Curated Insights 2019.04.12

You have to live it to believe it

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

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

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

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

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

The world’s greatest delivery empire

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

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

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

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

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

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

iBuying is Zestimate 2.0

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

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

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

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