Curated Insights 2019.04.19

Making uncommon knowledge common

Part of the reason was that companies benefited from this credibility through obscurity. Real estate brokers have access to significantly more data about the specific houses and the general market via a set of data sources called the MLS. Historically, only brokers had access to MLS data, which gave them leverage over their customers and entrenched their importance as market makers. Similarly, lack of visibility into companies allowed bad ones to put on a good face until prospective employees had already joined. And only large companies could pay for data from compensation research providers, giving them advantage over the potential hires they negotiated with. Many incumbents are able to intermediate their markets and unfairly gain an edge from people’s lack of knowledge. And it’s scary to be the first to buck this trend on your own.

Before Zillow and Glassdoor, if you wanted to look up information about a specific home or company, there wasn’t a webpage for it. Barton’s companies created the definitive page for each house and company. Using a combination of data from authoritative sources (like all the various MLS systems) and user-generated data, they created high quality content unique to each company or listing. Being among the first to do this let them do a huge SEO land grab, which has been hard to displace since.

Barton’s companies take industries that are low frequency and use their Data Content Loops and SEO to acquire users for free and engage them more frequently. While most companies in real estate have super high customer acquisition costs, Zillow is able to get potential sellers even before they are ready to sell, so Zillow is already there when the sellers are ready.

Owning demand ultimately becomes its own compounding loop since becoming a trusted brand builds its own network effects. Consistently building this reputation increases people’s trust in them and makes them a go to destination.

Nobody had yet indexed all the homes in the US and brought them online. While sites like Apartments.com had started to do so for rentals, it wasn’t until Zillow (and Trulia) that this was done for homes. There was fertile search real estate to grab and Zillow rushed out to claim it all using the Zestimate as its spearhead.


Zooplus vs Amazon in battle for the European pet supply market

Many e-commerce companies go through this cycle where their customer acquisition costs look fantastic because early adopters are cheaper to acquire, but then marketing expenses later go through the roof. Ironically, many direct-to-consumer companies in the US have started opening physical stores because that is cheaper marketing than online ads.

Zooplus discussed this on their Q3 2018 call. They said online ad pricing has increased because their competitors are shifting more ad budget to online. Facebook and Google ads are auctions, so more competition means more demand and thus higher prices. Today, 80% of Zooplus’s marketing spend is online ads and Google Shopping. That makes them very susceptible to competitor pressure.

My concern isn’t so much that Zooplus loses share to Amazon, but that Amazon has the scale to price pet food at a lower margin (or loss) if they want to. This could cap Zooplus’s ability to ever earn a profit. Amazon doesn’t need to overtake Zooplus in market share to negatively affect them because Amazon already has enough market share that lowering prices would harm Zooplus. In this scenario, it’s possible that Zooplus keeps their market share, continues to grow along with the online pet supply market, and still never reaches their profitability goal.

Why I don’t think Amazon needs more market share to harm Zooplus is because of the lack of switching costs in Zooplus’s business. Even though Zooplus has a 95% retention rate with its customers, if Amazon lowered their prices 10%, there’s not much that keeps most of Zooplus’s customers using their website. Zooplus seems well aware of this issue and it has tied their hands when it comes to price increases. On the Q2 2018 call, management said they “don’t want to be the first [pet retailer] sticking their head out passing on manufacturer prices increases.”


Amazon 2018 letter to shareholders

As a company grows, everything needs to scale, including the size of your failed experiments. If the size of your failures isn’t growing, you’re not going to be inventing at a size that can actually move the needle. Amazon will be experimenting at the right scale for a company of our size if we occasionally have multibillion-dollar failures. Of course, we won’t undertake such experiments cavalierly. We will work hard to make them good bets, but not all good bets will ultimately pay out. This kind of large-scale risk taking is part of the service we as a large company can provide to our customers and to society. The good news for shareowners is that a single big winning bet can more than cover the cost of many losers.

Uber Global Ridesharing Footprint
Percentages are based on our internal estimates of Gross Bookings and miles traveled using our currently available information.

Ensemble Capital: Landstar Systems update

The U.S. truck driver supply is structurally constrained. According to the Bureau of Labor Statistics, the average age of a U.S. truck driver is 55 years old. The core “trucking generation” aged 45 to 54 accounts for 29.3 percent of the labor force, while 25 to 34-year-olds are just 15.6 percent of truck drivers. We’ve seen trucking companies offering huge cash signing bonuses to licensed commercial drivers, without a noticeable jump in the driver pool. In short, there aren’t enough young drivers coming up to replace the older ones.

The average Landstar BCO driver earned a record $197,000 in gross revenue. Now, that’s before expenses like gas, maintenance, and tires, but still a great income. In fact, it was so good last year that some BCOs decided to take the last few weeks of December off – they’d already made more money than they needed for the year. The agent node of the Landstar network also had a record-setting 2018, with 608 agents generating more than $1 million of revenue – up from 542 in 2017.

Given this success, we think Landstar’s network is strengthening. It’s attracting more truckers and agents – indeed, Landstar recently said both the BCO and agent pipelines are full, despite a tight labor market. This creates a virtuous cycle. When Landstar adds truckers and agents, more shippers make Landstar their first and only call to move their freight. In turn, more shippers attract more truckers and agents to Landstar. And so on. An important point to make about Landstar is that it generates 70% incremental operating profit margins on net revenue and their market share is under 10%. We think they have plenty of room to drive profit growth in the decade to come.

As for recession risk, Landstar is a capital-light business with a mostly variable cost structure. Remember, BCO-derived gross margins remain steady throughout the cycle. Landstar’s gross margins fall in periods of strong demand, as lower-margin brokerage operations account for a greater percentage of revenue. Without the BCO structure, Landstar would be far more sensitive to the ebb and flow of the industrial economy. So, while far from recession proof, Landstar is recession resistant.

The second technological threat is autonomous-driving trucks. While the technology is perhaps already there, we think regulations will require a human driver or engineer to be in the truck cab for some time to come. Airplanes, trains, and other heavy transportation vehicles, for example, use various amounts of “autopilot” but still have captains, conductors, and engineers at the ready. As we’ve seen with autonomous driving automobiles, there’s massive headline risk for any accident related to driverless vehicles, even if, on the whole they are safer than human-driven vehicles. Also, we expect that any initial shipments by autonomous trucks will carry commodity, low-cost items like boxes of diapers and food. Landstar carries a lot of special loads like automotive, machinery, and hazmat, where we think human drivers will remain the standard due to the costly freight and related liabilities.

Disney already has a booming streaming service. It’s called Hotstar

Disney is taking on Netflix with a new streaming service in the United States. But there’s an even bigger and hotter market where it’s already winning by miles — India. Hotstar, which Disney bought from 21st Century Fox last year, already has nearly as many users as the entire US population. And it’s growing incredibly fast.

The Indian platform now has 300 million monthly active users, Disney (DIS) revealed during its investor day on Thursday. That means its user base has quadrupled in a little over a year — Hotstar had around 75 million monthly active users in India at the end of 2017. Disney is already way out in front thanks to Hotstar. At the end of 2017, the Indian platform dwarfed Amazon and Netflix, which had 11 million and 5 million Indian users respectively, according to Counterpoint Research.

A breast milk ingredient is the hot new health supplement for adults

Global chemical giants DowDuPont Inc. and BASF SE are investing millions to ramp up production of an indigestible sugar found naturally in breast milk. Infant formula makers like Nestle SA can’t get enough of the synthetic ingredient. Now the companies are eyeing a potentially bigger customer: adults. DuPont estimates the annual market could reach $1 billion.

Human milk oligosaccharide is the third most common solid in breast milk, after lactose and fat. HMO escapes digestion, allowing it to reach the colon where it feeds beneficial bacteria. HMOs may explain why breast-fed babies tend to fare better than formula-fed, said Rachael Buck, who leads HMO research at Similac formula-maker Abbott Laboratories.

DuPont plans to spend $40 million building out its HMO production capacity this year, its second biggest capital investment after expanding a factory that makes Tyvek. Meanwhile, it’s partnering with Lonza Group AG to make enough product to meet current demand. DuPont will become a stand-alone company when it splits from DowDuPont on June 1.

After two decades of research, Abbott was first to bring HMOs to the U.S. baby nutrition market in 2016. It’s now expanded to 15 countries. Nestle last year rolled out HMO formula in Gerber and other brands across 40 countries. HMOs nourish bacteria that “train’’ immune system cells, 80 percent of which reside in the gut, said Jose Saavedra, Nestle chief medical officer. The health claims propelled about $600 million in sales of HMO formula last year for each of Abbott and Nestle SA.

Danish biotechnology company Glycom S/A is targeting the adult digestive health market with HMO supplements it began selling in the U.S. and Europe late last year. The company touts its Holigos IBS product as managing symptoms of irritable bowel syndrome, including abdominal pain, constipation diarrhea and bloating. It sells 28 doses on Amazon.com for $50.

Recycling isn’t about the planet. It’s about profit.

Oil had reached a two-year high, and soda bottles are made of PET, which, like all plastics, is basically just processed oil. As the price of “raw” plastic increased, recycled plastic—a natural substitute for manufacturers—became more expensive too. What was good for cities’ recycling programs was bad for the companies that did business with them. The Coca-Cola Company’s Spartanburg, South Carolina, plant, which had opened in 2009 to recycle old soda bottles into new ones, idled as recycled PET plastic prices went through the roof.

Americans are still diligently filling our blue bags with everything we can, but there are fewer places for our dirty goods to go to find redemption. That’s in part thanks to China’s 2017 decision to shut the door on imports of recycled materials, ending a two-decade stretch during which the U.S. came to rely on the country to take and process about 70 percent of its used paper and 40 percent of its used plastic. In 2017, Republic Services, the second-largest waste collector in the U.S., was selling about 35 percent of its recyclables to China. By the end of 2018, China’s National Sword policy, which banned plastics outright and placed strict standards on paper imports, brought that number down to 1 percent.

After China stopped buying, a supply glut sent prices for recycled materials down, and fast. Recyclers found themselves dumping paper in landfills outside Seattle and incinerating plastic in the suburbs of Philadelphia. Glass recycling is local but expensive, and its reuse had often been subsidized by paper and plastic, so with paper and plastic prices in freefall, glass disposal became more of a burden too. In October, Northeastern recyclers were sending just 54 percent of the bottles they collected to processors for reuse. The rest were basically landfilled.

The hunger of Chinese manufacturers for wood pulp, plastic, and aluminum can’t be met by Chinese suppliers or even big commodity exporters like Brazil and Indonesia. Chinese importers solved this problem by buying enormous amounts of recyclables to substitute for raw materials. China went from bringing in 7 million tons of recycled material between 1994 and 1998 to 104 million tons between 2009 and 2013—a 15-fold increase.

Did capitalism kill inflation?

In other words, the capitalists killed inflation. In the decades after World War II, Polish economist Michal Kalecki depicted inflation as a product of the struggle between business and labor. If workers manage to extract big wage increases, their employers recoup the costs by putting through price increases, forcing workers to seek even more, and so on in a wage-price spiral. In contrast, if workers have little or no leverage, as is now the case in many industries, the wage-price spiral never gets started.

The importance of working with “A” players

I observed something fairly early on at Apple, which I didn’t know how to explain then, but I’ve thought a lot about it since. Most things in life have a dynamic range in which [the ratio of] “average” to “best” is at most 2:1. For example, if you go to New York City and get an average taxi cab driver, versus the best taxi cab driver, you’ll probably get to your destination with the best taxi driver 30% faster. And an automobile; what’s the difference between the average car and the best? Maybe 20%? The best CD player versus the average CD player? Maybe 20%? So 2:1 is a big dynamic range for most things in life. Now, in software, and it used to be the case in hardware, the difference between the average software developer and the best is 50:1; maybe even 100:1. Very few things in life are like this, but what I was lucky enough to spend my life doing, which is software, is like this. So I’ve built a lot of my success on finding these truly gifted people, and not settling for “B” and “C” players, but really going for the “A” players. And I found something… I found that when you get enough “A” players together, when you go through the incredible work to find these “A” players, they really like working with each other. Because most have never had the chance to do that before. And they don’t work with “B” and “C” players, so it’s self-policing. They only want to hire “A” players. So you build these pockets of “A” players and it just propagates.

In my experience solving difficult problems, the best talent available rarely led to the best solutions. You needed the best team. And the best team meant you had to exercise judgment and think about the problem. While there was often one individual with the idea that ultimately solved the problem, it wouldn’t have happened without the team. The ideas others spark in us are more than we can spark in ourselves.

Curated Insights 2019.04.12

You have to live it to believe it

Long-term business and investing skill is the intersection of getting rich and staying rich. Different generations whose formative experience was calm and growth-oriented may be better at getting rich – they’re willing to take risks. But generations whose upbringing was punctuated by crash and decline may be more attuned to staying rich – conservatism, room for error, and rational pessimism. The best investors find a balance between the two, toggling between the two traits at the right time. But that’s rare. And the reason it’s rare even among smart people is because the psychological scars of our experiences don’t discriminate on IQ. Or more specifically, they sit above IQ in the information hierarchy that people use to make decisions.

It’s never clear one way or another. People with different experience than us aren’t necessarily smarter. They just see the investing world through a different lens.

A 13-year-old girl being killed by a drunk driver is something everyone reading this article will agree is atrocious. Yet virtually all of us will say it’s atrocious without taking further action. But Candace Lightner’s daughter was that 13-year-old girl, so she created Mothers Against Drunk Driving to do something about it. Personal experience is often what pushes you from “I get it” to “I get it so well that I’m going to do something about it.”

Same in investing. Spreadsheets can model the historic frequency of big declines. But they can’t model the feeling of coming home, looking at your kids, and wondering if you’ve made a mistake that will impact their lives. Studying history makes you feel like you understand something. But until you’ve lived through it and personally felt its consequences, you may not understand it enough to change your behavior.

“Personal finance is more personal than it is finance,” says Carl Richards. To each their own. I always try to remember that before criticizing others’ decisions. “Your yesterday was not my yesterday, and your today is not even my today,” writes the book Our Kids.

The world’s greatest delivery empire

Behind this $35 billion delivery market isn’t exactly efficiency, though—it’s a fight between Meituan and Alibaba Group Holding Ltd., China’s most valuable company. Alibaba and its various subsidiaries dominate the country’s online retail market for physical goods, but Meituan is leading the way in services. Its namesake app, a sort of mashup of Grubhub, Expedia, MovieTickets.com, Groupon, and Yelp, has 600,000 delivery people serving 400 million customers a year in 2,800 cities. Alibaba is betting it can undercut Meituan to death. Both companies are spending billions in an escalating war of subsidies that might persuade even Jeff Bezos to cut his losses.

“They thought the business was group buying. We thought the business was e-commerce for services.”

Once Wang (of Meituan) had control of the meal delivery market, he began to spend more aggressively. He discounted the food so he could upsell users on hotel bookings and airfare. He was the first in China to make movie ticket sales easy online. Within a few years he’d shifted that market from 10 percent digital to more than 60 percent. By mid-2015, soon after Meituan raised $700 million in venture funding from Alibaba and others, Wang had spent so much money to keep up that he needed another round of venture capital.

Alibaba refused to put more money into Meituan, because the younger company wouldn’t fully integrate its app with Alibaba’s, according to Meituan co-founder Wang Huiwen. Wang Xing worried he’d lose control of the business if that happened. Instead, Meituan brokered a deal with Alibaba’s longtime archrival, Tencent Holdings Ltd., best known for its WeChat super-app. Tencent agreed to lead Meituan’s fundraising by pledging $1 billion, merge Tencent’s own delivery service with Meituan, and let the combined company operate independently. “It was a very easy meeting,” Wang says. “What they had, we needed. What we had, they needed.” When Meituan called a board meeting to make things official, Alibaba got 12 hours’ notice and no choice in the matter, according to people familiar with the proceedings. Wang had what he wanted. He’d also made some fearsome enemies.

Artificial intelligence software helps determine drivers’ itineraries. An average driver makes 25 deliveries a day, up from 17 three years ago; that’s about 20 million daily deliveries across the network. For comparison, Grubhub Inc., the U.S. leader and owner of Seamless, delivers fewer than 500,000 meals a day. Meituan’s scale dwarfs that of India’s dabbawalas, who deliver some 80 million pail lunches a year.

The math, and Meituan’s potential, can be dizzying. China’s urban areas have 2,426 people per square kilometer (6,283 per square mile), almost eight times the comparable U.S. population density. While the U.S. has 10 cities with 1 million or more people, China has 156. Deliveries in China cost about $1, compared with $5 in the U.S., iResearch says. Meituan retained about 63 percent of the country’s meal delivery market at the end of 2018, according to Bernstein Research, even as Alibaba spent billions over the previous several years to capture most of the rest.

iBuying is Zestimate 2.0

In the past, other listing portal competitors were relatively undifferentiated. Zillow has been the clear market leader, and there was no credible threat that could unseat it from its powerful position. However, the entry of iBuyers with a service that made instant offers on a home – online – was novel and compelling, just like the Zestimate in 2006. Suddenly, more and more consumers were beginning their home selling process not on Zillow, but on other web sites like Opendoor and Offerpad. This was a key existential threat for Zillow. The iBuyer business model is Zestimate 2.0 – the natural starting point for determining your home’s value. What’s more accurate than an actual offer on your home?

The ETF business is dominated by the Big Three. The SEC is suddenly concerned.

The exchange-traded fund industry has a competition problem. The $4 trillion industry has been unevenly bifurcated for years: Just three firms have steadily held on to 80% of ETF assets in some 600 products. That leaves another 1,600 ETFs and more than 100 firms competing like gunslingers in the Wild West. And there’s a new sheriff in town.

The Big Three— BlackRock ’s iShares, Vanguard Group, and State Street ’s Global Advisors—all have a comprehensive line of funds at hard-to-beat prices. In other words, for the most part, the ETF industry is dominated by good products offered by good companies. But the rest of the asset-management industry, along with the Securities and Exchange Commission, is now asking whether that concentration of power will snuff out innovation, or lead to a dearth of choices for investors.

Curated Insights 2019.04.05

The risk of low growth stocks: Heighten risk to the best companies

Most simply, ROIC measures how many incremental dollars of earnings a company earns by reinvesting their earnings. As a simple illustration, a company with an average 10% ROIC needs to invest 50% of their earnings to grow 5% (10%*50%=5%). A company with a 50% ROIC only needs to reinvest 10% of earnings to grow 5% (50%*10%=5%). In the former case, $0.50 of every dollar of earnings is not needed to fund growth, while in the latter case $0.90 is not needed to fund growth. This means that the higher ROIC company will generate 80% more free cash flow than the average ROIC company making the company 80% more valuable. This is why we focus on ROIC in our analysis. High ROIC businesses are significantly more valuable than average ROIC companies even when they produce the same level of growth.

Sony’s streaming service Crackle sells majority stake to Chicken Soup for the Soul

The transfer of ownership for Crackle, however, arrives at a time when ad-free streaming services like this are seeing newfound interest, with Amazon’s launch of IMDb’s FreeDive, Roku’s The Roku Channel, Walmart’s Vudu, Viacom’s new addition Pluto, Tubi and others now making gains.

As part of the deal, Sony will contribute to the new venture its U.S. assets, including the Crackle brand, user base and ad rep business, according to The Hollywood Reporter. It also will license to Crackle Plus movies and TV shows from the Sony Pictures Entertainment library, as well as Crackle’s original programming, like its shows “Start Up” and “The Oath,” for example.

CSS Entertainment will bring six of its ad-supported networks — including Popcornflix, Popcornflix Kids, Popcornflix Comedy, Frightpix, Espanolflix and Truli, plus its subscription service Pivotshare — to Crackle Plus.

The combination will lead Crackle Plus to become one of the largest ad-supported video-on-demand platforms in the U.S., the companies claim, with nearly 10 million monthly active users and 26 million registered users. The new service will also have access to more than 38,000 combined hours of programming, more than 90 content partnerships and more than 100 networks.

Andreessen Horowitz is blowing up the venture capital model (again)

So Andreessen Horowitz spent the spring embarking on one of its more disagreeable moves so far: The firm renounced its VC exemptions and registered as a financial advisor, with paperwork completed in March. It’s a costly, painful move that requires hiring compliance officers, audits for each employee and a ban on its investors talking up the portfolio or fund performance in public—even on its own podcast. The benefit: The firm’s partners can share deals freely again, with a real estate expert tag-teaming a deal with a crypto expert on, say, a blockchain startup for home buying, Haun says.

And it’ll come in handy when the firm announces a new growth fund—expected to close in the coming weeks, a source says—that will add a fresh $2 billion to $2.5 billion for its newest partner, David George, to invest across the portfolio and in other larger, high-growth companies. Under the new rules, that fund will be able to buy up shares from founders and early investors—or trade public stocks. Along with a fund announced last year that connects African-American leaders to startups, the new growth fund will give Andreessen Horowitz four specialized funds, with more potentially to follow.

Curated Insights 2019.03.29

How concentration affects portfolio performance

Vanguard calculated the returns of Russell 3000 stocks over the last 30 years and found that 47% of stocks were unprofitable investments and almost 30% lost more than half their value. They also found, and this is the big one, that 7% of stocks had cumulative returns over 1,000%.

What is Amazon?

We’ve seen the strategy that Amazon takes when it sees a regulatory threat looming on the horizon; it voluntarily started collecting sales tax in many states before states could force it to do so, and adopted a $15 minimum wage before it drew the full ire of a populist movement. With multiple headquarters distributed across multiples cities and outside access provisioned for all of its key products and services, Amazon seems more likely to break itself up – along its own preferred lines – than it is to be forcibly disassembled by regulators.

Recall Bezos’s 2002 edict: 1) All teams will henceforth expose their data and functionality through interfaces, 2) teams must communicate with each other through these interfaces, 3) all interfaces, without exception, must be designed from the ground up to be exposed to developers in the outside world, and 4) anyone who doesn’t do this will be fired.

If every meaningful Amazon product or service is exposed to outside developers via an interface, what does it matter whether Amazon is one single company or many? Antitrust action to break it apart could do nothing that it has not done to itself already; this is no doubt by design.


JD vs Alibaba in the last mile: what’s happening behind the Great Wall

China has more internet users than any other nation in the world, but there’s still plenty of room for e-commerce to grow. The Chinese e-commerce market is growing at an unfathomable rate: from 160 million online shoppers in 2010 to 530 million in 2017. This drove parcel growth of 28%, to over 100 million per day. Despite the current slowdown in economic growth, China’s e-commerce boom is likely to continue.

Consider this: 70% of packages in China are delivered same-day. This speed of delivery contributes to the success of e-commerce in China. Speed of delivery and customer experience are key, and China has both.

Alibaba holds a controlling interest in logistics operator Cainiao, which was set up in 2013 and is a collaboration including warehousing, trucking and the last mile. It’s essentially a massive, asset-light, data-sharing platform, with Alibaba owning very little of the infrastructure.

One of the prime drivers for the creation of Cainiao was to ensure capacity for Alibaba deliveries, but Alibaba and Cainiao depend on all the carriers, such as SF, ZTO and YTO. It now has over two million delivery drivers in the network.

JD has a completely different logistics strategy – it does it all itself. There are over 515 warehouses in its nationwide transportation network. Over 90% of orders from JD.com are delivered same-day or next-day by JD’s own fleet, which now comprises 65,000 drivers.

Forget Photoshop. Adobe is a marketing company now

Factor it all in, and Chief Executive Officer Shantanu Narayen has upended Adobe’s business model and quietly transformed it into that of a marketing company. Adobe has been working full crank to track every interaction a consumer has with a brand: tallying her visits to a brick-and-mortar store and what she buys; using cookies to monitor her web activity and figure out how many devices she has; analyzing her interest in emails about sales or promotions; and incorporating social media monitoring to see what she says about a brand. Adobe can combine all of this with other companies’ data about a person’s income and demographics to try to predict the triggers that would make her buy a new phone or pair of shoes. In essence, Adobe is trying to know a consumer’s decision-making process better than she may know it herself.

Demystifying aviation economics

Despite the narrow-body jets being relatively unattractive from a long-haul fuel efficiency perspective, budget airlines removed first class and were able to pack quite a bit more seats on the plane, lowering unit level economics to being competitive with the best wide-body planes today. Over the past four years, according to the International Council on Clean Transportation (ICCT), usage of narrow-body planes on the transatlantic route has more the tripled to nearly 40% of capacity.

Curated Insights 2019.03.15

Buying into the timeshares Hilton Grand Vacations, Wyndham Destinations, and Marriott Vacations Worldwide

All of the timeshare companies offer some form of financing; in general, they offer consumer loans at low double digit interest rates. These are rather attractive loans, and they can generally be packaged up and sold into the ABS market at mid-single digit rates of returns. As of Q3’18, most of the timeshare companies had ~10% of their enterprise values invested into financing receivables that they hadn’t sold into the ABS market yet. I don’t think it’s appropriate to pull those receivable investments from the timeshare companies’ enterprise valuation calculations since they’re generally valued on an EBITDA calculation that includes earnings from those loans, but I could see an argument for why they should be deducted from their EV calculation (i.e. treated as a cash equivalent). Doing so would make the timeshare companies even cheaper.

The twenty craziest investing facts ever

Why am I using the Dow instead of the S&P 500? They’re effectively the same thing. The rolling one-year correlation since 1970 is .95.

If you had invested from 1960-1980 and beaten the market by 5% each year, you would have made less money than if you had invested from 1980-2000 and underperformed the market by 5% a year.
When you were born > almost everything else.

Dow earnings were cut in half in 1908. The index gained 46%.

Curated Insights 2019.03.01

The value chain constraint

To put conservation of attractive profits in generic terms, profit in a value chain flows to whatever company is able to successfully integrate different component pieces of that value chain; the other parts of the value chain then modularize and are driven into commodity competition.

In other words, what matters is not “technological innovation”; what matters is value chains and the point of integration on which a company’s sustainable differentiation is built; stray too far and even the most fearsome companies become also-rans.

The reality is that technology has an amplification effect on business models: it has raised the Internet giants to unprecedented heights, and their positions in their relevant markets — or, more accurately, value chains — are nearly impregnable. At the same time, I suspect their ability to extend out horizontally into entirely different ways of doing business — new value chains — even if those businesses rely on similar technology, are more limited than they appear.

What does work are (1) forward and backwards integrations into the value chain and (2) acquisitions. This makes sense: further integrations simply absorb more of the value chain, while acquisitions acquire not simply technology but businesses that are built from the ground-up for different value chains. And, by extension, if society at large wants to limit just how large these companies can be, limiting these two strategies is the obvious place to start.

The risk of low growth stocks

If a 5% growing business requires a 4% cash flow yield (a free cash flow multiple of 25x, the inverse of 4%) for investors to earn 9%, you can easily do the math to figure out what sort of cash flow yield a 3% growth business or a 1% growth business requires. While a 4% yield plus 5% growth gets you to 9% total return, if a business is only growing at 3%, it needs a 6% cash flow yield. If it is only going to grow at just 1% per year, it needs an 8% cash flow yield.

Now that’s scary. And seriously risky. Because an 8% cash flow yield means a stock is worth exactly half of what it would be worth if it was trading at a 4% cash flow yield. We’re talking about a $100 stock that needs to fall to $50 if the company is only going to grow at 1% rather than 5%. Even a small change, like a 5% business slowing to 4% (in perpetuity) requires the cash flow yield to jump from 4% to 5%. This means a change from 25x cash flow to 20x or a 20% decline in the price. Ouch.

That perpetual 5% growth rate? Remember it is descriptive of the market as a whole. But under the surface, individual companies are experiencing large swings in their growth rate. The market as a whole keeps returning to about 5% growth because that’s approximately the growth rate of the overall economy. But many companies find that while they might be able to reverse temporary periods of decline, once their ongoing growth rate slows down they hit what might be thought of as “stall speed”. In aerodynamics, the stall speed is the minimum speed at which an aircraft must travel to remain in flight. If it slows to a speed below this rate, it will stall and eventually crash.

Zillow is now the Netflix of homes

You already know how Netflix shows you stuff. When you browse, you see Netflix originals plus you see all the content other studios serve through Netflix. Going forward you’ll now see this on Zillow. Why? Because last April they started buying homes directly from sellers, and want to ramp up to buying 5,000 homes a month over the next 3-5 years. How? Fill out a form on their site, get an offer. If you accept, you close in days. If you decline, they pair you with a local non-Zillow agent who can list your home for you the traditional way.

Listing with an agent might be slightly cheaper than the 7% of sales price you might pay to sell to Zillow (or other instant offer firms like Opendoor), but it doesn’t have the same certainty or speed. Since 61% of you sellers are also buying a new home, you’ll need a new mortgage. Zillow bought a mortgage company last year so they can also do your loan—whether you buy your new home directly from them or through another real estate company.

So you might hit Zillow to look for a new home or ask them to buy your existing home. Either way, this is as close as the housing industry has gotten to a one-stop shop. Over time, they might prioritize Zillow listings over non-Zillow listings like Netflix prioritizes Originals, but our TV habits have gotten us used to that already.

Aligning business models to markets

USHG is a constellation of very different restaurants and chains. At one end it has michelin star fine dining restaurants like The Modern and Gramercy Tavern. While at the other end it has the large chain Shake Shack. And many restaurants in between those two ends of the spectrum of pricing and scale.

If you do well you could go on to run a restaurant in USHG’s portfolio. Or if you wanted to open your own restaurant, you could open one with Danny Meyer as part of USHG–or start your own restaurant and have USHG as an early investor. In fact, another possibility is what the three michelin star restaurant 11 Madison Park did. It was a USHG restaurant that they sold to its general manager and head chef, who’d both worked at USHG for years.

By having a portfolio of restaurants at different scales and price points, employees are able grow their careers while staying in the family. And USHG is able to have high retention and invest more in its employees.

Curated Insights 2019.02.22

“Hollywood is now irrelevant,” says IAC Chairman Barry Diller

“Netflix has won this game. I mean, short of some existential event, it is Netflix’s. No one can get, I believe, to their level of subscribers, which gives them real dominance.”

And that includes its closest rival Amazon Prime, which isn’t designed to bid as aggressively on tomorrow’s media stars as Netflix is. “Amazon’s model is saying, ‘If you join Prime, we’re giving you things,’” Diller said. “‘So our job is to get you to join Prime. If we can get you to do that by giving you Black Panther, or whatever, or The Marvelous Mrs. Maisel, then great.’ But that model, to people in the entertainment business, is like, ‘Oh my god, how did that happen?’”


Tollymore Investment Partners’ investment thesis on Trupanion

TRUP is vertically integrated; it owns its insurance subsidiary and is responsible for acquiring and servicing existing customers as well as underwriting their insurance. TRUP estimates this vertical integration has eliminated frictional costs of c. 20% of revenues. These economic savings have been donated to consumers in the form of higher claims payout ratios. TRUP’s strategy has therefore been to sacrifice the near-term margin upside of this cost advantage in the pursuit of a larger and stickier customer base and subscription revenue pool. This cost advantage does not manifest itself in lower prices, but rather the highest sustainable expenditure on vet invoices per dollar of premiums.

TRUP has built a database over 15 years using 7.5mn pet months of information and > 1mn claims; it has segmented the market into 1.2mn price categories in order to more accurately underwrite insurance costs for a given pet. Of course, determining the point at which the marginal returns on incremental data diminish is difficult, but according to the CEO it would take a competitor 13 years to replicate this data asset. Although Nationwide is larger by number of pets enrolled, its data are likely to be less comprehensive for two reasons: (1) a lack of data for conditions not covered by policies, such as hereditary and congenital diseases, and (2) pricing categories by state rather than zip code, even though the cost of vet care can vary widely within states. TRUP considers its ability to accurately estimate the costs of pet healthcare costs by granular sub- categories crucial to its leading value proposition. This allows for the provision of more relevant products for the customer.

The addressable market is large and underpenetrated relative to other developed markets. The differences in these other markets are not demographic, social or economic, but rather (1) the length of time comprehensive pet insurance has been available, (2) the value proposition in the form of higher claims payments as a ratio to premiums (higher loss ratios) and (3) vet vs. direct to consumer distribution models. Pet insurance companies in the US typically do not cover hereditary and congenital conditions, which are the forms of illness most likely to be suffered by cats and dogs, they increase rates when claims are made, they impose payout limits, and pay claims according to an estimated cost schedule rather than actual vet invoices. TRUP is different in all these respects and as such expects to grow the addressable market in North America to greater than 1% penetration. In any case, it appears to be the case that TRUP’s value proposition is driving adoption in North America.

The unit economics associated with the pursuit of this opportunity to grow the company’s assets are attractive. The cost to acquire a pet is c. $150, around 3x the average monthly ARPU. Assuming the current 10% discretionary margin and a six-year average pet life, the IRR on new pets is 30-40%. At a 15% discretionary margin the IRR would be double this. I estimate that both ARPUs and discretionary margins would need to decline by 20-25% to render reinvestment in pet acquisition a capital destructive pursuit. This would contradict the economic reality of a market in which pet healthcare costs are increasing mid-single digits as new technologies and treatments are ported over from human healthcare, and the scalability of the business model.

Purchases with plastic get costlier for merchants—and consumers

Merchants paid an estimated $64 billion in Visa and Mastercard credit and debit interchange fees last year, according to new data from an industry publication, the Nilson Report. That is up 12% from a year earlier and up 77% from 2012.

Other fees are on the rise, as well. Visa, the largest U.S. card network, is increasing several fees in April, according to people familiar with the matter. Unlike interchange fees that are paid to card issuers, these fees are collected by Visa.

Visa raised its “credit-card assessment fee” this year by 0.01% for most credit-card purchases made in the U.S. While seemingly small on a percentage or flat-fee basis, the increased fees that Visa will put in place during the first four months of the year are expected to cost U.S. merchants at least an additional $570 million through April 2020, according to estimates by merchants-payments consulting firm CMSPI.

But network fees aren’t the only additional charges merchants face. There are also other fees charged by firms that process merchants’ card transactions. Those, which include the network fees, totaled $14.8 billion on Visa and Mastercard debit and credit transactions in 2018, up 10% from a year earlier and 70% from 2012, according to the Nilson Report.


MSG says the Knicks aren’t for sale. It’s a good time to invest in sports either way.

That $5 billion is a big number, 25% higher than the recent $4 billion valuation by Forbes. And $5 billion amounts to more than $200 per share, or about 71% of MSG’s current stock price. Just because the number is large doesn’t mean it isn’t realistic. Don’t forget the Clippers were sold to former Microsoft (MSFT) CEO Steve Ballmer for $2 billion in 2014. That year, before the sale was announced, Forbes valued the Knicks at $1.4 billion and the Clippers didn’t crack Forbes top-10 most valuable NBA franchises.

Live TV content is part of the reason the value of sports franchises have swelled. Live content is becoming increasingly more valuable to media outlets like traditional networks and streaming companies. But other factors are also at play. Sports betting is another important avenue for franchise owners to generate brand-new streams of cash. “I think everyone who owns a top four professional sports team just basically saw the value of their team double” Dallas Mavericks owner Mark Cuban said in 2018, after the U.S. Supreme Court cleared the way for legalized sports betting in states other than Nevada.

If the Knicks are sold, MSG would be left with the New York Rangers, the WNBA’s New York Liberty, the Hartford Wolf Pack of the American Hockey League, and the Westchester Knicks of the NBA’s developmental league. In addition to Madison Square Garden itself, MSG also owns the Hulu Theater at Madison Square Garden, Radio City Music Hall, the Beacon Theatre, the Forum, the Chicago Theatre, and the Wang Theatre.

Curated Insights 2019.01.18

10 years since BNSF

“It’s a crazy deal. It’s an insane deal. We looked at Burlington Northern at $75 and I’ll give you the exact calculation we did. You don’t have a high earnings return. They are paying 18 times earnings, but it’s really much worse than that. They report maintenance cap-ex very carefully. They report depreciation and amortization, and they report only about 70% of the maintenance cap-ex.”

One very important fact of this transaction, was his level of conviction. In November 2009, there were a ton of cheap opportunities. Buffett picked BNSF, and paid a 30% premium to gain full ownership. Also, 40% of the total consideration was paid with arguably deeply undervalued BRK shares. So, safe to say he really wanted BNSF. The $34bn paid for BNSF, represented almost 25% of Berkshire’s equity! It was a huge bet, with significant repercussions.

Applying similar numbers, we get to an Enterprise Value of $125bn and an equity value of $105bn for Berkshire´s railroad. Once again, Buffett paid $34bn, took out $31bn in dividends and is left with +$100bn in value…Good job Warren.

So we know returns for this massive investment have been impressive, but let´s get to a number. And the number is…~18%. That is massive for an investment many thought at the time would produce mediocre returns. Remember many experts thought he was overpaying for a capital-intensive, regulated and cyclical business.

18% is 1.5x the return of the S&P 500 during a bull market. But it gets better…At the time of the acquisition, Berkshire already owned ~20% of BNSF stock…so he didn´t have to pay the takeout premium on 100% of the shares outstanding. In reality, he had to pay ~$26bn for the shares he didn´t own. Also, Berkshire employed a bit of leverage to fund the acquisition. The company issued $8bn in bonds, so we get, leveraged returns. If we take into account the leverage and the shares of BNSF Berkshire already owned, then the return on the equity would go…way up. But I think we get the point.

Fund manager: Why Amazon could double

The market is not correctly conceptualizing normalized profitability. It seems that the market views AMZN’s profitability primarily through a legacy e-commerce lens, viewing AMZN as a single-digit-margin business. Piecing apart the business, I think this is wrong. First, AMZN has not known the meaning of the word “operating leverage” for the past 10 years, but it is showing through recently with beautiful impact. In Q3 18, fulfillment as a percentage of sales actually declined for the first time time in five years (having gone from 8.5% in 2010 to 15% of sales in 2018). This is a nascent signal, but suggests that the fulfillment infrastructure expansion is nearing its final stages. There are supplementary data points to support this notion, including the slowing in new DCs and headcount. As a result of this operating leverage, operating margins went from 0.8% in Q3 17 to 6.6% in Q3 18, with incremental margins of 26%. Second, there is a real mix shift going on at AMZN that benefits GMs and fundamentally changes the OM outlook for the combined business. Core e-commerce (lower margin) grew revenue only 10% in Q3, but third party seller services grew 31% and AWS grew 46%. As a result of this positive mix shift, gross margins went from 37% Q3 17 to 41.7% in Q3 18, with incremental gross margins coming in at 57.5%. Amazon effectively has a powerful combination of mix-driven GM expansion and operating leverage driven OM expansion in play here, and my view is that this dynamic will hold for at least a number of years to come.

PayPal quietly took over the checkout button

In 2013, PayPal bought Braintree Payment Solutions LLC, which processes the credit card transactions on the mobile apps of Uber, Airbnb, StubHub, and thousands of smaller businesses. The acquisition brought in an influx of programmers and designers, as well as Venmo, which Braintree had acquired the year before. Venmo is a way to quickly settle small debts between friends: a dinner check, a get-well present for a colleague. With Venmo, informal financial interactions formerly governed by social norms about reciprocity, forgiveness, and passive-aggressive hinting could be easily recorded and quickly paid. (“I only have a twenty” is no longer a viable excuse.) You could even “bill” your friends. The app—complete with a feed of the payments your friends have made to each other—has proved enormously popular with millennials.

Over the next six months, Schulman negotiated similar partnerships with Mastercard and Citibank, committing to make it as effortless as possible for customers to use Citibank-issued credit cards and Mastercard’s network. “When PayPal first spun out of EBay, there was a lot of competition and a lot of negative sentiment,” says Heath Terry, an analyst who covers the industry for Goldman Sachs Group Inc. “Basically, in 18 months on the job, Dan was able to completely change that narrative.” As with the Visa deal, PayPal was forgoing some profit but placating powerful and formerly antagonistic payments incumbents. Citi and Mastercard—along with Google, Apple, Amazon, and Samsung, each of which has an eponymous “pay” product—began steering customers to link their accounts with PayPal, seeing it not as a competitor but as a driver of transactions and the fees they generate. In short, as a pal.

The result has been a surge in growth. “It took us 14 years to go from 50 million subscribers to 250 million,” Schulman says. “I mean, it’s impressive, but it’s a long time. We went from 200 million to 250 million in about 18 months,” tripling the rate at which the company added users, or what it calls “net new actives.” PayPal’s stock is up more than 100 percent since the start of 2017. However, PayPal’s most impressive statistic may be its conversion rate. People who design online and mobile shopping apps are obsessed with smoothing and shortening the path from idle browsing to purchase—humans are acquisitive and impulsive creatures, but they’re also easily distracted and bad at remembering their credit card numbers. Too many options hurts conversion, and so does having to type out stuff or wait for a page to load. PayPal’s conversion rate is lights-out: Eighty-nine percent of the time a customer gets to its checkout page, he makes the purchase. For other online credit and debit card transactions, that number sits at about 50 percent.

This differential was cited by the hedge fund Third Point in an investor letter last July: “We see parallels between PayPal and other best-in-class internet platforms like Netflix and Amazon,” it read. It applauded PayPal’s $2.2 billion purchase in May of IZettle, a Swedish payments processor known as the “Square of Europe.” The praise was particularly striking coming from Third Point, whose billionaire founder Dan Loeb, like Icahn, is better known for publicly excoriating the leadership of the companies in which he invests. Built into PayPal’s high share price is the expectation that the company will figure out a way to turn Venmo’s popularity into profit. Third Point’s letter predicted that the app will be contributing $1 billion in additional annual revenue within three years. Disagreements over how to do that, or how much to even try, have led to the departures of two Venmo heads in two years. Employees who have left in recent months describe mounting mutual frustration. According to multiple people familiar with the company’s finances, the app is still losing hundreds of millions of dollars annually. In an interview after the announcement of Venmo’s latest leadership change in late September, Schulman’s deputy, PayPal Chief Operating Officer Bill Ready, downplayed any suggestion of turmoil. “Any startup that goes through rapid growth is going to experience this,” he says. “You evolve, and you have to bring in different skill sets for each stage of the journey.”

Cancer deaths decline 27% over 25 years

Deaths from cancer dropped 27% over a quarter century, meaning an estimated 2.6 million fewer people died of the disease during that period, according to a new report from researchers at the American Cancer Society.

For most of the 20th century, overall cancer deaths rose, driven mainly by men dying from lung cancer, researchers noted. But since the peak in 1991, the death rate has steadily dropped 1.5% a year through 2016, primarily because of long-running efforts to reduce smoking, as well as advances in detection and treatment of cancer at earlier stages, when prognosis for recovery is generally better.

Curated Insights 2018.11.30

What’s next for marketplace startups? Reinventing the $10 trillion service economy, that’s what.

The service economy lags behind: while services make up 69% of national consumer spending, the Bureau of Economic Analysis estimated that just 7% of services were primarily digital, meaning they utilized internet to conduct transactions.

In the a16z portfolio, Honor is building a managed marketplace for in-home care, and interviews and screens every care professional before they are onboarded and provides new customers with a Care Advisor to design a personalized care plan. Opendoor is a managed marketplace that creates a radically different experience for buying and selling a home. When a customer wants to sell their home, Opendoor actually buys the home, performs maintenance, markets the home, and finds the next buyer. Contrast this with the traditional experience of selling a home, where there is the hassle of repairs, listing, showings, and potentially months of uncertainty.

Managed marketplaces like Honor and Opendoor take on steps of the value chain that platforms traditionally left to customers or providers, such as vetting supply. Customers place their trust in the platform, rather than the counterparty of the transaction. To compensate for heavier operational costs, it’s common for managed marketplaces to actually dictate pricing for services and charge a higher take rate than less-managed marketplace models.

The last twenty years saw the explosion of a number of services coming online, from transportation to food delivery to home services, as well as an evolution of marketplace models from listings to full-stack, managed marketplaces. The next twenty years will be about the harder opportunities that software hasn’t yet infiltrated–those filled with technological, operational, and regulatory hurdles–where there is room to have massive impact on the quality and convenience of consumers’ everyday lives.

The services sector represents two-thirds of US consumer spending and employs 80% of the workforce. The companies that reinvent various service categories can improve both consumers’ and professionals’ lives–by creating more jobs and income, providing more flexible work arrangements, and improving consumer access and lowering cost.

Country stock markets as a percent of world

Keyence’s miraculous margins

The outsourcing reduces capital expenditure costs, and the associated depreciation, as there’s no machinery to purchase. It is also said to help Keyence to retain its valuable intellectual property. Suppliers, according to Morten Paulsen, Head of Research at CLSA Japan, have no visibility on how the respective pieces of the product puzzle fit together.

But Keyence are not the only business to run a “fabless” model. Apple, perhaps the most successful consumer brand of all time, outsources the creation of its iPhone to Taiwanese Foxconn. It reported operating margins of 26 per cent last quarter. Similarly, semiconductor designers such as Nvidia, Broadcom and Qualcomm also outsource to businesses like Taiwan Semiconductor. Their margins tend to range from 20 per cent to 40 per cent.

Keyence is also excellent at leveraging its suppliers, which it does “in a cleverer way than any other company I’ve seen”, he told us. Indeed, Keyence often has multiple suppliers manufacturing the same part, which stops one raising prices in fear of losing orders to competitors. Further to this, Keyence develops some of its manufacturing processes in house, then trains the suppliers, which means it can switch suppliers with greater ease than most if it begins to get strong armed, Paulsen argues.

What about its products? To its credit, Keyence has positioned itself right at the forefront of several key trends in an era of increasing factory automation, such as sensors which detect infinitesimal assembly-line mistakes. Customers, such as automakers — which make up roughly 25 per cent of its sales, according to Paulsen — are happy to pay top dollar for products that pay for themselves in 2 years, giving Keyence some degree of pricing power.

The reason for achieving high profitability is to maximise customer’s evaluation of products with high value added — that is, for customers, “I do not think it is expensive” and “I think it is cheap if it [our problem] can be solved” . . . As we explore the potential needs of our customers and develop them [the products] in advance, about 70 per cent of the new products of Keyence are the industry’s first and world’s first product as a result. Even in terms of management, we concentrate resources on product planning and design . . . we are trained to not only sell goods but also propose ideas that can solve customer’s problems.

Amazon, with little fanfare, emerges as an advertising giant

“The online retailer has ascended to the No. 3 spot in the U.S. digital ad market behind the dominant players, Alphabet Inc.’s Google and Facebook Inc. Though Amazon has just 4% of the market now, the company is expanding its avenues for marketers and hiring aggressively for its ad unit.

Amazon’s ad revenue is on pace to double this year, to $5.83 billion, according to eMarketer. Its ad sales are expected to jump $28.4 billion over the next five years, according to Cowen & Co.—more than the combined increases in ad revenue for all television networks globally, according to figures from media-buyer GroupM.”

Amazon’s ad business now contributes to gross profit and is expected to generate more income than its cloud business—which currently provides the bulk of its profits—as soon as 2021, according to Piper Jaffray analysts.

Amazon is expected to collect 15 cents of each new dollar spent on U.S. digital ads in 2020, up from 5 cents last year, according to an analysis of data from research firm eMarketer.

Why doctors hate their computers

This, I discovered, was the real reason the upgrade cost $1.6 billion. The software costs were under a hundred million dollars. The bulk of the expenses came from lost patient revenues and all the tech-support personnel and other people needed during the implementation phase.

Optimize your programming decisions for the 95%, not the 5%

Without having a deep understanding of what you’re developing and have put in the time to come up with good abstractions based on real experience, you’re just shooting in the dark hoping your generic user system works for all cases when you haven’t even programmed it yet for 1 use case. How is that even possible to do?

When you blindly follow what Google and other massive companies are doing, you’re optimizing for the 5% in a slightly different way. Instead of just getting your app up and running and seeing how it goes, you try to make decisions so that your application can be developed by 100 different teams sprawling across 5,000 developers. Meanwhile it’s just you developing the app by yourself in nearly all cases for new projects.

As soon as you start trying to make it work for a real application, or more specifically, your application, it all falls apart until you spend the time and really learn what it takes to scale an application (which is more than just picking tools). The companies that created these tools have put in the time over the years and have that knowledge, but that knowledge is specific to their application.

Premature optimization is the root of all evil (or at least most of it) in programming.

Optimizing for the 5% is a type of premature optimization. Maybe not so much for your development environment choices, but certainly for the other cases. Base your decisions on optimizing for the 95%, keep it simple and see how it goes. In other words, optimize when you really need to not because of “what if”.

Curated Insights 2018.11.02

Steve Jobs had an incredible definition of what a company should be

The company is one of the most amazing inventions of humans, this abstract construct that’s incredibly powerful. Even so, for me, it’s about the products. It’s about working together with really fun, smart, creative people and making wonderful things. It’s not about the money. What a company is, then, is a group of people who can make more than just the next big thing. It’s a talent, it’s a capability, it’s a culture, it’s a point of view, and it’s a way of working together to make the next thing, and the next one, and the next one.


Fossil fuels will save the world (really)

That fossil fuels are finite is a red herring. The Atlantic Ocean is finite, but that does not mean that you risk bumping into France if you row out of a harbor in Maine. The buffalo of the American West were infinite, in the sense that they could breed, yet they came close to extinction. It is an ironic truth that no nonrenewable resource has ever run dry, while renewable resources—whales, cod, forests, passenger pigeons—have frequently done so.


Gundlach: People want to be told what to think. I don’t

My biggest lesson that I’ve learned… I have the same flaw that every human being has and that is: As you’re growing up and getting older, you believe that everybody’s like you. You just extrapolate your personality traits and proclivities on other people. Then you start to realize increasingly, that that’s not true. And I believed, therefore, that everybody was intellectually objective and honest and wanted to figure things out for themselves. And I didn’t understand, for probably as long as 20 years, why I couldn’t convince people of almost mathematically analytical arguments regarding markets. And it was finally after years of this that I realized that people actually want to be told what to think.

It took me a long time to understand that. Not me, see, I don’t want to be told what to think. And so I figured nobody wants to be told what to think. But indeed, I think almost everybody wants to be told what to think. That creates a tremendous advantage in managing money. Because in that window of time between a fact and people being told what the fact means, you have a window if you’re capable of figuring out what it means – and don’t need to be told what it means – where you can actually act before other people and I found I’ve made a lot of money that way.

I remember when Ben Bernanke announced the Fed funds rate was going to stay at 0% for three years, and the markets didn’t move. And I had my traders look for this asset class in the bond market that would be the primary beneficiary of rate staying at zero for three years. And I said, “How much of the prices up?” And they said, “They’re not up at all.”

Assessing IBM’s $34 billion Red Hat acquisition

Dan Scholnick, general partner at Trinity Ventures, whose investments have included New Relic and Docker, was not terribly impressed with the deal, believing it smacked of desperation on IBM’s part. “IBM is a declining business that somehow needs to become relevant in the cloud era. Red Hat is not the answer. Red Hat’s business centers around an operating system, which is a layer of the technology stack that has been completely commoditized by cloud. (If you use AWS, you can get Amazon’s OS for free, so why would you pay Red Hat?) Red Hat has NO story for cloud,” he claimed in a statement.

Forrester analyst Dave Bartoletti sees the cloud native piece as being key here. “The combined company has a leading Kubernetes and container-based cloud-native development platform, and a much broader open source middleware and developer tools portfolio than either company separately. While any acquisition of this size will take time to play out, the combined company will be sure to reshape the open source and cloud platforms market for years to come,” he said.


IBM’s old playbook

The best thing going for this strategy is its pragmatism: IBM gave up its potential to compete in the public cloud a decade ago, faked it for the last five years, and now is finally admitting its best option is to build on top of everyone else’s clouds. That, though, gets at the strategy’s weakness: it seems more attuned to IBM’s needs than potential customers. After all, if an enterprise is concerned about lock-in, is IBM really a better option? And if the answer is that “Red Hat is open”, at what point do increasingly sophisticated businesses build it themselves?

The problem for IBM is that they are not building solutions for clueless IT departments bewildered by a dizzying array of open technologies: instead they are building on top of three cloud providers, one of which (Microsoft) is specializing in precisely the sort of hybrid solutions that IBM is targeting. The difference is that because Microsoft has actually spent the money on infrastructure their ability to extract money from the value chain is correspondingly higher; IBM has to pay rent:

The threat of Amazon’s content strategy

Even if content is created by a publisher and merely distributed through the tech platform, the tech company still captures its data; Netflix, for example, doesn’t share ratings data with TV producers, and Amazon doesn’t share Kindle readership data with the publishing industry. Meanwhile, Facebook actually shared false data with brands about their video’s viewership for years.

  • Anheuser-Busch InBev acquired a stake in RateBeer, a leading beer review platform, and October, a beer culture website.
  • Popular makeup startup Glossier initially launched as a content site; it then used insights gathered from users to develop its own line of cosmetics. Now, it aims to launch a new social commerce platform to encourage user reviews and feedback.
  • L’Oreal invested in Beautycon Media, which creates digital beauty content and hosts festivals for influencers
  • Mattress startup Casper even launched its own magazine; the current issue includes features like “A skeptic’s guide to crystals” and an adult coloring book.

Social Capital’s Chamath Palihapitiya says ‘we need to return to the roots of venture investing’

“The dynamics we’ve entered is, in many ways, creating a dangerous, high stakes Ponzi scheme. Highly marked up valuations, which should be a cost for VCs, have in fact become their key revenue driver. It lets them raise new funds and keep drawing fees.”

“VCs bid up and mark up each other’s portfolio company valuations today, justifying high prices by pointing to today’s user growth and tomorrow’s network effects. Those companies then go spend that money on even more user growth, often in zero-sum competition with one another. Today’s limited partners are fine with the exercise in the short run, as it gives them the markups and projected returns that they need to keep their own bosses happy.”

“Ultimately, the bill gets handed to current and future LPs (many years down the road), and startup employees (who lack the means to do anything about the problem other than leave for a new company, and acquire a ‘portfolio’ of options.)”

The coming storm for consumer staples dividends

AB InBev argued that by taking its leverage down to 2x net debt/EBITDA, it will reduce its cost of capital and “maximize total enterprise value.” All else equal, a lower cost of debt would in theory increase enterprise value, yet AB InBev already has solidly investment-grade credit ratings (e.g., A- from S&P). A ratings upgrade within the investment-grade space would likely only have a marginal impact on lowering cost of debt. Deleveraging could even increase its cost of capital, as more expensive equity takes a greater share of the capital structure.

Ultimately, a company’s dividend should be affordable, reflect the growth in shareholder value creation, and help management more prudently select high-return projects rather than pursue wasteful “empire building” deals. Dividends can be a problem, however, when they become too generous and handcuff management’s ability to invest in high-return projects and defend or widen the firm’s economic moat. When this happens, a dividend “rebasing” or “cut” would benefit long-term shareholders.


Uber-inequality

Uber received proposals from investment banks that pegged the ride-hailing firm’s IPO valuation at $120B. So, that posits Uber’s value is greater than the value of the US airline industry or the US auto industry (excluding Tesla). I love Uber and think the firm is genius. But that valuation is insane. Uber’s model doesn’t have the moats of an auto firm or even Airbnb, which must create global demand and supply (a local competitor to Airbnb doesn’t work, as visitors from other countries wouldn’t know about it). In contrast, local on-demand taxi services abound, even if without an app. The 120K readers of this newsletter could each put in $250, and boom — we have the number-three ride-hailing firm in Miami. Who’s with me?

In today’s economy, innovation means elegant theft: robbery of your data, privacy, health insurance, or minimum-wage protection. Uber has 16K employees and 3M driver partners. “Driver partner” means some great things. It means you don’t have to show up to an office. And it means you can work whenever you want — this is key. When I speak to Uber drivers, I always ask, “Do you like working for Uber?” The overwhelming majority say yes and reference the flexibility. I’ve been especially struck by how many need the flexibility, as they’re taking care of someone who’s sick. So many people taking care of others. So many people loving other people. And it comes at a huge cost. Many of them used to have jobs with benefits. Many had to move to a strange place to take care of their sister, mother, nephew.

The economic value of artificial intelligence

In the near term, around $6.6 trillion of the expected GDP growth will come from productivity gains, such as the continued automation of routine tasks. Over time, increased consumer demand for AI-enhanced offerings will overtake productivity gains and result in an additional $9.1 trillion of GDP growth by 2030.

China is expected to see the greatest economic gains from AI, a $7 trillion or 26% boost in GDP growth. One reason is the high proportion of China’s GDP that is based on manufacturing, where AI is expected to have a particularly big impact between now and 2030. Even more important over the longer term is China’s higher rate of AI investments compared to North America and Europe.

China is expected to see the greatest economic gains from AI, a $7 trillion or 26% boost in GDP growth. One reason is the high proportion of China’s GDP that is based on manufacturing, where AI is expected to have a particularly big impact between now and 2030. Even more important over the longer term is China’s higher rate of AI investments compared to North America and Europe.

In North America, the economic gains from AI are expected to reach $3.7 trillion or 14.5% of GDP growth by 2030. North America will see the fastest growth in the near term, given its current lead in AI technologies, applications, and market readiness. But China will likely begin to catch up by the middle 2020s given its accelerating AI investments.


A.I. is helping scientists predict when and where the next big earthquake will be

Some of the world’s most destructive earthquakes — China in 2008, Haiti in 2010 and Japan in 2011, among them — occurred in areas that seismic hazard maps had deemed relatively safe. The last large earthquake to strike Los Angeles, Northridge in 1994, occurred on a fault that did not appear on seismic maps.