of chapter study questions. So, if you took engineering or math or organic chemistry, there’s going to be a series of questions at the end of the chapter, so did you understand what you just read, and if you didn’t you probably won’t do so well on the test. What they’ve done is gotten exclusive licenses for 27,000 ISBNs and answered every single question and indexed it on Google, that being pretty important because the college student today copies and pastes. They copy the question and they put it in Google and search on it. Chegg comes up as the first organic result, which is how their user base has gone up 2.5x in 3 years with marketing costs being the same as they were 3 years ago…

Now Chegg has to pay money, big money, for those licenses to get that content, and so to some extent the publishers – Pearson and McGraw Hill – do have a lever over Chegg in that respect. We think those relationships are good, they recently renewed one of their licenses at similar cost to what it was a few years ago, largely because the publishers themselves are struggling and this is a very high margin source of income for them. And most college students, they’ve never heard of Pearson, that name means nothing to them. So if Pearson were to take all their textbooks and try to do this themselves, we think the marketing costs would be enormous…you do have some crowd sourced competitors to Chegg, where students basically post their own answers but here’s the thing. When you think about the value to a student of getting a 3.5 instead of a 3.0 GPA or passing a certain class that’s required of their major, the marginal benefit of paying $14.95/month for Chegg and knowing it’s the right answer…vs. just crowd-sourcing it on reddit, it’s a good cost-benefit.

So Workiva, they have 96% client retention, 106% revenue retention because they keep upselling clients. And what they did is create a product that lets companies do SEC filings much more efficiently than the old way, which was mark up a pdf and send it to RR Donnelley and the Donnelley sends it back to you and then you mark it up and send it back to them…so needless to say, [Workiva] went from 0% to 50% share in 6 years. In fact, the people who do external reporting – they’ve got 80% share of the Fortune 500 right now – people actually won’t go to work for another firm that doesn’t use Workiva…

It’s not an easy product to create because essentially what they had to do was replicate Excel in the cloud and enable it for scores of simultaneous users. There’s no check-in/check-out the worksheet. And then also the data points get linked inside your enterprise and so you might way we need to report this EBIT line, well that’s the function of Bob here and Jane over there, and their numbers roll up into mine and I link that inside my enterprise, so if you had a new product you’d have to break all those links and re-integrate it. So, not impossible but external reporting teams, even Wal-Mart, a huge company, their external reporting team’s like 20 people, so it’s feasible to do a rip-and-replace. But where things get interesting for this business and where the TAM gets much larger is internal reporting, where you’re rolling up data across the entire enterprise and then putting it together for the CFO/CEO or whatever, because then the linkages get much greater and the number of users becomes much bigger and the more users you have within an entity whose workflow would be disrupted if you got a new product, the stickier the product becomes…

In Workiva’s example, their customer acquisition costs really spiked about a year and half, two years ago because instead of going after the broader internal reporting market, they tried to pivot going from the SEC market to the Sarbanes Oxley market, SOX reporting, which didn’t work very well because with external reporting you were just saying ‘hey, you should just use Wdesk instead of Donnelley or Merrill…our product is superior’. Customer goes ‘why, yes it is.’ There is no SOX product, there is no product for SOX reporting, it’s a whole bunch of cludged together internal processes, so that’s a much harder sale, going in and saying ‘pay money for a product that is replacing an internal process that you’re not actually paying money for, it’s just sort of wasting people’s time’. That’s harder to put a number on if you’re a CFO or CEO, so that really spiked up their customer acquisition costs. Once they pivoted back to enterprise sales and frankly just reorganized their sales force geographically instead of functionally – which means less travel – customer acquisition costs came back down.

The U.S. states most vulnerable to a trade war

How to understand the financial levers in your business

Whatever your business, build a business model that includes all of your assumptions — and build the model so you can pressure-test variables and find your levers. Once you’ve identified them, build MVPs to test those assumptions in more detail. It’s really important to experiment early and get some good data on what works (and what doesn’t), before you start ramping up and pouring lots of money into marketing and execution. Some changes can have exponential effects — for better or for worse.

Want to keep your wine collection safe? Store it in a bomb shelter

Shipping wine in the country is tightly controlled by a web of state laws, and it is illegal for individuals to ship wine themselves across state lines. Having wine storage in different states can ensure that collectors get the wine they want regardless of where they live.

Storage fees can be as low as $1.25 a month per case of wine, which holds 12 regular bottles or six magnums. Of course, wine collectors rarely store just one box, and they are not putting it there for just a month.


What it takes to out-sleuth wine fraud

Ms. Downey offered advice and provided counterfeit-detection tools for seminar participants, including a jeweler’s loupe, a measuring tape, a UV light and UV-visible pens. She outlined her authentication process, which begins with careful scrutiny of the wine bottle—the loupe proved handy here—notably the label, the paper it’s printed on and the printing method and ink, as well as other components such as the capsule and the cork. Ultra-white paper, detectable under UV light, wasn’t in commercial use until the 1960s. With the aid of a microscope, one could detect if the paper was recycled, which would mean the wine couldn’t have been produced before the 1980s, when recycled paper was introduced for labels.

Above all, she emphasized that wine fraud isn’t a victimless crime. “It affects people who work very hard to make good wine, who are proud of their wines and their appellation,” she said. “It ruins their reputation and it destroys all their hard work.” With the right tools and a gimlet eye, she believes, we can all play a part in protecting that work.

Curated Insights 2018.04.08

The most important self-driving car announcement yet

The company’s autonomous vehicles have driven 5 million miles since Alphabet began the program back in 2009. The first million miles took roughly six years. The next million took about a year. The third million took less than eight months. The fourth million took six months. And the fifth million took just under three months. Today, that suggests a rate on the order of 10,000 miles per day. If Waymo hits their marks, they’ll be driving at a rate that’s three orders of magnitude faster in 2020. We’re talking about covering each million miles in hours.

But the qualitative impact will be even bigger. Right now, maybe 10,000 or 20,000 people have ever ridden in a self-driving car, in any context. Far fewer have been in a vehicle that is truly absent a driver. Up to a million people could have that experience every day in 2020.

2020 is not some distant number. It’s hardly even a projection. By laying out this time line yesterday, Waymo is telling the world: Get ready, this is really happening. This is autonomous driving at scale, and not in five years or 10 years or 50 years, but in two years or less.


Facebook, big brother and China

Whether users are OK with this is a personal judgment they make, or at least should be making, when using the services. In open and democratic societies, perhaps users are less worried about what large corporations, who can be secretly compelled to hand over data to the state, know about them. Users are protected by the rule of law, after all. If they are going to see advertising in exchange for content, storage and functionality, then they would rather see relevant than irrelevant advertising alongside their web pages, emails, photos, videos and other files. Most citizens are not criminals and not concerned about what the state knows – they just want to share their holiday photos and chat with each other and in groups via a convenient platform, knowing that Facebook can mine and exploit their data.

But in authoritarian states such as China which control what their citizens can see and which lack a reliable rule of law, such networks pose a bigger threat. Tencent, for example, with its billion active accounts, knows the social graph of China, who your friends and associates are, where you go, what you spend (if you use their payment app) and what you say to each other and in groups on the censored chat platform. Similarly Sina Weibo. The state security apparatus has access to all of this on demand, as well of course as access to data from the mobile phone operators. So even if you stay off the Tencent grid, if you use the phone network then the state will know a lot about anyone you call who is a user of these platforms, as well as being able to profile you based on your repeated common location with other users. All of this data is likely to be accessible to the state in China’s forthcoming Orwellian Social Credit System, a combination of credit rating with mass surveillance. Knowledge is power. No wonder then that China won’t allow Facebook into the game.

Nvidia announces a new chip… But it’s not a GPU

The new chip, NVSwitch, is a communication switch that allows multiple GPUs to work in concert at extremely high speeds. The NVSwitch will enable many GPUs – currently 16 but potentially many more – to work together. The NVSwitch will distance Nvidia from the dozen or so companies developing competing AI (artificial intelligence) chips. While most are focused on their first chips, Nvidia is building out highly scalable AI systems which will be difficult to dislodge.


Nvidia: One analyst thinks it’s decimating rivals in A.I. chips

[Nvidia CEO] Jen-Hsun [Huang] is very clever in that he sets the level of performance that is near impossible for people to keep up with. It’s classic Nvidia — they go to the limits of what they can possibly do in terms of process and systems that integrate memory and clever switch technology and software and they go at a pace that makes it impossible at this stage of the game for anyone to compete.

Everyone has to ask, Where do I need to be in process technology and in performance to be competitive with Nvidia in 2019. And do I have a follow-on product in 2020? That’s tough enough. Add to that the problem of compatibility you will have to have with 10 to 20 frameworks [for machine learning.] The only reason Nvidia has such an advantage is that they made the investment in CUDA [Nvidia’s software tools].

A lot of the announcements at GTC were not about silicon, they were about a platform. It was about things such as taking memory [chips] and putting it on top of Volta [Nvidia’s processor], and adding to that a switch function. They are taking the game to a higher level, and probably hurting some of the system-level guys. Jen-Hsun is making it a bigger game.

Nervana’s first chip didn’t work, they had to go back to the drawing board. It was supposed to go into production one or two quarters ago, and then they [Intel] said, ‘We have decided to just use the Nervana 1 chip for prototyping, and the actual production chip will be a second version.’ People aren’t parsing what that really means. It means it didn’t work! Next year, if Nervana 2 doesn’t happen, they’ll go back and do a Nervana 3.


Apple plans to use its own chips in Macs from 2020, replacing Intel

Apple’s decision to switch away from Intel in PC’s wouldn’t have a major impact on the chipmaker’s earnings because sales to the iPhone maker only constitute a small amount of its total. A bigger concern would be if this represents part of a wider trend of big customers moving to designing their own components, he said.

Apple’s custom processors have been recently manufactured principally by Taiwan Semiconductor Manufacturing Ltd. Its decision may signal confidence that TSMC and other suppliers such as Samsung Electronics Co. have closed the gap on Intel’s manufacturing lead and can produce processors that are just as powerful.

Live Nation rules music ticketing, some say with threats

Ticket prices are at record highs. Service fees are far from reduced. And Ticketmaster, part of the Live Nation empire, still tickets 80 of the top 100 arenas in the country. No other company has more than a handful. No competitor has risen to challenge its pre-eminence. It operates more than 200 venues worldwide. It promoted some 30,000 shows around the world last year and sold 500 million tickets.

Though the price of tickets has soared, that trajectory predates the merger and is driven by many factors, including artists’ reliance on touring income as record sales have plummeted.

Live Nation typically locks up much of the best talent by offering generous advances to artists and giving them a huge percentage of the ticket revenue from the door. Why? Because it can afford to. It has so many other related revenue streams on which to draw: sponsorships for the tour, concessions at venues, and, most of all, ticket fees. The fees supply about half of Live Nation’s earnings, according to company reports.

Critics say enforcement of the consent decree has been complicated by what they call its ambiguous language. Though it forbids Live Nation from forcing a client to buy both its talent and ticketing, the agreement lets the company “bundle” its services “in any combination.” So Live Nation is barred from punishing an arena by, say, steering a star like Drake to appear at a rival stop down the road. But it’s also allowed, under the agreement, to redirect a concert if it can defend the decision as sound business.

Roku’s business is not what you think

That’s far from the only ad inventory Roku has access to. The Roku Channel offers free-to-watch popular movies, which Roku sells ad time against. Many of Roku’s “free” channels are ad supported, with Roku having access to all or some of the ad time on many of those channels (not all of them).

While selling ads is the biggest piece of the company’s Platform business, there are some auxiliary sales as well. See those Netflix, Amazon, Pandora, YouTube, etc. buttons on your Roku remote? The company was paid to put them there. Additionally, some TV brands have licensed the right to include Roku OS right into their television set, another source of revenue.

All told, Platform revenue is 44% of total sales, and growing rapidly. In fact, it more than doubled in 2017, and has increased more than 3-fold over the past 2 years. Even better, Platform revenue carries a gross margin near 75%, meaning that already it makes up 85% of Roku’s gross profitability. Completing the trifecta of good news, Platform sales are far more recurring and reliable in nature than hardware sales, giving the company a firmer footing from which to expand their business. Bottom line here? Roku is not really a commodity hardware maker. It is more of a consumer digital video advertising platform.

There is no shortage of ways to get streaming content. And all of them are fighting tooth-and-nail for users. Google and Amazon practically give away their devices to get users into their ecosystem. Against that lineup, it really has very few competitive advantages. There is no meaningful lock-in to the platform. It is really quite simple and painless for a consumer to switch from a Roku to a competing offering. Getting new customers is even more of a dog fight.

Netflix makes up over 30% of streaming hours through Roku’s platform, but the channel provides essentially no revenue back. Same for Amazon, Hulu, and the most popular ad-supported video network in the world, YouTube. Roku relies on monetizing Roku Channel and other, less prominent content channels. However, there is nothing stopping those other channels from switching to a different ad provider, or (if they are large enough), building out their own.


Alibaba is preparing to invest in Grab

Alibaba leaned heavily on its long-time ally SoftBank — an early backer of Tokopedia and Grab — to get the Tokopedia deal ahead of Tencent. That’s despite Tokopedia’s own founders’ preference for Tencent due to Alibaba’s ownership of Lazada, an e-commerce rival to Tokopedia. SoftBank, however, forced the deal through. “It was literally SoftBank against every other investor,” a separate source with knowledge of negotiations told TechCrunch. Ultimately, Alibaba was successful and it led a $1.1 billion investment in Tokopedia in August which did not include Tencent.

CRISPR recorder

While the Cas9 protein is involved in cutting and correcting DNA, the Cas4 protein is part of the process that creates DNA and genetic memory. CRISPR evolved from a bacterial immune defense system in which bacteria destroy viral invaders. Now we are beginning to understand how bacteria detect the invaders and remember the encounters. With Cas4, bacteria can record these encounters in their DNA, creating a permanent ledger of historical events.

Our understanding of Cas4 is rudimentary, but its potential applications are provocative. Not only will it timestamp key events, but it should be able to monitor how an individual’s body works and how it reacts to different kinds of bacteria. A Cas4 tool should be able to fight antibiotic resistance, an important use case addressing a significant unmet need.

How do wars affect stock prices?

Our research is not alone in reaching this conclusion. A 2013 study of US equity markets found that in the month after the US enters conflict, the Dow Jones has risen, on average, by 4.0 percent—3.2 percent more than the average of all months since 1983. A 2017 study found that volatility also dropped to lower levels immediately following the commencement of hostilities relative to the build-up to conflict. During the four major wars of the last century (World War II, the Korean War, the Vietnam War, and the First Gulf War), for instance, large-cap US equities proved 33 percent less volatile while small-cap stocks proved 26 percent less volatile. Similarly, FTSE All Share and FTSE 100 volatility has historically fallen by 19 and 25 percent over one- and three-month horizons following the outbreak of conflict.

Regression to lumpy returns

Missing a bull can be even more detrimental than taking part in a bear. Following the two huge bear markets we’ve experienced this century, many investors decided it was more important to protect on the downside than take part in the upside. Risk is a two-way street and I’m a huge proponent of risk management, but investors have taken this mindset too far. Missing out on huge bull market gains can set you back years in terms of performance numbers because you basically have to wait for another crash to occur, and then have the fortitude to buy back in at the right time. I have a hard time believing people who missed this bull market because they were sitting in cash will be able to put money to work when the next downturn strikes.


How to talk to people about money

In the last 50 years medical schools subtly shifted teaching away from treating disease and toward treating patients. That meant laying out of the odds of what was likely to work, then letting the patient decide the best path forward. This was partly driven by patient-protection laws, partly by Katz’s influential book, which argued that patients have wildly different views about what’s worth it in medicine, so their beliefs have to be taken into consideration.

There is no “right” treatment plan, even for patients who seem identical in every respect. People have different goals and different tolerance for side effects. So once the patient is fully informed, the only accurate treatment plan is, “Whatever you want to do.” Maximizing for how well they sleep at night, rather than the odds of “winning.”

Everyone giving investing advice – or even just sharing investing opinions – should keep top of mind how emotional money is and how different people are. If the appropriate path of cancer treatments isn’t universal, man, don’t pretend like your bond strategy is appropriate for everyone, even when it aligns with their time horizon and net worth.

The best way to talk to people about money is keeping the phrases, “What do you want to do?” or “Whatever works for you,” loaded and ready to fire. You can explain to other people the history of what works and what hasn’t while acknowledging their preference to sleep well at night over your definition of “winning.”

Curated Insights 2018.03.25

What’s next for humanity: Automation, new morality and a ‘global useless class’

“Time is accelerating,” Mr. Harari said. The long term may no longer be defined in centuries or millenniums — but in terms of 20 years. “It’s the first time in history when we’ll have no idea how human society will be like in a couple of decades,” he said.

“We’re in an unprecedented situation in history in the sense that nobody knows what the basics about how the world will look like in 20 or 30 years. Not just the basics of geopolitics but what the job market would look like, what kind of skills people will need, what family structures will look like, what gender relations will look like. This means that for the first time in history we have no idea what to teach in schools.”

Leaders and political parties are still stuck in the 20th century, in the ideological battles pitting the right against the left, capitalism versus socialism. They don’t even have realistic ideas of what the job market looks like in a mere two decades, Mr. Harari said, “because they can’t see.” “Instead of formulating meaningful visions for where humankind will be in 2050, they repackage nostalgic fantasies about the past,” he said.

Investing is hard

On April 1st 1976, Steve Jobs, Steve Wozniak, and Ronald Wayne founded Apple. Wayne drew the first Apple logo, wrote the three men’s original partnership agreement, and wrote the Apple 1 manual. Jobs and Wozniak each owned 45% and Wayne 10%. Two weeks later, he sold his 10% interest for $800. This 10% interest would be worth $90 billion today. He was closer than anyone to the visionaries of Apple, and he still sold.

The Cambridge Analytica scandal, in 3 paragraphs

In June 2014, a researcher named Aleksandr Kogan developed a personality-quiz app for Facebook. It was heavily influenced by a similar personality-quiz app made by the Psychometrics Centre, a Cambridge University laboratory where Kogan worked. About 270,000 people installed Kogan’s app on their Facebook account. But as with any Facebook developer at the time, Kogan could access data about those users or their friends. And when Kogan’s app asked for that data, it saved that information into a private database instead of immediately deleting it. Kogan provided that private database, containing information about 50 million Facebook users, to the voter-profiling company Cambridge Analytica. Cambridge Analytica used it to make 30 million “psychographic” profiles about voters.

Cambridge Analytica has significant ties to some of President Trump’s most prominent supporters and advisers. Rebekah Mercer, a Republican donor and a co-owner of Breitbart News, sits on the board of Cambridge Analytica. Her father, Robert Mercer, invested $15 million in Cambridge Analytica on the recommendation of his political adviser, Steve Bannon, according to the Times. On Monday, hidden-camera footage appeared to show Alexander Nix, Cambridge Analytica’s CEO, offering to bribe and blackmail public officials around the world. If Nix did so, it would violate U.K. law. Cambridge Analytica suspended Nix on Tuesday.

Cambridge Analytica also used its “psychographic” tools to make targeted online ad buys for the Brexit “Leave” campaign, the 2016 presidential campaign of Ted Cruz, and the 2016 Trump campaign. If any British Cambridge Analytica employees without a green card worked on those two U.S. campaigns, they did so in violation of federal law.


Facebook and the endless string of worst-case scenarios

“I have more fear in my life that we aren’t going to maximize the opportunity that we have than that we mess something up” Zuckerberg said at a Facebook’s Social Good Forum event in November. Perhaps it’s time for that fear to shift more towards ‘what could go wrong’, not just for Zuck, but the leaders of all of today’s tech titans.

Most recently, Facebook has found its trust in app developers misplaced. For years it offered an API that allowed app makers to pull robust profile data on their users and somewhat limited info about their friends to make personalized products. But Facebook lacked strong enforcement mechanisms for its policy that prevented developers from sharing or selling that data to others. It’s quite likely that other developers have violated Facebook’s flimsy policies against storing, selling, or sharing user data they’ve collected, and more reports of misuse will emerge.


The Facebook brand

This episode is a perfect example: an unintended casualty of this weekend’s firestorm is the idea of data portability: I have argued that social networks like Facebook should make it trivial to export your network; it seems far more likely that most social networks will respond to this Cambridge Analytica scandal by locking down data even further. That may be good for privacy, but it’s not so good for competition. Everything is a trade-off.


Inside Apple’s secret plan to develop and build its own screens

Controlling MicroLED technology would help Apple stand out in a maturing smartphone market and outgun rivals like Samsung that have been able to tout superior screens. Ray Soneira, who runs screen tester DisplayMate Technologies, says bringing the design in-house is a “golden opportunity” for Apple. “Everyone can buy an OLED or LCD screen,” he says. “But Apple could own MicroLED.”

Creating MicroLED screens is extraordinarily complex. Depending on screen size, they can contain millions of individual pixels. Each has three sub-pixels: red, green and blue LEDs. Each of these tiny LEDs must be individually created and calibrated. Each piece comes from what is known as a “donor wafer” and then are mass-transferred to the MicroLED screen. Early in the process, Apple bought these wafers from third-party manufacturers like Epistar Corp. and Osram Licht AG but has since begun “growing” its own LEDs to make in-house donor wafers. The growing process is done inside a clean room at the Santa Clara facility.

The secretive company that pours America’s coffee

Keurig is offering distribution services to an increasingly broad network of outside brands through its Dr Pepper Snapple deal. It will also be able to sell its coffee, part of an armada of 125 beverage brands, to new customers. Peet’s distribution system is a regional one that doesn’t cover certain retailers such as convenience stores, popular stops for consumers who don’t want to wait in line at larger stores. Dr Pepper’s larger fleet will enable Peet’s ready-to-drink beverages to get into more stores.

Drake and Fortnite create a “crossing the chasm” moment for gaming

While the gaming market is large, generating $100 billion in revenue globally, it reaches relatively few people compared to the music market. Interestingly, music touches almost everyone on earth but generates only $16 billion in revenue per year.

Twitch is the other beneficiary, of course. Twitch is cementing its position as a modern-day ESPN with 15 million daily viewers who spend on average almost two hours per day on the platform.


Oasis hedge fund boss bets on Japan’s professional gaming scene

Strict anti-gambling laws had prevented paid competitions for years, but the industry’s move this month to issue professional gamer licenses is allowing them to sidestep the regulations. Fischer says that lays the groundwork for publishers to grow audiences, sell more games and begin generating new revenue from broadcasting rights and advertising.

Worldwide esports revenue, including media rights, advertising, ticket sales and merchandising, will reach about $5 billion annually by 2020, almost as much as the world’s biggest soccer league today, according to market researcher Activate. The total audience for competitive gaming will grow to 557 million people by 2021 from 380 million this year, according to researcher Newzoo.


Why watch other people play video games? What you need to know about esports

Competitive video game playing, more commonly known as esports, drew 258 million unique viewers globally last year, according to research firm SuperData. For perspective, the National Football League said 204 million unique viewers tuned into the 2016 NFL regular season in the U.S., based on Nielsen data. Just like “real” sports, esports makes money off of investments, branding, advertising and media deals, raking in $1.5 billion in revenue last year, said SuperData. The firm expects the esports industry to hit 299 million viewers this year and top $2 billion in revenue by 2021.

The two things we look for in a management team

As the slide mentions, Verisk decides on buybacks or M&A depending on the available opportunities. Even if they don’t always make the correct assessment in hindsight, we like that there’s a process in place. We were further impressed that Verisk followed the above slide with IRR results from their capital allocation decisions. Again, this level of transparency is rare, but we welcome it and would like more companies to follow suit.

Samsonite wants to spend up on handbags

Parker said Samsonite isn’t actively approaching potential buyers, and the company will likely spend the next year or two consolidating after its $1.8 billion acquisition of luxury bag maker Tumi Holdings Inc. in 2016 and the $105 million purchase of online retailer eBags Inc. last year. The non-travel products market could be a potential space for deals in the future, he said in a separate interview with Bloomberg TV on Thursday.


How one investor turned a bet on the Swiss Central Bank into millions

Still, the root of the gains for Mr. Siegert and the SNB’s other 2,191 private investors is a bit of a mystery. The SNB isn’t like other stocks and pays a tiny dividend. It is governed under laws for both public and private institutions, and owned primarily by individual Swiss states, known as cantons, and cantonal banks. Public-sector bodies own almost 80% of voting shares.

Shareholders have no say in the SNB’s monetary policy or how it manages its massive 790 billion franc war chest of foreign-currency stocks and bonds, built up through years of interventions to weaken the franc.

On the plus side, the SNB is ultrasafe. It prints its own currency—and the franc is among the world’s strongest—which it uses to buy assets. When the SNB loses money, it can always print more. Recently, its profit has been on a tear, aided by rising global stock markets, low bond yields and a weaker franc. The SNB earned a record 54 billion francs in profit last year.


Tencent’s 60,000% runup leads to one of the biggest VC payoffs ever

The stake Naspers bought for just $32 million in 2001 — when Tencent was an obscure Web firm in a nation where few people used the Internet — is now worth $175 billion.

The sale of 190 million shares, worth $10.6 billion based on Tencent’s closing price in Hong Kong on Thursday, will cut the stake held by Naspers to 31.2 percent from 33.2 percent. It’s the first time Naspers has reduced its holdings in Tencent since investing in the company. Naspers won’t sell more shares in the company for at least three years, it said.

Has China overtaken the U.S. in terms of innovation?

In 1996, China invested 0.56 percent of its GDP in R&D, while the U.S. invested 2.44 percent of its GDP. In 2015, China invested 2.06 percent of its GDP, whereas the U.S. invested 2.79 percent. That is, the R&D intensity in China increased by 1.5 percentage points and in the U.S. by only 0.3 percentage points.


Harvard’s nutty idea: Cracking into the almond market

Around 80% of the world’s almonds are currently produced in California, whose almond plantations in its Central Valley have generated strong returns for investors for many years. Volatile weather in recent months, including frost and storms, have hurt estimates for the state’s almond harvest this summer, helping to push wholesale export prices for U.S. almonds to near a two-year high of $6,807 a metric ton.

Consumption of almonds grew 15% from 2012 to 2017, according to estimates from Euromonitor International, which forecasts 4% annual growth through 2021.

In Australia, nuts generate gross revenue of 8,097 to 12,146 Australian dollars (US$6,314 to US$9,471) per acre, roughly 40 times that of grains for the same area, according to the Australian Nut Industry Council. At current wholesale prices of about US$7 per kilogram in Australia, almonds offer a gross margin of around 45% before overhead costs and other expenses, according to Tim McGavin, chief executive of Laguna Bay Pastoral Co., an agricultural asset manager in Brisbane.


Elderly in U.S. are projected to outnumber children for first time

The Census Bureau projects the country would grow to 355 million by 2030, five million fewer than it had estimated three years ago. That is an annual average growth rate of just 0.7%, in line with recent rates but well below historical levels.

Lower population growth could drag on economic growth. This year’s prime-age workforce—ages 25 to 54—is about 630,000 smaller than the Census Bureau projected it would be just three years ago. The bureau projects the prime-age workforce will grow 0.5% a year through 2030, down from a 2014 projected annual rate of 0.58% for the same period.

The share of Americans who are foreign-born, now about 13%, is expected to reach a record 14.9% by 2028, topping a mark set in 1890. That share would rise to 17.2% by 2060.

Does indexing threaten the market?

But from the above results and others, it does not appear that the current level of indexing is a significant problem. This assumes the 24.9% figure for index equity mutual funds and indexed ETFs as a fraction of all U.S. equity mutual funds. As mentioned above, there are no firm figures for institutional indexing or international markets, but it seems unlikely that overall indexed investments exceed the level of roughly 25%.

Along this line, we remain concerned about the fact that many new index ETFs might not be truly independent of the creation of the index, as mentioned above. Even more importantly, given that many of these ETFs and indices are designed via a process of computer exploration of many different component weightings, these ETFs are highly vulnerable to backtest overfitting. As mentioned above, a 2012 Vanguard report found that while 87% of newly published indexes outperformed the broad U.S. stock market over the time period used for the backtest, only 51% outperformed the broad market after inception of the ETF tied to the index.


“I hope for Goldman Sachs’ bankruptcy”: Nassim Nicholas Taleb on Skin in the Game

Our conversation concludes on an optimistic note: “We’ve survived 200,000 years as humans,” says Taleb. “Don’t you think there’s a reason why we survived? We’re good at risk management. And what’s our risk management? Paranoia. Optimism is not a good thing.” Is the paradox, I ask, that human pessimism offers grounds for optimism? “Exactly,” Taleb replies. “Provided psychologists don’t fuck with it.”


What your fund management job will look like in a decade

Asset managers are being squeezed as increased regulation drives up costs and investors shift more money into lower-cost investment products. The solution? The greater use of technology and data-mining to defend margins, reduce expenses and win more client business.

While alternatives still only account for about a tenth of assets, they contribute about 30 percent of revenue, and Oliver Wyman sees that growing to about 40 percent by 2025. That trend will continue to benefit the bigger players able to offer a wider range of investment strategies.

Asset managers that analyze their customer relationship information in conjunction with the asset allocation preferences of both existing and potential customers will gain an advantage. The bigger the firm, the more data it will have available and the more resources it can throw at improving its analytic capabilities.


NASA study: Astronaut’s DNA no longer identical to his identical twin’s after year in space

Though most of Kelly’s biological changes returned to baseline levels after returning to Earth, seven percent of his genes point to possible long-term changes, according to the study. NASA’s preliminary findings were validated this week, according to Space.com. “The Twins Study has benefited NASA by providing the first application of genomics to evaluate potential risks to the human body in space,” according to a release from the agency.

Curated Insights 2018.03.18

Remember to look up at the stars and not down at your feet. Try to make sense of what you see, and wonder about what makes the universe exist. Be curious. And however difficult life may seem, there is always something you can do, and succeed at. It matters that you don't just give up. -- Steven Hawking (1942-2018)

An Apple R&D bonanza

Much of this focus mantra is driven by the fact that Jony Ive and his Industrial Design group oversee Apple’s product vision and the user experience found with Apple products. With only 20 or so members, Jony and team can only do so much at any given moment. In a way, Apple’s organizational and leadership structure serve as safeguards preventing Apple from spreading itself too thin and doing too much. Instead of trying to expand the design team in order to work on more products, Apple’s strategy appears to be to do the opposite and place bigger bets on a few products.

These bigger bets come in the form of owning the core technologies powering Apple devices. Apple wants to reduce dependency on others. We are quickly moving to the point at which every Apple product will be powered by core technologies developed in-house. Such a reality would have been a pipe dream just a few years ago. Apple believes this strategy will give them an advantage in the marketplace. It’s a new twist to the Alan Kay line about “people who are really serious about software should make their own hardware.” We are moving to the point at which companies serious about software should design their own silicon. Having $285 billion of cash on the balance sheet gives Apple the freedom to pursue this ambitious goal. It is this motivation to control more of the user experience while pursuing new industries to enter that is driving the remarkable increase in Apple R&D expenditures.


Apple goes from villain to coveted client with this Finnish firm

Created through a merger of Sweden’s Stora AB and Finland’s Enso Oyj in 1998, the company has spent billions shifting from the declining paper business — as people increasingly switched to digital from printed newspapers — to focusing on innovative wrappings made from tree and plant fibers. More than a third of its sales now come from consumer board and packaging solutions, up from a fifth two decades ago.

Apple has undergone its own shift, away from plastic packaging. For its recent iPhone 8 launch, Apple used a fiber-alternative instead of the polypropylene wrap around the power adapter. The packaging for the iPhone 7 used 84 percent less plastic than the previous version.


Intel fights for its future

“…Broadcom is already an Apple parts supplier, and it wouldn’t want to jeopardize a good relationship with a negotiation over royalties. The exact percentage that Qualcomm charges in royalties is of the utmost importance to a standalone Qualcomm…But for a merged Broadcom-Qualcomm, the exact amount of the royalty would be less important than a good working relationship with Apple.”

If the dispute is settled, Intel loses its wireless modems deal with Apple. No mobile CPUs + no modems = nothing of substance. Broadcom would be in charge — they would hold all the cards.


Google wants to impose order on India’s street address chaos

Google is tackling the project as part of its own search for the next billion users. Non-standard addresses now increase the costs of running all types of commerce from ride-hailing to online retailing and food delivery. Plus Codes — in a ‘6-character + city’ format — can be generated and shared by anyone on Google Maps, while apps that use location services can incorporate those codes on their own platforms. And a user can enter the Plus Code into searches to call up a location. Google Maps is also adding voice navigation in six more Indian languages, after introducing Hindi three years ago.

WhatsApp could shake up digital payments in India

At stake is an Indian digital payments market that Credit Suisse Group AG estimates could be worth $1 trillion within five years and has homegrown and global players jostling for dominance. WhatsApp joins Google, Alibaba-backed Paytm, a unit of local e-commerce leader Flipkart and dozens of others already vying for customers as smartphone adoption surges. Mobile payments caught fire at the end of 2016 when the government’s demonetization temporarily took 86 percent of all paper currency out of circulation to tackle corruption.

“WhatsApp is likely to change the digital payments scenario by cannibalizing other wallets’ users and adding new converts,” said Satish Meena, an analyst at Forrester Inc. “Its base of 200 million users, a daily active usage that’s about 20 times higher than Paytm’s, and the fact that Indian users spend a lot more time on WhatsApp than even on parent Facebook has huge advantages,” said Meena.


Amazon turbocharged Audible’s domination of audiobooks

Audible accounts for about 41 percent of all audiobooks sold, including digital and physical formats, according to researcher Codex Group LLC. Amazon also sells audiobooks directly through its website and, with Audible, accounts for more than half the market. Audible doesn’t disclose financial information, but says its annual subscriber growth is in double digits. Most customers pay $15 for a monthly subscription that comes with a single audiobook. (A la carte, they often cost more than $20.) The company’s library includes 400,000 titles.


How Amazon’s bottomless appetite became corporate America’s nightmare

For many companies, perhaps what’s scariest is that Amazon has lots of room to grow, even in retail. In the U.S., more than 90 percent of all retail sales still happen in physical stores. In some big categories, including home furnishings, ­personal-care products, toys, and food, the brick-and-­mortar numbers are even higher. As the share of online shopping continues to increase, Amazon seems likely to benefit the most. It’s responsible for roughly 44¢ of every dollar Americans spend online, and it’s now mixing in retail stores.

Amazon is far from invulnerable. All the same old red flags are there—a puny 2.7 percent e-commerce profit in North America, massive outlays to establish delivery routes abroad—but few are paying attention. Anyone buying a share of Amazon stock today is agreeing to pay upfront for the next 180 years of profit. By one measure, it’s generating far less cash than investors believe. And its biggest risk may be the fear of its power in Washington, New York, and Brussels, a possible prelude to regulatory crackdown.


Netflix’s secrets to success: Six cell towers, dubbing and more

Why Netflix almost never goes down. The company’s service achieved an availability rate of 99.97% in 2017, according to Netflix engineering director Katharina Probst. Part of that is due to the fact that Netflix learned from outages early on, and now uses Amazon’s AWS data centers across three regions. When one of those regions does go down, Netflix automatically redirects all of its traffic to the two other regions.

In fact, the company even tests this fall-back regularly by just taking a region offline itself — something the company calls chaos engineering. “We intentionally introduce chaos into our systems,” explained Probst. Up until recently, it took Netflix up to an hour to successfully redirect all requests in case of such a massive failure. More recently, the company was able to bring that time down to less than 10 minutes.

Amex to woo retailers with biggest fee cut in 20 years

At a presentation for investors in New York last week, the company said the global average of the fees it charges merchants — known as its discount rate — would decline five or six basis points this year, to about 2.37 per cent. Each basis point is equivalent to about 11 cents of earnings per share, said Don Fandetti of Wells Fargo Securities.

The fee cuts for 2018, which are about double previous guidance, are the latest sign of competitive and regulatory pressures on the biggest US consumer finance company by market value. American Express is facing questions from Wall Street about competition from US banks, which use the rival payment networks Visa or MasterCard. Big-spending Americans have flocked to premium cards issued by banks.


SoftBank looks to invade Wall Street’s turf

Until recently, SoftBank’s fledgling investment arm was little more than a group of analysts in Tokyo and London sifting through possible deals. Buying Fortress provided the group with a template to use as it moved to becoming an actual institution, with a formal investment committee, compliance department, trading desk and investor relations unit. The new entity is now 1,000 people strong.


How China’s Huawei killed $117 billion Broadcom deal

Huawei uses Broadcom’s chips in networking products such as switches that direct data traffic between connected computers. Qualcomm also works with Huawei. The two said on Feb. 21 they completed testing on technology that advances faster 5G mobile services. Under one envisioned scenario, wireless carriers may be forced to turn to Huawei or other Chinese companies for cutting-edge telecoms gear. That’s unacceptable for a U.S. government that, concerned about the security of Huawei’s gear, has already blocked the sale of the Chinese company’s smartphones on American carriers’ networks.

Government officials and industry executives have long harbored suspicions that the closely held Huawei works primarily for Chinese government interests, especially as it sells increasing amounts of critical telecoms infrastructure to Europe, Africa and the Middle East.

WordPress is now 30 per cent of the web

Public data recorded that WordPress’s share of the top 10 million websites had ticked over from 29.9 per cent to 30 per cent. The firm put some context on that data by noting that 50.2 per cent of the world’s websites don’t run a content management system (CMS) at all. That means WordPress has over 60 per cent share among websites that do run a CMS. That’s a dominance few products in any category can claim. It’s also notable that WordPress has nearly ten times the market share of its nearest competitor, Joomla, which has 3.1 per cent share of all websites and 6.3 per cent of the CMS-using population.

Share buybacks work better in theory than in practice

The top 20 companies in terms of buybacks accounted for almost 50 percent of total expenditures.

The main problem with buybacks is that effects of bad decision-making don’t become clear until much later. To paraphrase Jeff Macke, stock buybacks are an allocation decision that has a hypothetical value to shareholders, but a real explicit value to option-holding executives. These people are supposed to be managing companies for the long term but get compensated over the short term. This misalignment if incentives should be a concern. It does seem like those with a vested short-term interest in stock prices put a thumb on the scale away from investments or dividends and towards buybacks.

Diving into the detail, the top culprit was Biotech companies, with 97% of biotech IPOs in the loss making camp. Second place, no prizes for guessing, was Technology companies at 83%. But interestingly enough that left 'all other companies' at 57% - which is actually a record high.

What’s the biggest trade on the New York Stock Exchange? The last one

Last year, 26% of all trading activity on the NYSE’s flagship exchange took place in the last trade of the day, up from 17% in 2012, exchange data shows. Last year, trades at the close accounted for more than 8% of trading volume in S&P 500 stocks, nearly four times what it was in 2004, according to Credit Suisse .

At least $10 billion worth of shares are traded in the NYSE’s closing auction on an average day, with a final tally of stock prices typically listed by 4:05 p.m.

A fund manager such as Vanguard, for instance, might need to buy millions of shares at a time. Making such a big purchase in the middle of the day could dry up supply, causing the price of the stock to jump—bad for Vanguard. By waiting to trade at a time when there are millions of shares being bought and sold, the risk of moving the price is reduced, saving Vanguard money.

Last year, the NYSE collected $87 million—45% of its net revenue from the exchange’s core stocks-trading business—from trading at the close, according to the research firm Equity Research Desk. The NYSE’s maximum fees for trading at the close have gone up 16% over three years, according to regulatory filings.


Is the US stock market overvalued? Depends on which model you ask

The Fed model was valid during the period from 1958 to 2010. Since after 2010 there has been no relationship between the stock’s earnings yield and the bond yield, the Fed model cannot be used to judge whether the US stock market is overvalued. In other words, the Fed model cannot support the high current CAPE ratio on the grounds of the low-rate environment.

The Shiller model is over-simplistic. It is justified only on the grounds that there is an empirical inverse relationship between the CAPE value and the subsequent stock market return over horizons ranging from 10 to 15 years. What is less known about the validity of the Shiller model is that it has forecasting power only for real returns.

The other serious problem with the Shiller model is that it cannot be successfully used to time the market. If the investor believes in the validity of the Shiller model, this investor should buy the stocks in the early 1970s. However, in this case, the investor would be highly disappointed because the stock prices had been decreasing till the early 1980s. Similarly, if the investor uses the Shiller model, this investor would sell stocks in the early 1990s, missing out on huge net gains over the full bull/bear cycle.

Pozen Priorities

“The common practice we found among the highest-ranked performers in our study wasn’t at all what we expected. It wasn’t a better ability to organize or delegate. Instead, top performers mastered selectivity. Whenever they could, they carefully selected which priorities, tasks, meetings, customers, ideas or steps to undertake and which to let go. They then applied intense, targeted effort on those few priorities in order to excel.”


Ironies of luck

If risk is what happens when you make good decisions but end up with a bad outcome, luck is what happens when you make bad or mediocre decisions but end up with a great outcome. They both happen because the world is too complex to allow 100% of your actions dictate 100% of your outcomes. They are mirrored cousins, driven by the same thing: You are one person in a 7 billion player game, and the accidental impact of other people’s actions can be more consequential than your own.

In investing, a huge amount of effort goes into identifying and managing risk. But so little effort goes into doing the same for luck. Investors hire risk managers; no one wants a luck consultant. Companies are required to disclose risks in their annual reports; they’re not required to disclose lucky breaks that may have led to previous success. There are risk-adjusted returns, never luck-adjusted returns.

Here’s why Stephen Hawking never won the Nobel prize in physics

It takes decades to build the scientific equipment to test theoretical discoveries; to put this into context, Einstein’s theory of gravitational waves in space, which he first proposed in the 1920s, was only recently proven in 2016.

One of Hawking’s most important finds was “Hawkings Radiation,” the theory that black holes are not completely black after all, but emit radiations that ultimately cause them to disappear. The issue is, the technology needed to observe this radiation will take years and cost millions before Hawking’s theory can ever be verified.

Curated Insights 2018.02.04

Ingvar Kamprad, Ikea’s Swedish billionaire founder, dies at 91

Kamprad was known for driving an old Volvo, recycling tea bags and taking home little packets of salt and pepper from restaurant visits. He was known as “Uncle Scrooge” and “The Miser” in the Swiss village of Epalinges, near Lausanne, where he moved in the 1970s before returning to Sweden a few years ago. He also avoided wearing suits and ties and traveled coach when flying.

Ikea’s corporate culture mirrors Kamprad’s celebration of frugality. Executives of the company travel on low-cost airlines and lodge in budget hotels. Its employees follow a basic pamphlet written by Kamprad in 1976, “The Testament of a Furniture Dealer,” which states that “wasting resources is a mortal sin,” and stipulates Ikea’s “duty to expand.”

The name Ikea is made up of the founder’s initials and the first letters of the Elmtaryd farm and Agunnaryd village where he was raised. His flat-pack furniture was invented by Ikea employee Gillis Lundgren in 1956 when he tried to fit a table into the back of a car. Realizing the table was too bulky, Lundgren removed the legs. Storing and selling Billy book shelves or entire kitchens in pieces has let Ikea cut storage space and fill its trucks with more goods. The concept of having customers pick up most of their own furniture in adjacent warehouses and transport it home for self-assembly also helped drive down costs.

How Amazon’s ad business could threaten Google and Facebook

But Amazon has a huge set of data that Facebook and Google can’t access—namely, its own. Already, more than half of all online searches for products start on Amazon, and of those a majority end there, according to various surveys. That figure has grown every year that pollsters have tracked it.

The Amazon Advertising Platform lets advertisers manage ad buys across multiple advertising exchanges, and it has quietly become as familiar to marketers as its equivalent from Google-owned DoubleClick.

Amazon also needs to expand the number of places it can sell advertisements, which is one reason the company bought videogame-streaming behemoth Twitch and is investing so heavily in its own streaming-video offerings.

How Apple built a chip powerhouse to threaten Qualcomm and Intel

…by designing its own chips, Apple cuts component costs, gets an early jump on future features because it controls research and development and keeps secrets away from frenemies such as Samsung…Those ultimately failed or stumbled because chip-making is the sport of kings: It’s brutally expensive and requires massive scale. Apple has wisely focused on designing its silicon (for its system on a chips, Apple uses reference designs from Arm Holdings Plc). Manufacturing is left to others, including Taiwan Semiconductor Manufacturing Co.

An investment pro who’s seen it all still sees upside for stocks

Over 40% of Standard & Poor’s 500 revenues now comes from abroad.

No other country is shrinking its equity base to the extent we are. We’re now in our ninth year of share buybacks equal to 3% of the market value of all S&P 500 stocks, based on Laszlo Birinyi’s work.

For 20 years, the average price/earnings ratio has been 19.3. If you go back 50 years, it’s 15.6 times. In periods where inflation grew 3% or less—which is 22 of the past 50 years—the P/E of the market was 19.7.

AlphaZero and the curse of human knowledge

Using self-play to recursively improve an agent’s ability to play a game isn’t new. Why hasn’t this method yielded a champion chess or Go engine until 2017? Historically, systems that improve via self-play have been very unstable. Previous attempts often ended up in cycles, forgetting and relearning strategies over and over rather than improving to superhuman levels. Or sometimes the agent would get stuck, failing to improve after achieving moderate success.

AlphaZero’s main contribution was solving these problems. After lots of experiments, DeepMind developed a series of new tricks and discovered a value function and tree search that reliably learned through self-play alone. They then leveraged their engineering talent and infrastructure resources to demonstrate that the system could work on the massive scale required to master complicated games such as chess and Go (the version that played Stockfish employed 5,000 custom machine learning chips).


Even if you knew the cards…

One of the (many) reasons I stopped heeding the macro forecasts of others and quit trying to come up with my own is that even if you knew what the future data would be, you’d still not be able to predict how people would react to it. You could certainly try, but markets are set up to confound us, not confirm our hypotheses.