Curated Insights 2019.08.23

The WeWork IPO

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

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

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

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

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

Pershing Square on Berkshire Hathaway

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

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

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

WeWTF

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


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

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

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


How big stars maximise their take from tours

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

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

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

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

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

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

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

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

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


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

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

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


The real story of Supreme

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

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

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

ETF fear mongering myths

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

Curated Insights 2019.08.09

Good for Google, bad for America

A.I.’s military power is the simple reason that the recent behavior of America’s leading software company, Google — starting an A.I. lab in China while ending an A.I. contract with the Pentagon — is shocking. As President Barack Obama’s defense secretary Ash Carter pointed out last month, “If you’re working in China, you don’t know whether you’re working on a project for the military or not.”

Netflix is not a tech company

Hence, Netflix isn’t using TV to leverage some other business – TV is the business. It’s a TV company. Amazon is using content as a way to leverage its subscription service, Prime, in much the same way to telcos buying cable companies or doing IPTV – it’s a way to stop churn. Amazon is using Lord of the Rings as leverage to get you to buy toilet paper through Prime. But Facebook and Google are not device businesses or subscription businesses. Facebook or Google won’t say ‘don’t cancel your subscription because you’ll lose this TV show’ – there is no subscription. That means the strategic value of TV or music is marginal – it’s marketing, not a lock-in.

Apple’s position in TV today is ambivalent. You can argue that the iPhone is a subscription business (spend $30 a month and get a phone every two years), and it certainly thinks about retention and renewals. The service subscriptions that it’s created recently (news, music, games) are all both incremental revenue leveraging a base of 1bn users and ways to lock those users in. But the only important question for the upcoming ‘TV Plus’ is whether Apple plans to spend $1bn a year buying content from people in LA, and produce another nice incremental service with some marketing and retention value, or spend $15bn buying content from people in LA, to take on Netflix. But of course, that’s a TV question, not a tech question.

Why we sold Trupanion

Why is Trupanion not outpacing the industry when it is the first name many pet owners hear? It could be that pet owners hear about pet insurance from their vet, go home, compare prices, and choose a more affordable option. It’s not an impossible problem for Trupanion to solve, but again, consumers don’t typically understand insurance value until they file a claim.

But at an investor event we attended a few months ago, Darryl said that he was making plans to switch to an executive chairman role in 2025. While we understood Darryl’s choice on a personal level, it also sharply increased our uncertainty around whether company management will be able to successfully build a moat and transform pet insurance as we had hoped. In our opinion, Trupanion will continue to need a visionary leader in the CEO role and finding another visionary to replace Rawlings will be a massive challenge.

Given the industry’s rapid growth, we think it’s perfectly normal for both regulators and pet insurance companies to have some growing pains. While Trupanion has been fined, faces more state investigations, and admits it should have paid more attention to regulators as a stakeholder, we considered these matters minor to our thesis. Regulators may require Trupanion’s Territory Partners to be licensed in all states, but this is more like a speed bump rather than a roadblock.


TGV Intrinsic on MercadoLibre

Network effects are among the highest entry barriers for competitors to build and leverage business. As market leader, MercadoLibre has been able to permanently focus on strengthening the network effects of the marketplace and eliminate points of conflict in transaction processing between buyer and seller. The most important point of conflict between seller and buyer in the past were the payment arrangements. To simplify this process, MercadoLibre launched its own payment service “MercadoPago” in 2004 (comparable to PayPal). MercadoPago provides a secure way to pay for goods and simplified the coordination between buyers and sellers in terms of payment. Today, over 90% of the value god goods sold on MercadoLibre is paid with MercadoPago, which equates to a payment volume of 11 billion US dollars.

Apart from that, logistics costs in many Latin American countries pose a major hurdle for buyers and sellers. The investments required to setup one’s own logistics system are high, delivery times in Latin America are relatively long, and service is rather mediocre. With the founding of MercadoEnvios in 2013, MercadoLibre took over an ever more extensive control over the logistics of goods in several steps. Today, MercadoEnvios operates its own logistics centres, takes over the first mile from the seller or organises the last mile to the end customer with selected partners. In 2018, at least part of the logistics was taken over by MercadoEnvious for 66% of the goods sold through the marketplace. Thanks to the sizeable investments in a proprietary payment system and the continuous expansion of its own logistics, MercadoLibre has massively expanded its marketplace and the network effect that has been set in motion over the past two decades. The value of these investments is reflected in the growth in the number of transactions amounting to 28% per annum over the past decade.

The value of this ecosystem lies in the ever-growing economy of scale. MercadoLibre has more touch points with its customers than its competitors, be it specialised online retailers, payment service providers, or logistics companies. At each of these points of contact, MercadoLibre can distribute its costs in customer acquisition to more services than its competitors. As a result, the costs for new customers per product are lower than for competitors. Second, MercadoLibre can freely decide which areas of a customer relationship to monetise and which not. For example, MercadoLibre may offer MercadoPago payment service to new brick-and-mortar retailers for free but would require a marketplace transaction fee for this merchant’s online product sales. A specialised payment provider does not have this flexibility. As a result, MercadoLibre has created a flexible and cost-effective customer acquisition engine that only very few companies have.


Zebras can change their stripes

Since 2012, JUVE has gone on to secure many other high profile “free” transfers with established winners such as Dani Alves and Sami Khediera, but then also find those that have significant upside potential like Adrien Rabiot, Kingsley Coman, and Emre Can. By far, the most impactful and value-accretive “free” transfer was Paul Pogba. In 2012, Juventus signed 19 year-old Pogba from Manchester United, and only four seasons later (and after winning four league titles) sold him back to Manchester United for a world-record fee of $116 million. In total, since 2011, the top 10 free transfer signings by Juventus have created $204m of value (i.e. market value of the players at time of signing) and over $135 million of cash from transfer sales proceeds. Yes, Pogba was an outlier, but JUVE has utilized the free transfer market better than any other club over the past decade.

Let us not forget this is a business, and Ronaldo prints money. Before the ink dried on the contract, the Ronaldo effect took Juventus, and Italy, by storm. His name generated over $60 million in jersey sales in one day – that is the best global branding a club can ask for. JUVE’s Twitter account showed a 10% increase in followers on the day he was signed. Then ESPN acquired the U.S. Serie A TV rights at a massive step-change in the fee ($55 million per year, versus $28 million previously) only one month later. And to no one’s surprise, the first game aired on August 18th showcasing Ronaldo in his new black and white jersey. Your author duly signed up for ESPN+ exclusively to live stream I Bianconeri. The acquisition led to a nice bump in GreenWood’s performance, and most importantly, Ronaldo helped his team win another Serie A title.

The periodic table of investments

Winner-take-all phenomenon rules the stock market, too

Just 1.3% of the world’s public companies account for all the market gains during the past three decades. Outside the U.S., the gains are even more concentrated, with less than 1% of all equities driving all of the net appreciation in share prices.

Just five companies — Apple Inc., Microsoft Corp., Amazon.Com Inc., Alphabet Inc. (Google) and Exxon Mobil Corp. — accounted for 8.3% of global net wealth creation. It is hard to imagine a greater example of the winner-take-all distribution — these five companies account for just 0.008% of the total sample set of 62,000 publicly traded companies. Expand that to the top 0.5%, or 306 companies, and they account for 73% of global net wealth creation. The best performing 811 companies (1.33% of the total) accounted for all net global wealth creation.


Negative rates could happen in America, too

What’s behind negative interest rates? Many observers blame central banks like the European Central Bank (ECB) and the Bank of Japan (BOJ) that are taxing banks’ excess reserves with negative deposit rates and have made bonds scarcer by removing them from the market through their purchase programs. The BOJ now owns about half and the ECB about 30% of the bonds issued by their respective governments, according to Bloomberg.

However, we believe central banks are not the villains but rather the victims of deeper fundamental drivers behind low and negative interest rates. The two most important secular drivers are demographics and technology. Rising life expectancy increases desired saving while new technologies are capital-saving and are becoming cheaper – and thus reduce ex ante demand for investment. The resulting savings glut tends to push the “natural” rate of interest lower and lower.

LBOs make (more) companies go bankrupt, research shows

According to researchers at California Polytechnic State University, roughly 20 percent of large companies acquired through leveraged buyouts go bankrupt within ten years, as compared to a control group’s bankruptcy rate of 2 percent during the same time period.


Is great information good enough? Evidence from physicians as patients

We compare the care received by a group of patients that should have the best possible information on health care service efficacy—i.e., physicians as patients—with a comparable group of non-physician patients, taking various steps to account for unobservable differences between the two groups. Our results suggest that physicians do only slightly better in adhering to both low- and high-value care guidelines than non-physicians – but not by much and not always.


Health facts aren’t enough. Should persuasion become a priority?

Those who were most opposed to genetically modified foods believed they were the most knowledgeable about this issue, yet scored the lowest on actual tests of scientific knowledge. In other words, those with the least understanding of science had the most science-opposed views, but thought they knew the most.

Curated Insights 2019.07.19

Disneyland makes surveillance palatable—and profitable

Despite these familial concerns, Disney’s data mining never faced the sort of scrutiny that Silicon Valley has. The reason is fairly simple: Disney World is the real-world manifestation of a walled garden, a family-friendly environment without a perceived risk of children being exposed to inappropriate content like on YouTube or Twitch. Wired once called this data-driven customer relationship “exactly the type of thing Apple, Facebook and Google are trying to build. Except Disney World isn’t just an app or a phone—it’s both, wrapped in an idealized vision of life that’s as safely self-contained as a snow globe.”


Ray-Ban owner in talks for GrandVision at $8 billion value

By adding GrandVision, which sells prescription glasses, contact lenses and other eyecare products, EssilorLuxottica would gain more than 7,000 stores in more than 40 countries. GrandVision operates under retail brands including Brilleland and For Eyes. In addition to its well-known sunglass labels, including Oakley, EssilorLuxottica owns store chains like LensCrafters and Pearle Vision.

EssilorLuxottica’s interest in GrandVision comes only two months after the company defused a leadership dispute that weighed on its shares. The eyecare maker, the result of a merger of France’s Essilor and Italy’s Luxottica, said in May that it would seek a new chief executive officer — an effort to find a compromise between Chairman Leonardo Del Vecchio and Vice Chairman Hubert Sagnieres. The dispute flared up after the companies sealed their $53 billion merger last year, with Del Vecchio saying he wanted to appoint his deputy as CEO and Sagnieres countering that the Italian was making false statements in an effort to seize control of the group.


Shopify and the power of platforms

This is how Shopify can both in the long run be the biggest competitor to Amazon even as it is a company that Amazon can’t compete with: Amazon is pursuing customers and bringing suppliers and merchants onto its platform on its own terms; Shopify is giving merchants an opportunity to differentiate themselves while bearing no risk if they fail.

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 2019.01.11

Disney’s Bob Iger talks streaming, park plans, and learning from Kodak

In the case of Pixar, Marvel, and Lucas, none of them were for sale. We were the only ones. Us identifying them as acquisition targets and my going out and meeting with Steve Jobs and Ike Perlmutter and George Lucas one on one. Just alone. And broaching the subject and ultimately doing a deal. In looking back, particularly with Marvel and Lucas—Pixar was different—we had an ability to monetize those assets better than anyone else. If someone came along, we would have had a competitive advantage. You can argue that in the Comcast case with Fox, they’re probably the only other company out there that can monetize. Whether they monetize as well as we do, I don’t know. I don’t think they’re quite where we are.

What we looked at there was partly the result of the strategy we’re deploying, which is to be in the direct-to-consumer space in a very serious way. In order to do that, we needed a few things, and one of them, really the most important, was intellectual property. And when we looked at the Fox assets and brands—National Geographic, FX, Searchlight, the movie Avatar, the Marvel properties that they licensed, I could go on, The Simpsons—they had a lot that we could use to feed the beast that we’re taking to the market. And the board has been great at articulating this back to me. Had we not defined this strategy and gone for it, they would not have figured out how the Fox assets would have been of value to us. Because on the surface, you’re buying traditional businesses—cable channels and the like—and what do you need that for?

And then on top of that there was a global element to it that was very important to us. For instance, the Star assets in India. And they have a very successful business across Latin America. Sky was obviously attractive to us too, but it got less attractive as the price went up.

Wiedower Capital 2018 Annual Shareholder Letter: Trupanion

The vast majority of companies would take these increased efficiencies and let them drop to the bottom line. Not Trupanion. Their goal when the business is more mature in a few years is to have an adjusted operating margin of 15% (which equates to a net margin of around 5%). Once they achieve maturity, they want to then share all savings above that with their customers, basically capping their net margin at around 5%. Trupanion’s current loss ratio is ~70%, but their longer-term goal is to increase that to 80% (essentially giving 10% more value back to their customers).

To be clear, even if Trupanion does succeed with the scaled economies shared flywheel, it will not be as effective as Costco’s has been. An insurance company increasing loss ratios is a much less tangible benefit to the consumer vs a retailer decreasing prices. This is because retail prices can easily be compared at Costco vs Walmart or Amazon, whereas insurance policy prices are generally harder to compare apples-to-apples. However, I still believe this will make life harder on other pet insurers if Trupanion is slowly increasing their loss ratios on a yearly basis. That is tough to compete with. Very few companies are willing to pass up higher short-term profits every single year in the hopes that decreasing their prices will increase long-term customer loyalty.

For Healthy Paws (the #3 pet insurer, but the competitor I worry about the most) to have a meaningful effect on Trupanion’s customer acquisition strategy, they would have to hire and train a hundred salespeople all over the country and those people would have to spend years getting inroads into vets. And vets that already have Trupanion Express installed will have an even higher barrier to entry. Over 10% of vets in North America already have Express installed and that number is growing quickly (install growth was 42% in 2017 and over 50% in 2018).

Because of their customer acquisition cost, Trupanion loses money in the first year of all new pets they sign up. However, the average pet stays with Trupanion for over eight years, so that initial loss is made up over time. But because Trupanion is growing so fast, the cost of those new pets every year make the reported financials look worse than the progress of the underlying business. If customer acquisition costs are amortized over the life of a pet, the financials look much better.

This means that for every dollar spent on sales and marketing, Trupanion gets a 30-40% return on that invested capital. Very few businesses can maintain that return on capital for very long. Trupanion has been doing this for years and, given the industry penetration is just over 1%, they may be able to continue achieving this high return for many more years. Trupanion has the best unit economics of any company we own and, just as important, I believe these returns can continue because they are very defensible.

In addition to valuation, I believe the regulatory risks to Trupanion are overblown. The most touted regulatory risk is that many of Trupanion’s territory partners are not licensed to sell insurance—even though they don’t sell insurance and ideally never even interact with potential customers. There are fringe cases where this can be iffy though. For example, an unlicensed territory partner who talks to her friend about the benefits of Trupanion could potentially cross the line. Even in the scenario where regulators rule that all territory partners need to be licensed, I don’t believe the risk is large to Trupanion. From talking to insurance regulators about this, I expect a modest fine at worst.

The regulatory risk that I think is a bigger concern, but that gets discussed less often, is if veterinarians were required to get licensed. The veterinarians are the main conduit that connect pet owners to Trupanion. If veterinarians were required to get licensed, this would kill Trupanion’s current business model as very few vets would go through the effort of getting licensed. Here, it’s important to note that veterinarians who work with Trupanion do not explain the insurance specifics to their pet owner clients. The vets are allowed to recommend the concept of pet insurance broadly, and then discuss their personal experience with Trupanion, but that’s it. The vets do not get into insurance coverage details because that is when they would be required to get licensed.

Dureka Carrasquillo long Ferrari: Sohn London Conference

In 2017 the luxury car market was valued at $570bn. Estimates suggest it will grow at about 9% for the next 5 years. Ferrari sits in the category of luxury goods that is considered an ‘experience’ and that category is projected to grow at an even higher rate.

Special cars have historically been about 2% of sales but they will become a larger part of the business. She estimates that by 2022 special cars will represent 20% of revenues. These cars which are limited editions – often 500 cars – sell for more than $1m each and sometimes sell out on the day they go on sale. Gross margins on special cars are about 3x base cars. If the number of special cars is increased in the way that Carrasquillo predicts EBITDA margins for the whole group could increase from 33% to 38%.

Another hallmark of a luxury goods player is careful management of supply. Current product capacity is about 16,000 cars per year yet only 9000 are made. In comparison, Porsche sells 25,000 to 30,00 911s per year. Carrasquillo thinks that Ferrari could increase production to 16,000 cars per year and still sell them. Ferrari intends to launch 15 new models in the next 5 years – that’s a lot more than in the past. It takes about 40 months to produce and launch a new car.


Luke Newman long Rolls Royce: Sohn London Conference

At its heart Rolls Royce is a razor to razorblade business model – the razors – or the engines in this case – cost billions of dollars to design, deliver and install and come with an obligation to buy razorblades – service contracts – for the next 25 years. The gross margins on the service contracts are high between 50% to 70% but the engines are sold at a loss.

The secular trends in air travel are supportive driven by increasing wealth and emerging markets. Air passenger kilometres over the last 70 years have grown at 6% CAGR. If passenger growth continues at 4.5% and assuming planes have a 25-year life, 425 new wide body planes are required every year to keep up with demand. That’s 37 new wide-bodied planes every month. The production schedules for Boeing and Airbus for next year are slated at 34 per month creating positive pricing dynamics for all participants.

Over the last 20 years what was a 3-player market has become a duopoly. Pratt and Whitney took the rationale decision to concentrate on narrow body engines and ceded their market share to Rolls Royce. That did not come for free because Rolls Royce had to spend billions of dollars developing new engines to take the market share. The good news is that this year is the first year in which most of the revenue will come from the high margin aftermarket business. The company has reached a critical inflection point.

GE, the other member of the duopoly, has been in harvest mode, maintaining share and enjoying good aftermarket revenues. GE has lots of problems, but the engine business has not been one of them. GE’s engine margins have been consistently high.

Curated Insights 2019.01.04

The customer acquisition pricing parade

“One spectator, determined to get a better view, stands on their tiptoes. It works well initially until everyone else does the same. Then, the taxing effort of standing on your toes becomes table stakes to be able to see anything at all. Now, not only is any advantage squandered, but we’re all worse off than we were when we first started.”

“Marketing is increasingly cheap. Trust is increasingly expensive. Attracting eyeballs no longer sets you apart. Building trust among those who have their eyes on you, does. Getting people’s attention is no longer a skill. Keeping people’s attention is.”

To decrease spending and increase profitability, the holding companies of tomorrow will shift their attention from controlling supply to controlling demand — from building around industries to building around audiences.  

Re-marketing to an existing customer is significantly cheaper than trying to persuade a first time customer to buy your product — sometimes nearly 90% cheaper.

Companies who cater to the needs of passionate customers will benefit from lowered customer acquisition costs and higher lifetime value (LTV), reduced churn and increased loyalty. Once a paying customer is acquired, companies can cross-sell and up-sell them into different products, categories, and even brands. The fight to find that customer will be much easier leading to an increase in transaction volume. As they reduce friction in the payment process and increase customer loyalty, they’ll accrue data behind customer cohorts leading to a customer-centric experience.

Companies who cater to their customers and develop direct relationships with them, will own the future.

Working more magic at Disney

Walt Disney has in a sense become more Disney-like in how it earns its profits. After 20 years of being dominated by television, especially cable, the company is returning to its roots in films and theme parks. Seven years ago, for each $1 in operating profit that Disney made from its parks and studios, it generated $3 in TV. During the fiscal year ended September, parks and studios retook the lead.

The coming streaming platform will be reported to Wall Street as a separate Netflix-like division within Disney. Investors will see how much cash the unit is paying for content. New Disney, so to speak, will pay this money to Old Disney. “What I’ve discovered is, businesses in a traditional space that want to innovate and spend money to do so, they park the cost of innovation in their traditional businesses,” Iger says. “Those businesses all kind of suffer from the cost of that innovation, because it’s not typically monetized right away. You can get impatient to the point of losing interest and abandoning innovation, because you don’t have the patience to wait for it to really pay off.”

For decades, Disney was largely a moviemaker with theme parks, although television has long been part of the mix; The Mickey Mouse Club, which began on ABC in 1955, helped finance Disneyland, and the Disney Channel has been a cable mainstay since the 1980s. But in 1995, Disney surprised investors with a $19 billion acquisition of Capital Cities/ABC, gaining a prosperous TV network and a thriving ESPN. As cable spread service across the nation, and TV producers learned how to extract higher fees from cable operators for their content, the small screen became Disney’s big earner.

Iger planted the roots of Disney’s growth spurt in its traditional businesses when he rolled up major story-telling outfits that weren’t for sale. He did that by visiting their bosses one-on-one: Steve Jobs, culminating in the $7.4 billion purchase of Pixar in 2006; Isaac Perlmutter, for a $4 billion acquisition of Marvel Entertainment in 2009; and George Lucas, in a $4 billion deal for Lucasfilm in 2012. What has followed has been a film boom for the ages.

This year, Disney will again become the only studio in history to reap $7 billion in worldwide box office receipts: $4 billion internationally and $3 billion in the U.S. It also did so in 2016. And Disney makes eight to 10 films a year; some big studios make two dozen.

Box office results relate to return on invested capital the way dunking a basketball relates to winning a game: The former gets the crowd’s attention, but people with stakes care mostly about the latter. The broader film industry operates with a single-digit return, Iger says. Yet there are years when Disney’s film returns top 30%. As a result, studio operating income has multiplied more than fourfold since 2011, to nearly $3 billion during the fiscal year ended in September.

Does AI make strong tech companies stronger?

First, though you need a lot of data for machine learning, the data you use is very specific to the problem that you’re trying to solve. GE has lots of telemetry data from gas turbines, Google has lots of search data, and Amex has lots of credit card fraud data. You can’t use the turbine data as examples to spot fraudulent transactions, and you can’t use web searches to spot gas turbines that are about to fail. That is, ML is a generalizable technology – you can use it for fraud detection or face recognition – but applications that you build with it are not generalized. Each thing you build can only do one thing. This is much the same as all previous waves of automation: just as a washing machine can only wash clothes and not wash dishes or cook a meal, and a chess program cannot do your taxes, a machine learning translation system cannot recognise cats. Both the applications you build and the data sets you need are very specific to the task that you’re trying to solve (though again, this is a moving target and there is research to try to make learning more transferable across different data sets).

So: as an industrial company, do you keep your own data and build the ML systems to analyse it (or pay a contractor do do this for you)? Do you buy a finished product from a vendor that’s already trained on other people’s data? Do you co-mingle your data into that, or into the training derived from it? Does the vendor even need your data or do they already have enough? The answer will be different in different parts of your business, in different industries and for different use cases.

This takes me to a metaphor I’ve used elsewhere – we should compare machine learning to SQL. It’s an important building block that allowed new and important things, and will be part of everything. If you don’t use it and your competitors do, you will fall behind. Some people will create entirely new companies with this – part of Wal-Mart’s success came from using databases to manage inventory and logistics more efficiently. But today, if you started a retailer and said “…and we’re going to use databases”, that would not make you different or interesting – SQL became part of everything and then disappeared. The same will happen with machine learning.


One giant step for a chess-playing machine

Most unnerving was that AlphaZero seemed to express insight. It played like no computer ever has, intuitively and beautifully, with a romantic, attacking style. It played gambits and took risks. In some games it paralyzed Stockfish and toyed with it. While conducting its attack in Game 10, AlphaZero retreated its queen back into the corner of the board on its own side, far from Stockfish’s king, not normally where an attacking queen should be placed.

Yet this peculiar retreat was venomous: No matter how Stockfish replied, it was doomed. It was almost as if AlphaZero was waiting for Stockfish to realize, after billions of brutish calculations, how hopeless its position truly was, so that the beast could relax and expire peacefully, like a vanquished bull before a matador. Grandmasters had never seen anything like it. AlphaZero had the finesse of a virtuoso and the power of a machine. It was humankind’s first glimpse of an awesome new kind of intelligence.

Tellingly, AlphaZero won by thinking smarter, not faster; it examined only 60 thousand positions a second, compared to 60 million for Stockfish. It was wiser, knowing what to think about and what to ignore. By discovering the principles of chess on its own, AlphaZero developed a style of play that “reflects the truth” about the game rather than “the priorities and prejudices of programmers,” Mr. Kasparov wrote in a commentary accompanying the Science article.

What is frustrating about machine learning, however, is that the algorithms can’t articulate what they’re thinking. We don’t know why they work, so we don’t know if they can be trusted. AlphaZero gives every appearance of having discovered some important principles about chess, but it can’t share that understanding with us. Not yet, at least. As human beings, we want more than answers. We want insight. This is going to be a source of tension in our interactions with computers from now on.

Maybe eventually our lack of insight would no longer bother us. After all, AlphaInfinity could cure all our diseases, solve all our scientific problems and make all our other intellectual trains run on time. We did pretty well without much insight for the first 300,000 years or so of our existence as Homo sapiens. And we’ll have no shortage of memory: we will recall with pride the golden era of human insight, this glorious interlude, a few thousand years long, between our uncomprehending past and our incomprehensible future.


Evaluating early stage startups — The three metrics that matter

Defining “fast growth” depends on stage, but for early (Seed or Series A), growing 100% YoY is typically pretty solid. Paul Graham (PG) famously looks for 5–7% weekly growth for companies in Y Combinator, and his rationale is pretty simple: “a company that grows at 1% a week will grow 1.7x a year, whereas a company that grows at 5% a week will grow 12.6x.” When you consider the compounding effects of this growth, it means a company starting with $1,000 in revenue and growing at 1% will be at $7,900 per month four years later, whereas the company growing 5% per week will be bringing in more than $25 million per month.


The founder’s guide to understanding investors

When we dig deeper, the degree to which early-stage investing is a grand slam business is shocking. First, amongst early stage investors, the returns are disproportionately distributed. The Kauffman Foundation, an investor in many VC funds, found the top 20 VC firms (~3% of VC firms), generate 95% of all venture returns. Second, outside of the top 20 VC firms, most lose money! A study found the top 29 VC firms made a profit of $64B on $21B invested, while the rest of the VC universe lost $75B on $160B invested.

As early-stage investing operates on a power law, Paul Graham (founder of Y Combinator) mentions “You [as an investor] have to ignore the elephant in front of you, the likelihood they’ll [the startup] succeed, and focus instead on the separate and almost invisibly intangible question of whether they’ll succeed really big.” He highlights there are 10,000x variations (!) in startup investing returns, meaning top investors must have the mindset of willing to strike out in order to hit grand slams.

There needs to be room for your startup to capture a large share of this market. Elad Gil (early investor in Airbnb, Coinbase, Gusto, Instacart, Stripe), explains this means i) the market is structurally set up to support multiple winners, but ii) if the market only supports one winner and customers are currently not served well – there is an opportunity to dominate the market.

At the Series A stage, investors are mainly looking to see if PMF is achieved. This evaluation can be qualitative – Marc Andreessen (co-founder of Netscape and Andreessen Horowitz, an early investor in Facebook, Twitter, Wealthfront, Slack) notes, on the inside, “you can always feel product/market fit when it’s happening. The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can. Reporters are calling…”

When investors are evaluating for PMF, Rachleff notes that the best test is to see if the product is growing exponentially with no marketing, meaning the product is so good it grows through word of mouth. Top investors often don’t want to see marketing spend because it shows care for vanity metrics (things that don’t matter) rather than building an amazing product that people engage with (which does matter).

Not all buzzwords will fulfill their potential and result in a disruptive technology shift though. As a founder, you can reduce this risk by avoid starting a startup on that shift until the technology adoption is growing quickly and reaches a multi-hour per day level of usage. Sam Altman expands, “It’s very hard to differentiate between fake trends and real trends…If you think hard and you really pay attention, sometimes you can. The metric I use to differentiate between a real trend and a fake trend is similar to loving a product. It’s when there is a new platform that people are using many hours every day.”

To believe the startup can fulfill grand slam potential, investors want to see the startup has verified their assumptions on how users find the product in a repeatable and scalable manner. This is also called a go-to-market strategy (GTM).

Bill Gurley (major early investor in Uber, Stitch Fix, Zillow, etc.) called a unique GTM the most under-appreciated part about startups. It’s not about who did it first, but who did it right. Gurley looks to see if the startup has two things: (1) An interesting way to get into the market; (2) A way to establish themselves once in the market. The word ‘unique’ is important here. Replicating existing GTM strategies is often too costly because incumbents have already dried up the channel(s) to market and sell to customers. As a founder, you need to find a unique GTM that is repeatable and scalable. The good news here is that if you succeed, you’ll be able to keep out competitors by saturating the new channels.

Andy Rachleff has a second perspective on how startups can avoid competition. With his adaptation to Clayton Christensen’s (Harvard Business School Professor) disruption theory, startups can compete with reduced competition in either two ways. They can compete via new-market disruption – targeting a new set of users and competing on different characteristics (e.g. instead of price, focus on experience) than competitors, or they can compete via low-end disruption – targeting the same set of users as incumbents, but offering a greatly reduced product at a lower price point.

Along with the above quote, Bill Gurley tests if executives at the startup have a notion of insane curiosity – constantly learning new ways to win. To evaluate this, he asks questions on what information (e.g. books, podcasts) executives learn from, how they engage with it, and then probes if they are trying to use that information to majorly improve themselves or their business.

Curious folks tinker. Obsessively curious folks solve the hardest problems that require endless tinkering. If you are obsessively curious and fail with your original plan, odds are you will use your learnings and pivot into a big market that loves their product.

If a founder is obsessively curious, they can navigate the idea maze. By running a founder through the idea maze, investors evaluate if the founder understands all permutations of their idea, why their plan is superior to all other competitors, and which turns to lead to treasure versus which ones lead to certain death. It’s important for a founder to thoroughly know their idea maze, it can save years by not going down the wrong path, in addition to convincing investors you know can be a grand slam.

Rating citizens – can China’s social credit system fix its trust deficit?

In some Chinese cities, if you have wilfully defaulted on paying your debts, callers to your mobile phone will hear this message instead of the usual ringback tone: “This is a friendly reminder from the people’s court of XX city. The person you have just called has been declared a trust-breaker subject to enforcement by the court …”

Given that 80 per cent of respondents in a 2018 opinion poll conducted across China have approved of the social credit system, it seems that most Chinese, for now, do not consider the drastic surveillance scheme a violation of their privacy. Instead, most see the merit of the system in the perks they may enjoy and its potential in fostering trustworthiness in society.

However, the feasibility of this is highly questionable since the government is simultaneously the enforcer, the appraiser and the appraisee. For instance, many local governments in China have often failed to repay debt ranging from a few thousand to tens of million yuan, including loans, payment to contractors, and compensation for seized land. Since local governments are the ones that assess trustworthiness and mete out punishment, will they themselves be subject to the same penalties as other defaulters?

In this county, slandering others online will take 100 points off your social credit rating, while manufacturing and selling fake products will set you back by merely 35 points. Someone who may be rightfully seeking redress by occupying government offices may be slapped with a 50-point deduction, the same penalty as someone who has given or received bribes.

Curated Insights 2018.11.23

No more “struggle porn”

I call this “struggle porn”: a masochistic obsession with pushing yourself harder, listening to people tell you to work harder, and broadcasting how hard you’re working.

Struggle porn has normalized sustained failure. It’s made it acceptable to fly to Bali and burn through your life savings trying to launch an Amazon dropshipping business. Made it reasonable to keep living on your parents money for years after graduation while you try to become #instafamous. Made LinkedIn into a depressingly hilarious circlejerk for people who look way too excited to be having their headshot taken.

Working hard is great, but struggle porn has a dangerous side effect: not quitting. When you believe the normal state of affairs is to feel like you’re struggling to make progress, you’ll be less likely to quit something that isn’t going anywhere.

Rule #1 of #StrugglePorn: if someone is bragging about how hard they’re working, you can be sure their business is failing. I don’t know anyone running a multi-million dollar business who follows struggle pornographers like GaryVee. They don’t need the feel-good reassurance that beating their head against the wall is worthwhile. They’re making money, not LinkedIn posts. They’re busy, not struggle busy.


How software is helping big companies dominate

Economies of scale are certainly part of the answer. Software is expensive to build but relatively cheap to distribute; larger companies are better able to afford the up-front expense. But these “supply-side economies of scale” can’t be the only answer or else vendors, who can achieve large economies of scale by selling to the majority of players in the market, would dominate. Network effects, or “demand-side economies of scale,” are another likely culprit. But the fact that the link between software and industry concentration is pervasive outside of the tech industry — where companies are less likely to be harnessing billions of users — suggests network effects are only part of the story.

Research suggests that the benefits of information technology depend in part on management. Well-managed firms get more from their IT investments, and big firms tend to be better managed. There are other “intangible” assets that differentiate leading firms, and which can be difficult or costly to replicate. A senior executive who has worked at a series of leading enterprise software firms recently told one of us (Walter) that a company’s ability to get more from an average developer depended on successfully setting up “the software to make software” — the tools, workflows, and defaults that allow a programmer to plug in to the company’s production system without having to learn an endless number of new skills.

Patents and copyright also make it harder for software innovations to spread to other companies, as do noncompete agreements that keep employees from easily switching jobs. But one of the biggest barriers to diffusion — and therefore one of the biggest sources of competitive advantage for the firms that excel at software — comes down to how companies are organized.

As Dixon, the VC, clearly recognized, these architectural innovations can create openings for startups. “Before [Lyft and Uber] were started, there were multiple startups that tried to build software that would make the taxi and limo industry more efficient,” Dixon has noted. If Uber had merely created software for dispatching taxis, incumbents would have been well positioned to adopt it, according to Henderson’s theory. One “component” of the service would have been changed by technology (dispatching) but not the entire architecture of the service. But ridesharing startups like Uber and Lyft didn’t didn’t just make taxis more efficient; they fundamentally changed the way the different pieces of the system fit together.

Lakhani’s answer is that Apple had the right architecture to bring phones into the internet age. Apple and Nokia both had plenty of the intangible assets necessary to excel in the smartphone business, including software developers, hardware engineers, designers. But Apple’s structure and culture were already based around the combination of hardware and a software ecosystem to which third parties contributed. It already had experience building hardware, operating systems, and software development kits from its PC business. It had built a software platform to deliver content to mobile devices in the form of iTunes. Steve Jobs initially resisted letting developers build apps for the iPhone. But when he eventually gave in, the app store became the iPhone’s key advantage. And Apple was able to manage it because of its existing “architecture.” Like any theory, architectural innovation can’t explain everything. If experience building operating systems and SDKs were so key, why didn’t Microsoft invent the winning smartphone? Apple’s particular acumen in product design clearly mattered, too. But architectural innovation helps explain why certain capabilities are so tough to replicate.

There is some good news: research suggests that cloud computing is helping smaller, newer firms to compete. Also, some firms are unbundling their advanced capabilities. For example, Amazon now offers complete fulfillment services including two-day delivery to sellers, large and small, on its Marketplace. It may be that Carr was right in principle but just had the timing wrong. But we wouldn’t bet on it. Some aspects of software will be democratized, including perhaps some areas where companies now derive competitive advantage. But other opportunities will arise for companies to use software to their advantage. One in particular stands out: even when machine learning software is freely available, the datasets to make it valuable often remain proprietary, as do the models companies create based on them. Policy may be able to help level that playing field. But companies that don’t invest in software and data capabilities risk being left behind.

Disney is spending more on theme parks than it did on Pixar, Marvel and Lucasfilm combined

Disney faces an enviable challenge: Even with steady price increases for peak periods — single-day peak tickets at Disneyland in California now run $135 — visitor interest often exceeds capacity at some properties. “You can only let so many people in a park before you start to impede on satisfaction level,” Mr. Chapek said.

So Disney’s expansion plan is more ambitious than building a “Black Panther” roller coaster here or introducing an “Incredibles” character there. The goal is transformation — adding significant capacity to Disney’s most popular parks (Disneyland, Tokyo DisneySea) and giving others major upgrades (Epcot, Disney Studios Park at Disneyland Paris) to help attract visitors more evenly throughout the empire.

In terms of attracting crowds and creating excitement, nothing quite compares to the “Star Wars” franchise. In 2019, Disney World and Disneyland will open matching 14-acre “lands” called Star Wars: Galaxy’s Edge. On one lavish attraction, guests will board an Imperial Star Destroyer, where roughly 50 animatronic stormtroopers await in formation. On another, guests will be able to pilot an interactive Millennium Falcon.

Even so, Ms. Reif said she was pleased that Disney was spending so heavily on its parks. “It’s the highest return on investment that Disney has,” she said.

Disney Cruise Line will also nearly double in size by 2023. Disney has ordered three new ships costing an analyst-estimated $1.25 billion apiece. It is buying 746 acres on a Bahamian island to build a second Caribbean port. (Disney already has one private island port.)

Rocket Lab’s modest launch is giant leap for small rocket business

Advances in technology and computer chips have enabled smaller satellites to perform the same tasks as their predecessors. And constellations of hundreds or thousands of small satellites, orbiting at lower altitudes that are easier to reach, can mimic the capabilities once possible only from a fixed geosynchronous position.

A Falcon Heavy can lift a payload 300 times heavier than a Rocket Lab Electron, but it costs $90 million compared to the Electron’s $5 million. Whereas SpaceX’s standard Falcon 9 rocket has no shortage of customers, the Heavy has only announced a half-dozen customers for the years to come.


Self-driving cars will be for sex, scientists say

“One of the starting points was that AVs will provide new forms of competition for hotels and restaurants. People will be sleeping in their vehicles, which has implications for roadside hotels. And people may be eating in vehicles that function as restaurant pods,” says Scott Cohen, deputy director of research of the School of Hospitality and Tourism Management at the University of Surrey in the U.K., who led the study. “That led us to think, besides sleeping, what other things will people do in cars when free from the task of driving? And you can see that in the long association of automobiles and sex that’s represented in just about every coming-of-age movie. It’s not a big leap.”

Of the many conclusions the paper drew about the way AVs will reshape urban tourism, perhaps the most surprising was that they’ll also revolutionize red light districts, putting prostitution on wheels. In Amsterdam, the industry (which is far from the regulated sexual utopia it’s often purported to be) was an $800 million business in 2011.

Is there a new debt crisis on the horizon?

Historically, the cycle of interest rate hikes by the Federal Reserve has been a key factor in the pricing and volatility of relatively risky and illiquid assets, such as fixed income securities issued and traded in emerging markets. If anything, recent turmoil in the global debt, equity and currency markets once again questions the viability and sustainability of the economic growth in some emerging economies and emerging financial markets.

If history can be a useful benchmark, three types of risks may emerge in emerging economies in response to interest rate hikes: 1. Capital flight; 2. Asset price fluctuation; 3. Currency devaluation.

Three charts that explain boom in Southeast Asia’s net economy

The region’s ride-hailing market will expand to about $7.7 billion in 2018 and is expected to reach $28 billion by 2025, underscoring the ambition of Go-Jek and Grab to become Southeast Asia’s super apps. Google and Temasek began including online food delivery in this category for the first time this year, given the growing importance of that business.

Online travel is the largest and most established among the four sectors of the internet economy, accounting for about $30 billion in bookings in 2018. About 41 percent of all travel bookings made in Southeast Asia were completed online, up from 34 percent in 2015. By 2025, 57 percent of the bookings will be made online when the market is projected to reach $78 billion.

Online shopping has been the fastest growing sector of the internet economy, reaching $23 billion in 2018. It’s expected to exceed $100 billion by 2025.

Box CEO Aaron Levie thinks big companies are responding to disruption the wrong way

But the root of where that innovation comes from, whether it’s Netflix, Amazon, Lyft, or Airbnb, is that these businesses are run completely differently than the incumbents. A lot of incumbents attempt to either buy, acquire, or partner with those disrupters, but that’s not going to get to the root of actually solving the problem over the long run, which is that your company has to fundamentally run in a different way in the digital age.

That’s the fundamental difference between how most people are responding to disruption and how you realistically need to in the digital age. Yes, the business model is important. Yes, the consumer experience is incredibly important. But the sustainable way to make sure you’re always able to keep up with that is by looking at your organization and your operations. That’s the thing that most companies tend to miss.


Why it’s easier to make decisions for someone else

We should also work to distance ourselves from our own problems by adopting a fly-on-the-wall perspective. In this mindset, we can act as our own advisors—indeed, it may even be effective to refer to yourself in the third-person when considering an important decision as though you’re addressing someone else. Instead of asking yourself, “what should I do?” ask yourself “what should you do?”.

Another distancing technique is to pretend that your decision is someone else’s and visualize it from his or her perspective. This can be very easy when thinking of famous exemplars, such as how Steve Jobs would make your decision. By imagining how someone else would tackle your problem, people may unwittingly help themselves.

Perhaps the easiest solution is to let others make our decisions for us. By outsourcing our choices, we can take advantage of a growing market of firms and apps that make it increasingly easier for people to “pitch” their decisions to others. For example, people can have their clothes, food, books, or home decor options chosen for them by others.

The unfair advantage of discomfort

The most uncrowded path to profound wealth is often subtle improvements in an existing industry so beautifully boring as to not attract attention from those attempting to sharpen a unicorn horn instead.

Curated Insights 2018.11.16

The Experience Economy

What makes this possible is the paradigm shift I just described: consumers are always connected, which means reaching them is dramatically cheaper than it used to be. Even seemingly basic channels like email are very effective at driving surveys that show exactly how consumers are feeling immediately after interacting with a company or buying their product.

This gives an entirely new level of insight to management: while ERP showed what was happening in the main office, and CRM what was happening in offices all over the world, experience management promises the ability to understand what is happening with customers directly. It is a perfect example of business using new technology and paradigms to their advantage.

To win in the experience economy there are two pieces to the puzzle. SAP has the first one: operational data, or what we call O-data, from the systems that run companies. Our applications portfolio is end-to-end, from demand chain to supply chain. The second piece of the puzzle is owned by Qualtrics. Experience data, or, X-data. This is actual feedback in real-time from actual people. How they’re engaging with a company’s brand. Are they satisfied with the customer experience that was offered. Is the product doing what they expected? What do they feel about the direction of their employer?

Think of it this way: the O-data tells you what happened, the X-data tells you why it happened. At present, there is not technology company that brings these two worlds together. In particular, this exposes the structural weaknesses of CRM offerings, which are still back-office focused. Experience management is about helping every person outside of companies influence every person inside a company. So SAP and Qualtrics will do just that: the strategic value of this announcement is rivaled only by the business value.

Inside John Malone’s world

“Malone has long been focused on economic return,” says Vijay Jayant, an analyst with Evercore ISI. “He’s not an empire builder for the sake of owning assets. His strategy has worked out well for the people sitting on the same side of the table as him—the shareholders in his companies.”

Warren Buffett is often a point of comparison. Among the major differences is that Malone favors creating pure-play companies, while Buffett keeps everything under one roof at Berkshire Hathaway. Malone is comfortable with financial leverage, while Buffett shuns it. “Our businesses are rationally levered with cheap money,” Malone says. “It creates a higher return on equity for our investors. There’s no reason to think the leopard will change its spots.”

Here’s Malone’s take: “We’re not out there competing to buy Red Hat for $35 billion, but we have always been an opportunistic company. We try to position ourselves so that we can take advantage of opportunities through timely investments, good management, and synergies with our existing businesses.”

His method of control through supervoting stock is ingenious. He leverages relatively small economic stakes in Liberty companies—all fall below 10%—with a total value of about $5 billion into an influential voice or effective control of virtually all of them through ownership of supervoting stock. The beauty of Malone’s approach is illustrated by Liberty Broadband, which holds a 20.6% stake in Charter. Malone’s stake in Liberty Broadband of less than 4%, worth about $500 million, gives him a strong voice at Charter—a company with a market value of $75 billion—and effective veto power over important strategic decisions.

Why technology favors tyranny

Even if some societies remain ostensibly democratic, the increasing efficiency of algorithms will still shift more and more authority from individual humans to networked machines. We might willingly give up more and more authority over our lives because we will learn from experience to trust the algorithms more than our own feelings, eventually losing our ability to make many decisions for ourselves. Just think of the way that, within a mere two decades, billions of people have come to entrust Google’s search algorithm with one of the most important tasks of all: finding relevant and trustworthy information. As we rely more on Google for answers, our ability to locate information independently diminishes. Already today, “truth” is defined by the top results of a Google search. This process has likewise affected our physical abilities, such as navigating space. People ask Google not just to find information but also to guide them around. Self-driving cars and AI physicians would represent further erosion: While these innovations would put truckers and human doctors out of work, their larger import lies in the continuing transfer of authority and responsibility to machines.

Lethal bacteria help power kidney drug to beat 1-in-1,000 odds

Doctors believe they’ve found an answer for patients like Romero in a protein that is produced by lethal bacteria. The protein, which temporarily wipes out antibodies, was crafted into an experimental drug called imlifidase to give donated organs a fighting chance against the immune system’s defenses. Developer Hansa Medical AB says imlifidase could make transplants possible for about 35,000 U.S. patients who currently have poor odds, and increase matches for others.

Trends & time lapses

The most common age in the U.S. right now is 27. In fact, by 2020, the 10 most common ages in the U.S. will all be 35 and under. A wave of young people will be saving, investing, and buying houses in the coming years. This fits with my theory that baby boomers will not destroy the stock market as they retire en masse because millennials actually outnumber them now.

The housing market will always have its ups and downs but based purely on this demographic data my inclination would be to conclude real estate across the country will continue to rise in the coming decades as millennials begin settling down and starting families. That will put some massive pressure on the housing market where supply is relatively constrained following the real estate boom and bust of the 2000s.

The relative stability of the United States as the largest economy in the world is impressive. People have been calling for a downfall of the American empire for some time now but the U.S. has a lot of built-in advantages — a diversified, dynamic economy, a vibrant technology industry, a better demographic profile than the rest of the developed world, diversity and immigration (people still want to come live here), and our increasing role as a big player in the energy space to name a few.

When things get wild

There are three legal investment strategies: You can be smarter than others. You can be luckier than others. Or you can be more patient than others. Know your edge and how hard it is to maintain.

If investing were all about math, mathematicians would be rich. If it were all about history, historians would be rich. If it were all about economics, economists would be rich. If it were all about psychology, psychologists would be rich. In reality it’s a mix of many disciplines, but some of the brightest people specialize in one topic and can’t see the world through another lens.

Your lifetime results as an investor will be mostly determined by what you do during wild times.

How this all happened

People measure their well being against their peers. And for most of the 1945-1980 period, people had a lot of what looked like peers to compare themselves to. Many people – most people – lived lives that were either equal or at least fathomable to those around them. The idea that people’s lives equalized as much as their incomes is an important point of this story we’ll come back to.

Quantitative easing both prevented economic collapse and boosted asset prices, a boon for those who owned them – mostly rich people. The Fed backstopped corporate debt in 2008. That helped those who owned their debt – mostly rich people.

Tax cuts over the last 20 years have predominantly gone to those with higher incomes. People with higher incomes send their kids to the best colleges. Those kids can go on to earn higher incomes and invest in corporate debt that will be backstopped by the Fed, own stocks that will be supported by various government policies, and so on. Economist Bhashkar Mazumder has shown that incomes among brothers are more correlated than height or weight. If you are rich and tall, your brother is more likely to also be rich than he is tall.

None of these things are problems in and of themselves, which is why they stay in place. But they’re symptomatic of the bigger thing that’s happened since the early 1980s: The economy works better for some people than others. Success isn’t as meritocratic as it used to be and, when success is granted, is rewarded with higher gains than in previous eras.

How do you help a grieving friend?

Cheering people up, telling them to be strong and persevere, helping them move on…it doesn’t actually work. It’s kind of a puzzle. It seems counterintuitive, but the way to help someone feel better is to let them be in pain.

Grief… happens upon you, it’s bigger than you. There is a humility that you have to step into, where you surrender to being moved through the landscape of grief by grief itself. And it has its own timeframe, it has its own itinerary with you, it has its own power over you, and it will come when it comes. And when it comes, it’s a bow-down. It’s a carve-out. And it comes when it wants to, and it carves you out — it comes in the middle of the night, comes in the middle of the day, comes in the middle of a meeting, comes in the middle of a meal. It arrives — it’s this tremendously forceful arrival and it cannot be resisted without you suffering more… The posture that you take is you hit your knees in absolute humility and you let it rock you until it is done with you. And it will be done with you, eventually. And when it is done, it will leave. But to stiffen, to resist, and to fight it is to hurt yourself.

Curated Insights 2018.10.12

“[The whole tech bubble] is very interesting, because the stock is not the company and the company is not the stock. So as I watched the stock fall from $113 to $6 I was also watching all of our internal business metrics: number of customers, profit per unit, defects, everything you can imagine. Every single thing about the business was getting better, and fast. So as the stock price was going the wrong way, everything inside the company was going the right way. We didn’t need to go back to the capital markets because we didn’t need more money. The only reason a financial bust makes it really hard is to raise money. So we just needed to progress.”

“Everything I have ever done has started small. Amazon started with a couple of people. Blue Origin started with five people and the budget was very small. Now the budget approaches a billion dollars. Amazon was literally ten people, today it’s half a million. For me it’s like yesterday I was driving packages to the post office myself and hoping one day we could afford a forklift. For me, I’ve seen small things get big and it’s part of this ‘day one’ mentality. I like treating things as if they’re small; Amazon is a large company but I want it to have the heart and spirit of a small one.”

“I believe in the power of wandering. All of my best decisions in business and in life have been made with heart, intuition and guts. Not analysis. When you can make a decision with analysis you should do so. But it turns out in life your most important decisions are always made with instinct, intuition, taste and heart.”

“AWS completely reinvented the way companies buy computation. Then a business miracle happened. This never happens. This is the greatest piece of business luck in the history of business as far as I know. We faced no like-minded competition for seven years. It’s unbelievable. When you pioneer if you’re lucky you get a two year head start. Nobody gets a seven year head start. We had this incredible runway.”

“We are so inventive that whatever regulations are promulgated or however it works, that will not stop us from serving customers. Under all regulatory frameworks I can imagine, customers are still going to want low prices, they are still going to want fast delivery, they are still going to want big selection. It is really important that politicians and others need to understand the value big companies bring and not demonise or vilify big companies. The reason is simple. There are certain things only big companies can do. Nobody in their garage is going to build an all carbon-fiber fuel efficient Boeing 787. It’s not going to happen. You need Boeing to do that. This world would be really bad without Boeing, Apple, Samsung and so on.”

How big can Amazon get?

What business is Amazon most similar to? Definitely not Wal-Mart. Amazon’s model is much, much closer to Costco’s model. How does Costco’s model differ from Wal-Mart’s model?

Costco does not try to be a leading general retailer in specific towns, counties, states, the nation as a whole, etc. What Costco does is focus on getting a very big share of each customer’s wallet. Costco also focuses on achieving low costs for the items it does sell by concentrating its buying power on specific products and therefore being one of the biggest volume purchasers of say “Original” flavor Eggo waffles. It sells these waffles in bulk, offers them in one flavor (Wal-Mart might offer five different flavors of that same product) and thereby gets its customer the lowest price.

There’s two functions that Costco performs where it might be creating value, gaining a competitive advantage, etc. One is supply side. Costco may get lower costs for the limited selection it offers. In some things it does. In others, it doesn’t. The toughest category for Costco to compete in is in fresh food. I shop at Costco and at other supermarkets in the area. The very large format supermarkets built by companies like HEB (here in Texas) can certainly match or beat Costco, Wal-Mart, and Amazon (online and via Whole Foods stores) when it comes to quality, selection, and price for certain fresh items. But, what can Costco do that HEB can’t? It can have greater product breadth (offering lots of non-food items) and it can make far, far, far more profit per customer.

Now, an interesting question to ask is what SHOULD determine the market value per customer. Not what does. But, what should? In other words, if we had to do a really, really long-term discounted cash flow calculation – what variables would matter most? If two companies both have 10 million customers which company should be valued higher and why? Two variables matter. One: Annual profit per customer. Two: Retention rate. Basically, we’re talking about a DCF here. If Company A and Company B both have 10 million customers and both make $150 per customer the company that should have a higher earnings multiple (P/E or P/FCF) should be the one with the higher retention rate.

What Spotify can learn from Tencent Music

Tencent Music is no small player: As the music arm of Chinese digital media giant Tencent, its four apps have several hundred million monthly active users, $1.3 billion in revenue for the first half of 2018, and roughly 75 percent market share in China’s rapidly growing music streaming market. Unlike Spotify and Apple Music, however, almost none of its users pay for the service, and those who do are mostly not paying in the form of a streaming subscription.

Its SEC filing shows that 70 percent of revenue is from the 4.2 percent of its overall users who pay to give virtual gifts to other users (and music stars) who sing karaoke or live stream a concert and/or who paid for access to premium tools for karaoke; the other 30 percent is the combination of streaming subscriptions, music downloads, and ad revenue.

Tencent Music has an advantage in creating social music experiences because it is part of the same company that owns the country’s leading social apps and is integrated into them. It has been able to build off the social graph of WeChat and QQ rather than building a siloed social network for music. Even Spotify’s main corporate rivals, Apple Music and Amazon Music, aren’t attached to leading social platforms.


Traffic acquisition costs

In other words the two companies have an agreement that Apple is paid in proportion to the actual query volume generated. This would extend the relationship from one of granting access for a number of users or devices to revenue sharing based on usage or consumption. Effectively Apple would have “equity” in Google search sharing in the growth as well as decline in search volume.

The idea that Apple receives $1B/month of pure profit from Google may come as a shock. It would amount to 20% of Apple’s net income and be an even bigger transfer of value out of Google. The shock comes from considering the previously antagonistic relationship between the companies.

The remarkable story here is how Apple has come to be such a good partner. Both Microsoft and Google now distribute a significant portion of their products through Apple. Apple is also a partner for enterprises such as Salesforce, IBM, and Cisco. In many ways Apple is the quintessential platform company: providing a collaborative environment for competitors as much as for agnostic third parties.

Shares of pet insurer Trupanion are overvalued

Much of the Trupanion excitement is based on the low 1% penetration rate and the fact that it’s the only pet-insurance pure play. Bradley Safalow, who runs PAA Research, an independent investment research firm, disputes the lofty expectations. Bulls extrapolate from industry data that say about two million pets out of 184 million in North America are insured now. Safalow says that ignores a key factor—the income levels of pet owners. Because Trupanion’s policies cost about $600 to $1,500 annually and don’t cover wellness visits, he estimates that, in the case of dogs, which represent 85% of the pet market, a more realistic target customer would be owners who earn $85,000 or more a year. Based on that benchmark, Safalow estimates insurance penetration—of those most likely to buy it—at about 6% already for dogs.

The requests for rate increases would indicate that premiums aren’t keeping up with claims; that the policy risks are worse than the company expected; and that the profitability of its book of business is relatively weak. APIC’s ratio of losses and loss-adjustment expense to premiums earned have risen steadily over the past four years to 75.6% in the first quarter of this year from 68.9% for all of 2014, according to state filings. The loss ratio is total losses incurred in claims plus costs to administer the claims (loss adjustment expense) divided by premiums earned.

Bob Iger’s bets are paying off big time for Disney

Iger thinks he knows how to coax consumers who already pay for one streaming service to either add another or switch to Disney’s. “We’re going to do something different,” he says. “We’re going to give audiences choice.” There are thousands of barely watched movies on Netflix, and Iger figures that people don’t like to pay for what they don’t use. So families can buy only a Disney stream, which will offer Pixar, Marvel, Lucas, Disney-branded programming. Sports lovers can opt just for an ESPN stream. Hulu, of which Disney will own a 60% stake after it buys Fox (and perhaps more if it can persuade Comcast to sell its share), will beef up ABC’s content with Fox Searchlight and FX and other Fox assets. “To fight [Amazon and Netflix], you’ve got to put a lot of product on the table,” says Murdoch. “You take what Disney’s got in sports, in family, in general entertainment—they can put together a pretty great offer.”

Having a leader who is willing to insulate key creative people from the vicissitudes of business has helped Disney successfully incorporate its prominent acquisitions. They have not been Disneyfied. Marvel movies are not all of a sudden family friendly (at least not by Disney standards). Pixar movies have not been required to add princesses. Most of the people who ran the companies before Disney bought them still run them (with the exception of John Lasseter, who was ousted in June in the wake of #MeToo). “I’ve been watching him with his people and with Fox people; he’s clearly got great leadership qualities,” says Murdoch.”He listens very carefully and he decides something and it’s done. People respect that.”


Can anyone bury BlackRock?

Today the Aladdin platform supports more than $18 trillion, making it one of the largest portfolio operating systems in the industry. BlackRock says Aladdin technology has been adopted in some form by 210 institutional clients globally, including asset owners such as CalSTRS and even direct competitors like Vanguard.

“Not only does it provide risk transparency, but it also provides an ability to model trades, to capture trades, to structure portfolios, to manage portfolio compliance — all of the operating components of the workflow,” Goldstein says. “It’s a comprehensive, singular enterprise platform versus a model where you’re piecing together a lot of things and trying to figure out how to interface them.”

In a market that’s traditionally been very fragmented, BlackRock’s ability to offer an integrated, multipurpose platform has proven a strong selling point for prospective clients — even when it’s up against competitors that perform specific functions better.

How to break up a credit ratings oligopoly

This is not to say Kroll’s firm, Kroll Bond Rating Agency, hasn’t been successful. It grew gross fees by 49 percent annualized between 2012 and the end of 2017 on the back of growing institutional demand for alternative investments. Since 2011 it has rated 11,920 transactions, representing $785 billion and 1,500 issuers. Still, KBRA and other competitors, including Lisbon-based ARC Ratings and Morningstar Credit Ratings, that have entered the sector in the last decade have barely made a dent in the market share of the big three.

The upstarts are facing more than just deeply entrenched competition, although that is striking: S&P, Moody’s, and Fitch control more than 90 percent of the market combined. A host of other complex factors have combined to make it nearly impossible to dislodge the big three — and to address the central conflict of interest baked into the ratings agency business model.


Elon Musk, Google and the battle for the future of transportation

We think a similar analogy is likely with AV/EV — the most economically well-off people will still care about comfort, features, and identity that the AV/EV they ride and arrive in imparts on them. If Waymo can deliver a premium experience at a better price and higher utility than their current solution (i.e. driving themselves in their own cars or Ubers/taxis) with cost economics that yield a strong profit margin/ROIC at scale (1/2-1/3 the pricing of Uber at 1/10 the cost), it will have built an offering that will be set to be the leading AV service and create tremendous value for shareholders despite the early capital intensity. Estimates of the value of this Transportation as a Service (TaaS) or Mobility as a Service (MaaS) go from hundreds of billions on up based on Morgan Stanley’s estimate of 11 billion miles (3B in the US) driven globally and forecasted to double over the next decade.

Eventually, if Waymo is successful at taking the strong lead via network effects in AV and converting enough consumers to use its premium service (achieving a cultural and regulatory tipping point), it could decide to open up its service’s usage across other auto “hardware” partners as they demonstrate their ability to deliver a certain level of quality experience and scale globally, enabling a broader application of its service to lower tiers of the market with lower capital intensity (akin to Apple’s 2nd hand iPhone market, which broadens its user base for services offerings).


Network effect: How Shopify is the platform powering the DTC brand revolution

“The 21st-century brand is the direct-to-consumer brand,” said Jeff Weiser, chief marketing officer at Shopify. “A couple of things have enabled the rise of the DTC, which is the ability to outsource the supply chain.” For Weiser, who described himself as “loving” anything to do with DTC, what Shopify does is power all of that ability — from selling to payments to marketing. “We run the gamut of a retail operating system.” The company has admittedly benefited from a DTC boom: Starting with small businesses run from people’s kitchens, then going upmarket to giant Fortune 500 companies, Weiser said that DTC’s “graduation” into giant juggernauts themselves has made a huge difference. Shopify powers hundreds of those companies, from Allbirds to mattress brand Leesa to Chubbies.

Just as Google and Facebook are core to anyone marketing online, Shopify is becoming the same to those who sell directly online. Like any platform, Shopify is building an ecosystem of developers, startups and ad agencies. The company has 2,500 apps through its own app store. The company can, like the Apple App Store, add apps into its ecosystem that merchants can then purchase.


Why the Elastic IPO is so important

Elastic’s open source products are downloaded voluminously, with over 350M downloads of its open source software to date. As a result, sales engages with customers who are already users and highly familiar with the products. This leads to shorter sales cycles and higher sales conversions. Additionally, awareness and engaged prospects are generated by popular open source projects, such as Elasticsearch and others from Elastic, obviating the need for top-of-funnel and mid-funnel marketing spend. Elastic still spent a healthy 49% of revenue on Sales & Marketing in FY ’18 (year ending Jan ’18) but this was down from 60% the prior year, and the implied efficiency on Elastic’s Sales & Marketing spend is extremely high, enabling the 79% top-line growth the company has enjoyed. Finally, Elastic shows how disruptive an open source model can be to competition. There are already large incumbents in the search, analytics, IT Ops and security markets, but, while the incumbents start with sales people trying to get into accounts, Elastic is rapidly gaining share through adoption of its open source by practitioners.

Elastic controls the code to it open source projects. The committers are all employed by the company. Contributions may come from the community but committers are the last line of defense. This is in contrast to open source projects such as Linux and Hadoop, where non profit foundations made up of many commercial actors with different agendas tend to govern updates to the software. The biggest risk to any open source project is getting forked and losing control of the roadmap, and its difficult for a company to build a sustainable high margin business supporting a community-governed open source project as a result. Elastic, and other companies who more tightly control the open source projects they’ve popularized, have full visibility to roadmaps and are therefore able to build commercial software that complements and extends the open source. This isn’t a guarantee of success. The viability of any open source company rests with the engagement of its open source community, but if Elastic continues to manage this well, their franchise should continue to grow in value for for foreseeable future.


Elastic closed 94% up in first day of trading on NYSE, raised $252M at a $2.5B valuation in its IPO

“When you hail a ride home from work with Uber, Elastic helps power the systems that locate nearby riders and drivers. When you shop online at Walgreens, Elastic helps power finding the right products to add to your cart. When you look for a partner on Tinder, Elastic helps power the algorithms that guide you to a match. When you search across Adobe’s millions of assets, Elastic helps power finding the right photo, font, or color palette to complete your project,” the company noted in its IPO prospectus.

“As Sprint operates its nationwide network of mobile subscribers, Elastic helps power the logging of billions of events per day to track and manage website performance issues and network outages. As SoftBank monitors the usage of thousands of servers across its entire IT environment, Elastic helps power the processing of terabytes of daily data in real time. When Indiana University welcomes a new student class, Elastic helps power the cybersecurity operations protecting thousands of devices and critical data across collaborating universities in the BigTen Security Operations Center. All of this is search.”

The Big Hack: How China used a tiny chip to infiltrate U.S. companies

One government official says China’s goal was long-term access to high-value corporate secrets and sensitive government networks. No consumer data is known to have been stolen.

With more than 900 customers in 100 countries by 2015, Supermicro offered inroads to a bountiful collection of sensitive targets. “Think of Supermicro as the Microsoft of the hardware world,” says a former U.S. intelligence official who’s studied Supermicro and its business model. “Attacking Supermicro motherboards is like attacking Windows. It’s like attacking the whole world.”

Since the implants were small, the amount of code they contained was small as well. But they were capable of doing two very important things: telling the device to communicate with one of several anonymous computers elsewhere on the internet that were loaded with more complex code; and preparing the device’s operating system to accept this new code. The illicit chips could do all this because they were connected to the baseboard management controller, a kind of superchip that administrators use to remotely log in to problematic servers, giving them access to the most sensitive code even on machines that have crashed or are turned off.

Can anyone catch America in plastics?

Ethane, once converted to ethylene through “cracking” is the principal input into production of polyethylene. Simply put, ethane is turned into plastic. Polyethylene is manufactured in greater quantities than any other compound. U.S. ethane production has more than doubled in the past decade, to 1.5 Million Barrels per Day (MMB/D).

The result is that ethane trade flows are shifting, and the U.S. is becoming a more important supplier of plastics. The Shale Revolution draws attention for the growth in fossil fuels — crude oil and natural gas, where the U.S. leads the world. But we’re even more dominant in NGLs, contributing one-third of global production. The impact of NGLs and consequent growth in America’s petrochemical industry receives far less attention, although it’s another huge success story.


Amazon’s wage will change how U.S. thinks about work

If $15 an hour becomes the new standard for entry-level wages in corporate America, its impact may be felt most broadly among middle-class workers. Average hourly earnings for non-managerial workers in the U.S. were $22.73 an hour in August. The historically low level of jobless claims and unemployment, combined with $15 an hour becoming an anchor in people’s minds, could make someone people earning around that $22 mark feel more secure in their jobs. Instead of worrying about losing their job and being on the unemployment rolls for a while, or only being able to find last-ditch work that pays $9 or $10 an hour, the “floor” may be seen as a $15 an hour job.

That creates a whole new set of options for middle-class households. In 2017, the real median household income in the U.S. was $61,372, which is roughly what two earners with full-time jobs making $15 an hour would make. A $15-an-hour floor might embolden some workers to quit their jobs to move to another city even without a job offer there. It might let some workers switch to part-time to focus more time on education, gaining new skills or child care.

Circle of competence

It’s not the size of your circle of competence that matters, but rather how accurate your assessment of it is. There are some investors who are capable of figuring out incredibly complex investments. Others are really good at a wide variety of investments types, allowing them to take advantage of a broad set of opportunities. Don’t try to keep up with the Joneses. Figure out what feels comfortable, and do that. If you are not quite sure whether something is within your circle of competence or not – that in and of itself is an indicator that it’s better to pass. After all, to quote Seth Klarman’s letter to his investors shortly after the Financial Crisis of 2008, “Nowhere does it say that investors should strive to make every last dollar of potential profit; consideration of risk must never take a backseat to return.”


Lessons from Howard Marks’ new nook: “Mastering the Market Cycle – Getting the Odds on Your Side”

… you can prepare; you can’t predict. The thing that caused the bubble to burst was the insubstantiality of mortgage-backed securities, especially subprime. If you read the memos, you won’t find a word about it. We didn’t predict that. We didn’t even know about it. It was occurring in an odd corner of the securities market. Most of us didn’t know about it, but it is what brought the house down and we had no idea. But we were prepared because we simply knew that we were on dangerous ground, and that required cautious preparation.


Market timing is hard

People use data to justify market timing. But it’s hindsight bias, right? If you know ahead of time when the biggest peaks and troughs were through history, you can make any strategy look good. So Antti and his co-authors made a more realistic and testable market timing strategy. And here’s the key difference — instead of having all hundred years of history, Antti’s strategy used only the information that was available at the time. So, say for example it’s 1996, early tech bubble. We know after the fact that the U.S. stock market would get even more expensive for a few years before it crashed. But in 1996 you wouldn’t actually know that. So by doing their study this way, Antti could get a more realistic test of value-based market timing.

The interesting and troubling result was when we did this market timing analysis the bottom line was very disappointing. It was not just underwhelming, it basically showed in the last 50-60 years, in our lifetimes, you didn’t make any money using this information.

The Decision Matrix: How to prioritize what matters

I invested some of that time meeting with the people making these decisions once a week. I wanted to know what types of decisions they made, how they thought about them, and how the results were going. We tracked old decisions as well, so they could see their judgment improving (or not).

Consequential decisions are a different beast. Reversible and consequential decisions are my favorite. These decisions trick you into thinking they are one big important decision. In reality, reversible and consequential decisions are the perfect decisions to run experiments and gather information. The team or individual would decide experiments we were going to run, the results that would indicate we were on the right path, and who would be responsible for execution. They’d present these findings.

Consequential and irreversible decisions are the ones that you really need to focus on. All of the time I saved from using this matrix didn’t allow me to sip drinks on the beach. Rather, I invested it in the most important decisions, the ones I couldn’t justify delegating. I also had another rule that proved helpful: unless the decision needed to be made on the spot, as some operational decisions do, I would take a 30-minute walk first.

Risk management

Once you frame risk as avoiding regret, the questions becomes, “Who cares what’s hard but I can recover from? Because that’s not what I’m worried about. I’m worried about, ‘What will I regret?’”

So risk management comes down to serially avoiding decisions that can’t easily be reversed, whose downsides will demolish you and prevent recovery.

Actual risk management is understanding that even if you do everything you can to avoid regrets, you are at best dealing with odds, and all reasonable odds are less than 100. So there is a measurable chance you’ll be disappointed, no matter how hard you’ll try or how smart you are. The biggest risk – the biggest regret – happens when you ignore that reality.

Carl Richards got this right, and it’s a humbling but accurate view of the world: “Risk is what’s left over when you think you’ve thought of everything.”


The most important survival skill for the next 50 years isn’t what you think

Even if there is a new job, and even if you get support from the government to kind of retrain yourself, you need a lot of mental flexibility to manage these transitions. Teenagers or 20-somethings, they are quite good with change. But beyond a certain age—when you get to 40, 50—change is stressful. And a weapon you will have [is] the psychological flexibility to go through this transition at age 30, and 40, and 50, and 60. The most important investment that people can make is not to learn a particular skill—”I’ll learn how to code computers,” or “I will learn Chinese,” or something like that. No, the most important investment is really in building this more flexible mind or personality.

The better you know yourself, the more protected you are from all these algorithms trying to manipulate you. If we go back to the example of the YouTube videos. If you know “I have this weakness, I tend to hate this group of people,” or “I have a bit obsession to the way my hair looks,” then you can be a little more protected from these kinds of manipulations. Like with alcoholics or smokers, the first step is to just recognize, “Yes, I have this bad habit and I need to be more careful about it.”

And this is very dangerous because instead of trying to find real solutions to the new problems we face, people are engaged in this nostalgic exercise. If it fails—and it’s bound to fail—they’ll never acknowledge it. They’ll just blame somebody: “We couldn’t realize this dream because of either external enemies or internal traitors.” And then this is a very dangerous mess.

The other danger, the opposite one, is, “Well, the future will basically take care of itself. We just need to develop better technology and it will create a kind of paradise on earth.” Which doesn’t take into account all of the dystopian and problematic ways in which technology can influence our lives.