Curated Insights 2018.10.26

A change in perspective

Which one of these investments would you want for the next 20 years? Mathematically you should be indifferent, but behaviorally you won’t be.

If you are aged 25-44, asset C will be cheap while you are still in the wealth accumulation stage of your life. This is why Josh Brown says millennials should be stoked for a market crash, and he is right. However, since we don’t know the future, it would be near impossible to stay with asset C while assets A and B also exist. Once again, the deciding factor is perspective.

This is why you should never forget the impact of your perspective, and the perspectives of others, when making investment decisions. You have to consider someone else’s investment umwelt before you make any important financial choices. When you see friends rushing into the hottest asset class, consider what their goals are. When you hear about a new stock tip from a broker, think about why they would be telling you that. When you feel the panic set in as everyone around you is selling, remind yourself of your long term financial plan.

Can the stock market predict the next recession?

By my calculations, the S&P 500 has had 20 bear markets (down 20% or worse) and 27 corrections (down 10% but less than 20%) since 1928. The average losses saw stocks fall 24% and lasted 228 days from peak-to-trough. Of those 47 double-digit sell-offs, 31 of them occurred outside of a recession and didn’t happen in the lead up to a recession. That means around 66% of the time, the market has experienced a double-digit drawdown with no recession as the main cause. Of those 31 which occurred outside of a recession, the losses were -18% over 154 days, on average.

We’ll have a recession at some point but odds are the stock market won’t tip us off ahead of time. In fact, most of the time people don’t even realize we’re in a recession until after it’s already begun. NBER typically gives the official word for a recession around the time they’re ending or already in the midst of a slowdown. The recession that began in March 2001 wasn’t officially called a recession by NBER until November 2001, the month it ended. The recession that began in the summer of 1990 wasn’t determined until the spring of 1991. And the recession that began in the summer of 1981 wasn’t called a recession until January of 1982.

21 lessons from Jeff Bezos’ annual letters to shareholders

2017: Build high standards into company culture
2016: Move fast and focus on outcomes
2015: Don’t deliberate over easily reversible decisions
2014: Bet on ideas that have unlimited upside
2013: Decentralize decision-making to generate innovation
2012: Surprise and delight your customers to build long-term trust
2011: Self-service platforms unlock innovation
2010: R&D should pervade every department
2009: Focus on inputs — the outputs will take care of themselves
2008: Work backwards from customer needs to know what to build next
2007: Missionaries build better products
2006: Nurture your seedlings to build big lines of business
2005: Don’t get fixated on short-term numbers
2004: Free cash flow enables more innovation
2003: Long-term thinking is rooted in ownership
2002: Build your business on your fixed costs
2001: Measure your company by your free cash flow
2000: In lean times, build a cash moat
1999: Build on top of infrastructure that’s improving on its own
1998: Stay terrified of your customers
1997: Bring on shareholders who align with your values
Links to Jeff Bezos’s Shareholder Letters (1997-2017)

The quality of quantity at Netflix

Calculating the customer acquisition cost for Netflix is easy — take the segmented marketing costs (handily provided by the company), and divide by the number of paid subscribers added.

The lifetime value of a Netflix subscriber. To work this out: 1. take the average revenue of a user in the quarter; 2. multiply it by the gross margin (to figure out how profitable a subscriber is), then
3. divide this figure by the churn rate — the proportion of customers which leave each quarter.

On to stage 2 of our calculation: the profitability per user. So that’s the numbers above, multiplied by the gross margin (revenues, minus the cost of providing the service).

Lower gross margins in the future due to higher content costs might effect the lifetime value assessment, but lets stick with existing numbers for now. So we’ve got the first two parts of our customer lifetime value calculation, leaving just the churn rate.

But that isn’t really what we’re after, what we want to know is the ratio between how much money a paid subscriber is worth — the lifetime value — and how much it costs Netflix to pull one in to its platform — the customer acquisition cost.

Tesla short seller warns of ‘massive’ supply-chain disruption

“We question the ability for Tesla to actually deliver on their promises to their customers when they’re on the brink of potentially a massive supply-chain disruption,” Quadir said in an interview on Bloomberg Television. “We see very little contingency planning, and we also see executives from the supply chain department departing in recent weeks and months.’’


Trupanion stock sinks after report of state probe

Part of the short thesis on Trupanion is based on the idea that vet activity may not comply with some state insurance regulations. It represents a bigger risk than consumer complaint investigations, which are commonplace for insurers. If regulatory challenges continue it could further dent investor sentiment about the shares.

Serverless computing’s innovative approach to software development

“By purchasing more cloud computing capacity then they really need – even as a deliberate strategy to safeguard against crashing key systems – or buying advanced reserves that they will never use, companies across all industries may be overspending on cloud services by an average of 42%, according to data compiled by Densify, a cloud optimization firm that works with big companies worldwide. That can translate into hundreds of thousands or even millions of lost dollars in IT budgets a year, depending on the size of cloud deployments, the firm said. Its estimates are based on input from 200 cloud-industry professionals and 70 global companies over the last year.”

Serverless is based on a very different resource management model. The biggest overhead is in the design of the application. Serverless applications are woven or composed from a collection of loosely coupled, lightweight modules or microservices. Each such module is only given resources when triggered by another application module or invoked by an external function. Serverless modules are expected to run for a relatively short time, and are generally limited in how long each invocation is allowed to run. Once the module finishes running, its resources are returned to the serverless platform and made available to other modules that need them. The modules are stateless, meaning that no information is carried over or remembered between invocations. Any information that needs to be persistent across invocations must be explicitly stored in a separate file or data base.

Given the special nature of serverless applications, developers no longer need to plan, allocate or provision module instances. Once a module is invoked, the serverless platform will figure out the resources it requires and automatically provision them. As other modules are invoked, the platform will automatically allocate the required resources, and take them away once they’ve finished running. Developers are only charged for the resources used during the time their modules actually run. If invoked infrequently, or if invocations are spiky, there’s no need to plan for and pay for just-in-case-resources.


Now apps can track you even after you uninstall them

Uninstall tracking exploits a core element of Apple Inc.’s and Google’s mobile operating systems: push notifications. Developers have always been able to use so-called silent push notifications to ping installed apps at regular intervals without alerting the user—to refresh an inbox or social media feed while the app is running in the background, for example. But if the app doesn’t ping the developer back, the app is logged as uninstalled, and the uninstall tracking tools add those changes to the file associated with the given mobile device’s unique advertising ID, details that make it easy to identify just who’s holding the phone and advertise the app to them wherever they go.

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.

Curated Insights 2017.11.26

What Tesla’s big rig must do to seduce truckers

In North America alone, the largest heavy duty freight trucks—Class 8 semis—account for about $30 billion in sales each year, or more than 250,000 new trucks, according to industry data tracked by Bloomberg. Class 8 trucks, which have a loaded weight rating of at least 33,000 pounds, come in a variety of shapes and sizes, from trash trucks and cement mixers to city buses all the way up to tractor-trailers whose drivers spend days and nights living on the road. The most common day cab delivery trucks cost around $100,000, and big rigs with sleeper cabins are about $150,000.

Batteries are the single most expensive component of an electric truck, and the battery of a cross-country hauler could cost $100,000 even before they build the truck around it. But that upfront investment can be offset by cheaper operating costs. Running a truck on electricity saves tens of thousands in fuel costs as well as savings of roughly 7 cents a mile on lower maintenance costs. And if the autonomous driving system is good enough to run without a driver, it could also dramatically cut labor expenses, which add about 57 cents for every mile on the road.

Any range less than 400 miles is likely meant for local and regional deliveries, the sort of thing done by UPS and FedEx or the type of hub-and-spoke model used by giant retailers such as Wal-Mart Stores Inc. to move goods from distribution centers to stores or warehouses. If Tesla wants to go after the longest routes to replace what are known as “over-the-road” trucks, which feature sleeping cabins for multi-day driving stretches, the company will need a range of at least 500 miles—or else a way to charge an electric truck that’s faster than anything in use now. The battery needs for each of these categories would be different, and so would the costs.

Perhaps Tesla’s biggest advantage over other truck makers is that its semi will share some core parts with the Model 3. Musk disclosed during an earnings call in May that the semi uses “a bunch” of Model 3 motors, which sit in line with the truck’s axles. These relatively cheap electric motors will give the semis unparalleled electric torque for getting quickly up to speed with a heavy load.


This man is leading an AI revolution in Silicon Valley—and he’s just getting started

Booming demand for its products has supercharged growth at Nvidia. Over the past three full fiscal years, it has increased sales by an average of 19% and profits by an astonishing 56% annually. Nvidia meanwhile has so far managed to retain its roughly 70% market share in GPUs despite competition from formidable rivals—among them Intel and AMD—who want their share of the billions in chip sales to come from this new tech revolution. “IBM dominated in the 1950s with the mainframe computer, Digital Equipment Corp. in the mid-1960s with the transition to mini-computers, Microsoft and Intel as PCs ramped, and finally Apple and Google as cellphones became ubiquitous,” wrote Jefferies equity analyst Mark Lipacis in a July note to clients. “We believe the next tectonic shift is happening now and Nvidia stands to benefit.”

“We believed this model of computing could solve problems that general-purpose computing fundamentally couldn’t. We also observed that video games were simultaneously one of the most computationally challenging problems and would have incredibly high sales volume. Those two conditions don’t happen very often. Video games was our killer app—a flywheel to reach large markets funding huge R&D to solve massive computational problems.”

“In the future, companies will have an A.I. that is watching every single transaction—every business process—that is happening, all day long. Certain transactions or patterns that are being repeated. The process could be very complicated. It could go through sales to engineering, supply chain, logistics, business operations, finance, customer service. And it could be observed that this pattern is happening all the time. As a result of this observation, the artificial intelligence software writes an artificial intelligence software to automate that business process. Because we won’t be able to do it. It’s too complicated.”

“We’re seeing early indications of it now. Generative adversarial networks, or GAN. I think over the next several years we’re going to see a lot of neural networks that develop neural networks. For the next couple of decades, the greatest contribution of A.I. is writing software that humans simply can’t write. Solving the unsolvable problems.”

Google advances their future smart clothing vision with focus on delivering an ‘interactive garment’

Notably the user is able to trigger various different types of functionalities through interactions with the interactive garment, such as by touching or swiping the user’s shirt sleeve. In addition, by enabling the triggering of functionality through interactions with a wearable garment, instead of a device, the user does not need to fiddle around with the user interface of a smartwatch or smartphone in order trigger a functionality. In fact, the user may be able to provide the gesture to the interactive garment without even looking at the garment. In addition, a simple gesture to a garment is discreet and thus enables the user to trigger functionalities in a crowded setting without the need to take out their smartphone or other electronic device.


Apple’s ginormous share of industry profit expands, says Canaccord

Apple is capturing more and more, at 72% of total industry profits, up from 68% in the July quarter, while Samsung’s share dipped slightly to 24%. Looking ahead, Walkley thinks Apple’s share of all smartphone units shipped in 2018 will expand to 14.5% from an expected 13.3% this year, while Samsung’s share he thinks will dip to 19.1% from 20.2%. He expects Huawei and Xiaomi, two big privately held Chinese vendors, to both see share rise in 2018, at 11% and 6.4%, respectively. They won’t do as well, however, as Oppo and Vivo, two other Chinese competitors, who may capture 7.8% and 7.5% of the market next year, he opines.


Why Apple’s HomePod is three years behind Amazon’s Echo

The Echo is a truly standalone product at the center of an ecosystem. The cloud-based operating system has made it easy for developers to create thousands of skills or voice-activated apps. By contrast, the HomePod is essentially an extension of the iPhone, like an accessory. When someone asks the HomePod to open a third-party app, the request won’t go directly to the cloud, as with the Echo, but to an iPhone. As a result, developers can’t write apps for the HomePod. They must create tweaked versions of existing iPhone apps. What’s more, Apple has limited the kinds of apps to messaging, to-do lists and notes. If Alexa is the beating heart of the Echo, Siri is almost an afterthought.


Asia’s consumers snubbing global brands for these products

In Indonesia’s $1.3 billion instant-coffee market, the disparity is more pronounced. During that period, Javaprima gained about 12 percentage points for a 33 percent share, while Nestle lost 1.4 percentage points to 16 percent. Nestle declined to comment on the Indonesian market. Javaprima is capitalizing on local trends, such as demand by women and new coffee drinkers for a smooth and creamy brew, director Agus Susanto said.

Nestle’s revenue from Asia, Oceania and Africa fell 23 percent between 2012 and 2016 to 14.5 billion francs ($14.7 billion). To capture more Asian consumers, the company introduced ready-to-drink cold coffees in the region, opened branded cafes at Chinese universities and formulated a Cafe Viet lineup.

Pechoin, owned by closely held Shanghai Pehchaolin Daily Chemical Co., saw its market share jump fivefold between 2012 and 2016, according to Euromonitor. The parent company had revenue of about $1 billion in 2016. The newfound popularity came partly at the expense of the L’Oreal Paris label, which lost more than a fifth of its market share in the same period. Pechoin, founded in 1931, focuses on herbal products and claims to be one of China’s first cosmetics brands.

L’Oreal remains the No. 1 beauty group in China, and the nation’s increasing demand for luxury cosmetics bodes well for its premium positioning, the company said. Paris-based L’Oreal also has boosted efforts to tailor products for Asia. In 2014, it bought Magic, a Chinese brand known for skincare masks, a popular local beauty ritual. The company also introduced a liquid foundation that uses a cushion applicator popularized in South Korea, and it’s competing with Amorepacific Corp. for the Muslim cosmetics business in Southeast Asia.

A new kind of self-sustaining fishery could offset the worst impacts of animal farming

The Ocean Farm 1 – created by leading salmon farming company SalMar – is the first offshore fish farm capable of complete automation in feeding and monitoring fish. According to SalMar, the farm can mature up to 1.5M fish in just 14 months. If the experimental facility proves viable (and environmentally sound) it may compel more companies and governments to use offshore fish farms to help grow our global food supply.

But American seas are newly open for business: The National Oceanic and Atmospheric Administration announced a rule in 2016 that allows for large-scale fish farming in federally controlled waters three or more miles offshore. In Europe, the regulatory environment has been more friendly. The EU embraced policy changes recommending the shift of aquaculture offshore back in 2002; by 2008, offshore farms were operational in Norway, Ireland, Italy, Spain, and several other countries. Norway is arguably the aquaculture capital of the world: Fish farming helped Norway produce around 1.18M metric tons of salmon in 2016, and fish contribute $8B annually to Norway’s economy – accounting for about 8% of its exports.

Developing only 1% of Indonesia’s suitable ocean area could produce more than 24 million tonnes of fish per year or over 3.9 × 1011 individual 4 cm bivalves. If consumed entirely within Indonesia, this volume of additional fish production would increase seafood consumption per capita sixfold. In fact, there is already considerable activity working to expand Indonesian aquaculture.


Asia’s richest banker spots a once-in-a-lifetime opportunity

For India, it’s a $207 billion mess, a pile-up of bad loans years in the making that’s dragging on growth. For the nation’s wealthiest banker, it’s the kind of opportunity that very rarely presents itself. What has billionaire Uday Kotak salivating is the government’s attempt to finally draw a line under delinquent loans, with recent steps to overhaul India’s bankruptcy laws and recapitalize state-owned banks. The moves are intended to lift a burden from the country’s banks and encourage them to accelerate lending, supporting economic growth.

The sense among some Indian executives that they could walk away from their debts without facing consequences was a major factor limiting past efforts to bring delinquent loans in check. The government’s announcement last month that it will inject a record 2.1 trillion rupees into state-owned banks is another sea change, in that it should give the lenders sufficient capital to write off bad loans weighing down their balance sheets.


Billionaire Kotak says Indian banks need to cut costs: Q&A

Debt markets and other segments will put pressure on the bank loan markets because they are working at much narrower spreads between the investor and the issuer. This is going to be one of the biggest challenges at a time when non-bank sectors like mutual funds, insurance, debt capital market and so on are dis-intermediating on the one hand, and technology is commoditizing the lending business at the other.

First is the formalization of finance. For instance, you see a reduction in the cash economy as less money is going into land and real assets, especially in rural India. That money is going into the formal economy which is a mega change which we are seeing. The second trend which we are seeing is the broad-basing of financial services. As finance became broader, savers wanted to look at things in addition to or beyond bank deposits. So money is going into mutual funds, insurance and equities markets. The third is digital. It, combined with Aadhaar (India’s biometric identification program), is a very potent force. We are at about 1,360 branches now. In the past we would have thought we would need about 5,000 branches. But with the digital economy, Aadhaar and customer behavior changes, we believe we can do with less.


Traffic is piling up—and so are its costs

Last year, congestion cost each U.S. driver $1,400 on average, for a total of nearly $300 billion, according to Inrix’s latest annual scorecard. The cost reflects wasted fuel, decreased productivity and lost time, which might include longer delivery times or missed meetings. The biggest losers are the most congested cities.

“We find that 49% to 61% of ride-hailing trips would have not been made at all, or by walking, biking or transit,” the researchers reported.

First digital pill approved to worries about biomedical ‘big brother’

Experts estimate that so-called nonadherence or noncompliance to medication costs about $100 billion a year, much of it because patients get sicker and need additional treatment or hospitalization.

The technology could potentially be used to monitor whether post-surgical patients took too much opioid medication or clinical trial participants correctly took drugs being tested. Insurers might eventually give patients incentives to use them, like discounts on copayments, said Dr. Eric Topol, director of Scripps Translational Science Institute, adding that ethical issues could arise if the technology was “so much incentivized that it almost is like coercion.”

This ex-trucker has some questions about the Tesla Semi

This first version of the Semi will not replace the dozens of thousands of trucks on huge regional or coast-to-coast runs, clocking 2,000 to 5,000 miles per week.

I understand acceleration is a core Tesla brand value, but I’m far more interested in braking. An 80,000-pound tractor trailer needs about 550 feet to come to a complete stop from 55 miles per hour, and I spent a surprising portion of every driving shift trying not to obliterate car drivers who weren’t aware of that fact. Show me how much the Semi can lop off that braking distance.

Companies like Wal-Mart and JB Hunt that have placed orders for Tesla Semis have the routes, terminal control, and money for terminal infrastructure to make the most of the Semi, so we’ll see what the production unit looks like in 2019 (hopefully) and parse the feedback after 10,000 miles of road duty. Don’t be surprised to see more mirrors.


Can carbon-dioxide removal save the world?

Carbon-dioxide removal is, potentially, a trillion-dollar enterprise because it offers a way not just to slow the rise in CO2 but to reverse it. The process is sometimes referred to as “negative emissions”: instead of adding carbon to the air, it subtracts it. Carbon-removal plants could be built anywhere, or everywhere. Construct enough of them and, in theory at least, CO2 emissions could continue unabated and still we could avert calamity. Depending on how you look at things, the technology represents either the ultimate insurance policy or the ultimate moral hazard.

As a technology of last resort, carbon removal is, almost by its nature, paradoxical. It has become vital without necessarily being viable. It may be impossible to manage and it may also be impossible to manage without.

Building arks, rather than trying to predict The rain

“One thing I’ve come to as an investor, is recognizing that there are a lot of ways to make money in the market. There are a lot of investment approaches and philosophies that can do very well, but all of them test the investor in one way or another. Therefore, it’s important for you to figure out how to align your investment philosophy with your own personality – so that when the investment philosophy inevitably tests you, you’re the sort of person who will pass the particular types of tests required to successful manage your investment strategy.”


What is blockchain technology?

The blockchain is still in its nascent stages. However, blockchain technology promises to entirely reshape money, middlemen, and trust. Ultimately, blockchain is as much a political and economic hypothesis as a technological one. Blockchain technology provides a new way to think about how we agree on things. For the first time, multiple untrusted parties can create and agree on a single source of truth, without the use of a middleman. The technology’s implications for traditional middlemen and corporate players are therefore potentially enormous. As the landscape evolves, the future of blockchain will likely take on forms yet to be imagined.

It’s fructan, not gluten, that’s causing stomach problems, says new research

The scientists found that the participants only developed bloating symptoms after eating fructan-containing bars. Other bars, including those with gluten, did not cause the distress. This led the researchers to conclude that fructan, not gluten, may be behind the bowel problems. One big reason it’s important to figure this out – people who are on a gluten-free diet were found to have an increased risk of developing type 2 diabetes by other recent research.


To solve problems caused by sitting, learn to squat

In the past half century, epidemiologists have been forced to shift how they study movement patterns. In modern times, the sheer amount of sitting we do is a separate problem from the amount of exercise we get. Our failure to squat has biomechanical and physiological implications, but it also points to something bigger.

“Every joint in our body has synovial fluid in it. This is the oil in our body that provides nutrition to the cartilage,” Jam says. “Two things are required to produce that fluid: movement and compression. So if a joint doesn’t go through its full range—if the hips and knees never go past 90 degrees—the body says ‘I’m not being used’ and starts to degenerate and stops the production of synovial fluid.”

Curated Insights 2017.07.30

Capital accumulation, private property, and inequality in China, 1978-2015

Between 1978 and 2015, China moved being from a poor, underdeveloped country to the world’s leading emerging economy. But relatively little is known about how the distribution of income and wealth within the country changed over this period. This column presents the first systematic estimates of the level and structure of China’s national wealth since the beginning of the market reform process. The national wealth-income ratio increased from 350% in 1978 to 700% in 2015, driven mainly by the increase of private wealth.

The top 10 stocks in the S&P 500 at year-end every five years going back to 1980

The biggest stocks

…it’s not that out of the ordinary for a handful of stocks to account for a large portion of the stock market’s gains. This is just the nature of the beast with the stock market. There are very few big winners and lots of big losers over the long haul.

The top 5 companies today are all technology companies (we can quibble on how to define some of these firms but they are mostly tech firms). This has some people worried. Maybe it should cause us some concern but look at the top 10 companies in 1980 — the list was dominated by energy companies, a much more cyclical industry.

Both Citigroup and AIG were on the top 10 list in 2000 and 2005. These were two of the companies that were responsible for nearly taking down the entire financial industry and have suffered enormous losses because of it. Since the end of 2005, Citigroup is down 86% while AIG has fallen more than 95% in market cap.

If it cracked down on password sharing, Netflix could probably make $400 million more a year

If 6% of that audience, or 4 million US households, stopped borrowing passwords and signed up for their own Netflix memberships, Netflix could stand to make as much as $391 million more a year. That’s if each of those new members signed up for Netflix’s cheapest plan, which is $7.99 a month in the US.

Tesla and Elon Musk’s moment of truth with first mass-market car

“No one can produce a car that size, and with that amount of battery, at a lower cost than General Motors.”

Maintaining premium pricing while fending off some of the big carmakers will not be easy. It has been tempting for investors to view Tesla as the latest in a line of disruptive Californian companies that will go on to dominate a new industry, says Bruce Greenwald, a professor at Columbia Business School. But he adds that, unlike Apple and Google, there are no “moats” to protect its business from competition and it does not dominate any single market.

Artificial intelligence is not as smart as you (or Elon Musk) think

…as strong as AlphaGo was at its given task, it actually couldn’t do anything else but play Go on a standard 19 x 19 board. He relayed a story that while speaking to the DeepMind team in London recently, he asked them what would have happened if they had changed the size of the board to 29 x 29, and the AlphaGo team admitted to him that had there been even a slight change to the size of the board, “we would have been dead.”

“In chess, machines dominate the game because of the brute force of calculation and they [could] crunch chess once the databases got big enough and hardware got fast enough and algorithms got smart enough, but there are still many things that humans understand. Machines don’t have understanding. They don’t recognize strategical patterns. Machines don’t have purpose,” Kasparov explained.

 

 

The myth of drug expiration dates

The dates on drug labels are simply the point up to which the Food and Drug Administration and pharmaceutical companies guarantee their effectiveness, typically at two or three years. But the dates don’t necessarily mean they’re ineffective immediately after they “expire” — just that there’s no incentive for drugmakers to study whether they could still be usable.

Tossing such drugs when they expire is doubly hard. One pharmacist at Newton-Wellesley Hospital outside Boston says the 240-bed facility is able to return some expired drugs for credit, but had to destroy about $200,000 worth last year. A commentary in the journal Mayo Clinic Proceedings cited similar losses at the nearby Tufts Medical Center. Play that out at hospitals across the country and the tab is significant: about $800 million per year. And that doesn’t include the costs of expired drugs at long-term care pharmacies, retail pharmacies and in consumer medicine cabinets.


Do probiotics really work?

The idea that consuming probiotics can boost the ability of already well-functioning native bacteria to promote general health is dubious for a couple of reasons. Manufacturers of probiotics often select specific bacterial strains for their products because they know how to grow them in large numbers, not because they are adapted to the human gut or known to improve health. The particular strains of Bifidobacterium or Lactobacillus that are typically found in many yogurts and pills may not be the same kind that can survive the highly acidic environment of the human stomach and from there colonize the gut.

Many researchers think personalized probiotics are the most promising path forward for patients with compromised gut microbiomes.


Should you feed your kid probiotics?

A pill with “40 billion live organisms” is not going to help your child lose weight or “boost” their immune system. It won’t stop your baby from crying on an airplane, protect your toddler’s teeth from decay, lessen the duration of a cold or flu, or cure acid reflux. It’s a billion-dollar industry with virtually no medical oversight.

There’s no credible evidence that the regular consumption of a probiotic yogurt will make your child or you any healthier. But this doesn’t stop marketers from suggesting that it’s a delicious panacea…Food manufacturers may not like to admit it, but it is difficult to control the types of organisms that grow in these live cultures, despite industry standards set to determine what types of bacteria should be in yogurt.


Buy time, they’re not making any more of it

According to a study published Monday in the journal PNAS, people who buy time by paying someone to complete household tasks are more satisfied with life. And it’s not just wealthy people. Across a range of incomes, careers and countries, timesaving purchases were correlated with less time-related stress and more positive feelings. Yet the researchers’ surveys showed that very few individuals think to spend money in this way.

“People are notoriously bad at making decisions that will make them happier,” Whillans [Ashley] said. She suspects the abstract nature of time may be to blame. “We always think we’re going to have more time tomorrow than we do right now,” she said, so we’re hesitant to trade money, which is concrete and measurable, for time, which is much more uncertain.

Why does the other line always move faster?

At the supermarket checkout, should you pick the shorter line or the line where people have fewer items? I have gotten into heated arguments with people who insist on a particular way. And yet, the discussion is actually moot since there is a bigger issue: the entire question is flawed. Mathematically you are bound to wait in long lines because the game is rigged against you.


Why you should never eat food on planes, and other jet-set tips

…at superhigh altitude, your digestive system shuts down completely. Someone said to me it’s like being under anesthesia. So when you get off the plane, everything restarts and [your digestive system] has so much more work to do and so it makes you more tired.