Curated Insights 2019.09.06

Where the opportunities are in regulated marketplaces: Managed marketplaces

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

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

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


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

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

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


Debunking the silly “passive is a bubble” myth

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

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

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

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

Why the Periodic Table of Elements Is More Important Than Ever

How Amazon’s shipping empire is challenging UPS and FedEx

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

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

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

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

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

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

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

The Amazon is not Earth’s lungs

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

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

Why Indonesia is shifting its capital From Jakarta

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

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

Better is fragile — different is king

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

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

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

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


A silent interlude

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


Running your trading as a business

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

Reasonable investing philosophies

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

Curated Insights 2018.06.29

75% of bull markets are nothing but multiple expansion

Hedge funds’ best ideas? Those are just stocks they’re dumping

“This suggests that the pitched stocks were their ‘best ideas’ but not likely any longer. Returns of pitched stocks diverged from market immediately after the pitches—long pitches spike up and short pitches spike down. These results suggest that these investment conferences are closely followed by other investors and have high market impacts. The majority of the outperformance occurs before the pitches. Outperformance after the pitches are likely driven by inflows from other investors that follow these investment conferences.”

Amazon’s scale in Japan challenges rivals and regulators

In the wake of Amazon’s rise, Rakuten, its largest Japanese rival, which operates the country’s biggest online marketplace, has expanded aggressively into financial technology, mobile phones and home-sharing. Still, to compete better against Amazon, the company is aiming to create its own logistics and delivery network within two years. Unlike its US rival, it had left warehouse and inventory management to the retailers that use its marketplace rather than building its own proprietary systems.

Amazon held a 23 per cent share in Japan’s internet retail market compared with Rakuten’s 18.5 per cent share last year, after overtaking its Japanese rival in 2016, according to Euromonitor. Other industry data shows the two rivals in a tight race.

“There is no way rivals can compete against Amazon. They invest in the best-in-class technology with little regard for profits so that they can create a sophisticated logistics operation,” said Shinichiro Nishino, a former Amazon executive who was hired by Mr Bezos to launch the business in Japan.


Amazon wants the whole package in delivery

Amazon plans to provide entrepreneurs known as “Delivery Service Partners” with guaranteed delivery volume, use of Amazon’s logistics technology, and discounts on Amazon-branded delivery van leases, vehicle insurance, Amazon uniforms, and even fuel. The company envisions hundreds of owners operating fleets of 20 to 40 vehicles and eventually having “tens of thousands of delivery drivers across the U.S.,” Amazon trumpeted in its press release.

The independent contractor owner-operator model is similar to how FedEx handles its last-mile deliveries, while UPS delivery trucks are staffed by unionized employees, Blackledge writes. Amazon has been steadily encroaching on all parts of the traditional delivery firms’ turf in recent years, with initiatives including a delivery service for small businesses, building its own air cargo hub, and even expanding into ocean freight shipping. Amazon already boasts a fleet of 7,500 trucks, 35 aircraft, and over 70 delivery centers. This pales in comparison, however, to FedEx’s stated world-wide armada of 650 planes, 150,000 delivery trucks, 400,000 employees, and 4,800 fulfillment facilities.

Danny Meyer’s recipe for success

Rather than rolling out replicas of USC in other cities, as is a common tactic for ambitious restaurant empire builders, Meyer employed a different strategy. Sticking close to home, Meyer expanded by replicating his enlightened hospitality, cultivating regulars, and stimulating buzz by endowing each new restaurant with its own memorable menu and décor.

“The fact that Danny has been so successful translating the culture across so many different restaurant brands, and engaging a lot of people to help him, is key to understanding the quality and influence of the culture he inspired. He happens to be in the restaurant business, but if he had been a university president, you would have a different kind of college. When he looks at you, he sees you. He’s not playing the role of an executive. He’s a hugger. He trusts his gut, and his gut is always working.”

Meyer never set out to be a business mogul. He simply wanted to create a homey, unpretentious, and affordable Michelin star–quality restaurant that did not exist in New York in the 1980s. Unlike the dominant, ultra-expensive, and exclusive French haute cuisine establishments, such as Le Pavillon and Lutèce, which oozed effeteness, Meyer wanted USC customers to feel comfortable asking their server, or even the sommelier, to explain and pronounce menu items. He wanted people walking in without a reservation to feel welcome ordering a full-course meal at the bar.

Stewarding the culture in association with every business decision is the main responsibility and passion for Meyer, who recently turned 60, and is not slowing down. Also on his agenda? Creating a few more fine casual brands, such as Shake Shack and Tender Greens, and making them all as essential to millennials as McDonald’s once was to boomers.

All the questions you wanted answered about Bird Scooters and their recent $300 million funding

Capital. Because Bird was first to market, extremely innovative, quick to hire talented leadership and an experienced founder it was able to raise $125 million in an extraordinarily short period of time. That has allowed the company to launch in many markets, build amazing applications, design future versions of the scooter and monetize while many companies are still just drawing up their go-to-market plans. This allowed Bird to then raise $300 million from some of the top VCs in the country. Capital of course drives scale advantages and when you have “winner take most” markets it also has a way of scaring away some investors from investing in the 3–5th “me too” competitors. You can expect some strong competition, but it’s unlikely that there will be 5 great scooter companies.

Density. One huge advantage the early-movers have is “density.” A dockless eScooter solution is only compelling if you believe that you’ll always be able to find a scooter in a relatively short walking distance or it defeats the purpose. If Bird has thousands of scooters in a neighborhood (and if it can acquire these scooters at cheaper prices due to scale advantages) then it’s significantly more difficult for new entrants to launch without serious capital and it’s hard to get serious capital from investors who perceive you’re late to the game.

Data. Bird already has an enormous lead in data collection. What appears as just an electric-powered scooter is really a computer with wheels. Between our on-board CPUs and your mobile phone companions we have an enormous amount of data on transportation routes, where riders want to pick up scooters in the morning and where they leave them in the evening. This not only allows Bird to have advantages in right-sizing city inventory levels and proper placement to maximize yield, but the company has already been providing this data to cities to help them better plan their cities of the future. We clearly need a world in which gas cars don’t dominate dense city environments and providing this data to cities is a great start in that direction.

Mechanics. What is even more remarkable than “chargers” is how Bird has build out local teams of mechanics in each market, providing large legions of skilled labor the ability to earn meaningful dollars for repairs to wheels, brakes, cables, batteries, electronics, etc. Local politicians wanting to see local job creation rather than jobs at tech firms all migrating to San Francisco should be heartened. Because each market won’t have unlimited labor suppliers of repair people and because the largest services can pay the best, there is inherent advantage in capturing the early pools of mechanics.


How WeWork’s revenue-sharing leases could affect property investors

Both WeWork and THRE are keeping details of the revenue-sharing lease under wraps but, broadly, it means that WeWork does not have to pay a fixed amount of rent. If it is doing badly and cannot attract tenants, it pays less — or nothing — to its landlords, THRE and PFAE. Conversely, if it does well, it can pay more.

This has implications for property investors. By offering an uneven and potentially volatile income stream in place of a steady and fixed one, a lease of this kind changes the bond-like nature of property as an asset class into something closer to an equity.


The business of death has a bright future in Japan

The funeral business has a bright future in Japan, where deaths have outpaced births every year since 2007. Almost 30 percent of the population is 65 or older. And this year is a tipping-point of sorts. After 2018, the number of Japanese women of child-bearing age will decline so sharply that by 2025 the population is forecast to drop by four million people, equivalent to the population of Los Angeles.

Trump tariffs would be bad for the entire global auto industry, says Moody’s

Daimler AG, BMW and Volkswagen AG all import more than half the vehicles they sell in the U.S. from other countries. The breakdown is 50% for Daimler, 70% for BMW and above 80% for VW. “However, these imports represent only about 12% of BMW’s total annual unit sales, about 8% of Daimler’s global light vehicle sales, and around 3% of VW group sales (figures include sales from Chinese joint ventures),” said Clark. “On the other hand, BMW and Daimler export more than half the vehicles they produce at their U.S. assembly plants. Fiat Chrysler Automobiles NV produces about half its vehicles in the U.S., with the remaining units imported mainly from Mexico and Canada.”

Moody’s estimates that Toyota exports roughly 22% of cars produced in Japan to the U.S., while Nissan exports about 31% of its domestic production to the U.S. market. Honda has the most diversified production of the three and a low ratio of exports to the U.S. but is planning to increase exports in 2018. Korean car makers Hyundai Motor Co. and Kia Motors Corp. import a bit more than half their vehicles sold in the U.S., mostly from Korea but also from Mexico. Both were planning to produce more SUVs and crossovers in the U.S. in the next two years.

Mexico would be hurt more than other markets as many big car makers have assembly plants there to serve the U.S. market. Mexico produced 3.8 million vehicles in 2017, 82% of which were exported. Of that total, 84% went to the U.S. and Canada. In the first quarter of 2018, the car industry accounted for 2.9% of Mexico’s GDP, meaning tariffs would hurt more than the car manufacturers and auto-parts suppliers.

One group that will be especially hard hit is U.S. car dealers, which rely heavily on imports. “These companies have minimal U.S.-produced vehicle penetration to offset reduced sales from price increases on imported vehicles,” said the report.

Where 3 million electric vehicle batteries will go when they retire

By 2030, there will be a 25-fold surge in battery demand for EVs. Automobiles have overtaken consumer electronics as the biggest users of lithium-ion batteries, according to Paris-based Avicenne Energy. By 2040, more than half of new-car sales and a third of the global fleet –- equal to 559 million vehicles — will be electric. By 2050, companies will have invested about $550 billion in home, industrial and grid-scale battery storage, according to BNEF.

Introducing a16z crypto

Trust is a new software primitive from which other components can be constructed.

The new primitive of trust also means that 3rd-party developers, entrepreneurs, and creators can build on top of crypto-powered platforms without worrying about whether the rules of the game will change later on. In an era in which the internet is increasingly controlled by a handful of large tech incumbents, it’s more important than ever to create the right economic conditions for developers, creators, and entrepreneurs. Trust also enables new kinds of governance where communities collectively make important decisions about how networks evolve, what behaviors are permitted, and how economic benefits are distributed.

Cryptogoods can unlock new experiences and business models for games and other forms of media.


Ten lessons from Michael Batnick’s book ‘Big Mistakes’

Ben Graham understood that no approach works all the time. There are time and place for everything. Markets evolve and some concepts stop working. A margin of safety doesn’t matter during periods of forced liquidation, especially when you are leveraged to the hill.

A high IQ guarantees you nothing! This is one of the hardest things for newer investors to come to grips with, that markets don’t compensate you just for being smart.” and “Intelligence in investing is not absolute; it’s relative. In other words, it doesn’t just matter how smart you are, it matters how smart your competition is.

The most disciplined investors are intimately aware of how they’ll behave in different market environments, so they hold a portfolio that is suited to their personality. They don’t kill themselves trying to build a perfect portfolio because they know that it doesn’t exist.