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 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 2018.06.03

How will GDPR affect digital marketers?

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

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

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

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

For Google, all roads lead back to search

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

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

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

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

Marchionne’s finale entails expanding Jeep, shrinking Fiat

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

Buffett proposed $3 billion Uber investment but deal crumbled

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

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


Airbnb founders go it alone in China after refusing merger offer

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

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

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

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