Curated Insights 2018.06.17

What helps or hurts investment returns? Here’s a ranking

An unexpected challenge in performing this exercise is a tendency for some elements to offset others. For example, changes in profits could be offset by widening or contracting price-earnings ratios; sentiment might offset valuation; returns tend to vary inversely with risk. Why does this matter? Because in the real world, one hand giveth while the other taketh away. This concept of cancellation matters a great deal to total portfolio returns.

The overall cost of a portfolio, compounded over 20 or 30 years, can add up to (or subtract) a substantial amount of the returns. One Vanguard Group study noted that a 110 basis-point expense ratio can cost as much as 25 percent of total returns after 30 years. That does not take into consideration other costs such as trading expenses, capital-gains taxes or account location (i.e., using qualified or tax-deferred accounts). The rise of indexing during the past decade is a tacit acknowledgment that on average, cost matters more than stock-picking prowess.

Those people born in 1948 not only managed to have their peak earning and investing years (35-65) coincide with multiple bull markets and interest rates dropping from more than 15 percent to less than 1 percent. They also lucked into a market that tripled in the decade before retirement.

Behavior and discipline > Humility and learning > Longevity and starting early > Valuation and year of birth > Asset allocation > Costs and expenses > Security selection


The forging of a skeptic

I think another thing people have gotten confused about is the sustainable competitive advantage and the moat. Durable competitive advantage and moats are not the same thing as brands. People sometimes use these terms interchangeably. I have also seen people ascribe competitive advantages to brands that don’t have them. For example, retailers — retailers have brands. We all know what Macy’s is, but retailing is fundamentally a bad business.

In essence, the merits of a brand are not the brand itself; they are the qualities of the product that create the consumer loyalty. What attracted him, ultimately, to Coca-Cola is that Coca-Cola’s formula make you more, not less, thirsty, and supposedly has been tested to prove that it doesn’t wear out the palate, no matter how much is consumed. This implies infinite sales potential. The cute commercials and cheery red logo create an association in people’s minds with those qualities. They aren’t what makes it Coca-Cola.

While there are moats that include brands, a brand is not a moat. The moat is whatever qualities are innate to the business that make it difficult to compete with

Worried about big tech? Chinese giants make America’s look tame

They have both funded ventures that offer online education, make electric cars and rent out bicycles. For the giants, such initiatives represent new opportunities for people to use their digital wallets — Ant Financial’s Alipay and Tencent’s WeChat Pay — and new ways to collect data on consumer behavior. Analysts at Sanford C. Bernstein counted 247 investment deals by Tencent in recent years and 156 by Alibaba, though given the pace of the companies’ deal-making, they said their database was “likely to be perennially incomplete.”

In a report this week, Morgan Stanley predicted that by 2027, the total market in China in which Alibaba could be making money will be worth $19 trillion — more than Amazon’s potential market worldwide.

‘As long as they’re unfriendly, it’s a sign they have confidence’

Keyence keeps up compound sales growth of 14 per cent a year (1986-2016) even with sales in the billions of dollars. It takes seemingly simple products such as barcode readers and sells them for five times the cost of manufacture.

Keyence’s first secret is its production outsourcing. It buys raw materials in bulk and sends them to component suppliers; it collects the components and sends them to assemblers and performs the final inspection of goods itself.

The second secret is what Keyence really sells: not a product, but a way to make a factory more efficient. Graeme McDonald, machinery analyst at Citigroup in Tokyo, says the group’s sales engineers “can often provide an idea of how to improve your manufacturing set-up literally on the site with an idea of the payback time and return on investment”. It offers quick victories — such as a sensor to replace manual inspection, for example — not risky projects. “The products they sell are not capital expenditure, they’re cost to the factory manager,” says Mr Noguchi. If the manager can save a $40,000 salary with a $20,000 gadget, they will sign off quickly, without worrying how much Keyence earns.

The products are high quality, if not necessarily unique. Keyence has a modest research budget and less than a tenth of the US patents held by rival automation companies such as Fanuc.

Fanuc in trouble? Talk to the (robot) hand

Fair enough, it’s a tough world for all iPhone dependents. Here’s a wrinkle in the bear-case thesis, though: Overseas shipments of robots and Robodrills from Yokohama, while down elsewhere, are up sharply to Asia. The volume of robots shipped by the port – mostly Fanuc’s – remains close to its highest in decades, at about 5,000 units in April. The company’s backlog of orders is near to its highest in more than two years, according to Bernstein analysts.

How e-commerce with drone delivery is taking flight in China

It is still waiting to earn back its investment in drone-delivery infrastructure, although it says that making a delivery by drone costs a fifth of the price than by man-and-van, once the driver’s labour is taken into account. Liu Qiangdong, JD’s chief executive, says drone delivery will cut costs by 70% once it is scaled up across the country. Villagers tend to buy washing powder, accessories for their phones, maternity goods and fresh food. The firm has made 20,000 such deliveries to date.

JD may have added drones to daily Chinese village life, but whether they will make financial sense for the company over time remains to be seen. Current models of drone are pricey, although JD says the cost will gradually come down as it scales up the network and builds more drones (it plans to sell those it makes to other firms, as well as use them for its operations). The government approves of its operations in rural areas, and is planning to build a new train station in Suqian next to JD’s drone base. If JD can use drone delivery to cut its costs and attract rural shoppers, that will help the firm compete with its arch-rival in e-commerce, Alibaba, which has not, as yet, seen the value of drone delivery. JD hopes that will prove to be a mistake.


Internet lending is booming in China

The balance of online consumer loans in China has grown about fivefold between 2015 and 2017, reaching 350 billion yuan ($54.6 billion), according to Chinese research company Analysys. According to a survey conducted by research specialist Analysys in December 2017, people between the ages of 24 and 35 accounted for more than 70% of consumer borrowers in China.

Chinese consumers, especially people born in 1980 and later, are less squeamish than their older peers about buying on credit. But the total balance of consumer loans in China is still about 60% lower than that in the U.S. and is expected to continue growing. Analysys estimates that the balance of internet loans in China will more than double to 720 billion yuan in 2019, compared with 350 billion yuan in 2017. That flow of credit will likely give a lift to the Chinese consumer market.

The scooter economy

The mistake in Kalanick’s thinking is two-fold: First, up-and-until the point that self-driving cars are widely available — that is, not simply invented, but built-and-deployed at scale — Uber’s drivers are its biggest competitive advantage. Kalanick’s public statements on the matter hardly evinced understanding on this point. Second, bringing self-driving cars to market would entail huge amounts of capital investment. For one, this means it would be unlikely that Google, a company that rushes to reassure investors when it loses tens of basis points in margin, would do so by itself, and for another, whatever companies did make such an investment would be highly incentivized to maximize utilization of said investment as soon as possible. That means plugging into the dominant transportation-as-a-service network, which means partnering with Uber.

My contention is that Uber would have been best-served concentrating all of its resources on its driver-centric model, even as it built relationships with everyone in the self-driving space, positioning itself to be the best route to customers for whoever wins the self-driving technology battle.

Why you should read those boring 10-K filings

The vast majority of the text changes are concentrated in the Management Discussion and Analysis (MD&A) of the 10-K. These disclosures also tend to be more negative than positive, perhaps because the reports are typically drafted by lawyers who tilt toward disclosing negative trends more than positive ones. When the authors applied natural language text processing to evaluate the changes, they found that 86 percent reflected negative sentiment shifts and only 14 percent positive shifts. Furthermore, the text differences contain useful information for predicting future earnings: Changes in the 10-K written text today predict earnings surprises in the future.

Given this negative bias to the textual changes and their ability to predict future earnings, the study shows that companies with 10-K text modifications experience noticeably lower future stock returns than other firms. For example, the authors construct a portfolio that goes long on companies with no material textual changes and shorts firms that contain such changes. That portfolio earns an abnormal positive return of up to 7 percent per year above the market.

Curated Insights 2018.05.20

The spectacular power of Big Lens

There is a good chance, meanwhile, that your frames are made by Luxottica, an Italian company with an unparalleled combination of factories, designer labels and retail outlets. Luxottica pioneered the use of luxury brands in the optical business, and one of the many powerful functions of names such as Ray-Ban (which is owned by Luxottica) or Vogue (which is owned by Luxottica) or Prada (whose glasses are made by Luxottica) or Oliver Peoples (which is owned by Luxottica) or high-street outlets such as LensCrafters, the largest optical retailer in the US (which is owned by Luxottica), or John Lewis Opticians in the UK (which is run by Luxottica), or Sunglass Hut (which is owned by Luxottica) is to make the marketplace feel more varied than it actually is.

Now they are becoming one. On 1 March, regulators in the EU and the US gave permission for the world’s largest optical companies to form a single corporation, which will be known as EssilorLuxottica. The new firm will not technically be a monopoly: Essilor currently has around 45% of the prescription lenses market, and Luxottica 25% of the frames. But in seven centuries of spectacles, there has never been anything like it. The new entity will be worth around $50bn (£37bn), sell close to a billion pairs of lenses and frames every year, and have a workforce of more than 140,000 people. EssilorLuxottica intends to dominate what its executives call “the visual experience” for decades to come.

For a long time, scientists thought myopia was primarily determined by our genes. But about 10 years ago, it became clear that the way children were growing up was harming their eyesight, too. The effect is starkest in east Asia, where myopia has always been more common, but the rate of increase has been uniform, more or less, across the world. In the 1950s, between 10% and 20% of Chinese people were shortsighted. Now, among teenagers and young adults, the proportion is more like 90%. In Seoul, 95% of 19-year-old men are myopic, many of them severely, and at risk of blindness later in life.

Del Vecchio paid $645m (£476m) for Ray-Ban. During the negotiations, he promised to protect thousands of jobs at four factories in the US and Ireland. Three months later, he closed the plants and shifted production to China and Italy. Over the next year and a half, Luxottica withdrew Ray-Ban from 13,000 retail outlets, hiked their prices and radically improved the quality: increasing the layers of lacquer on a pair of Wayfarers from two to 31. In 2004, to the disbelief of many of his subordinates, del Vecchio decided that Ray-Ban, which had been invented for American pilots in the 1930s, should branch out from sunglasses into optical lenses, too. “A lot of us were sceptical. Really? Ray. Ban. Banning rays from the sun?” the former manager said. “But he was right.” Ray-Ban is now the most valuable optical brand in the world. It generates more than $2bn (£1.5bn) in sales for Luxottica each year, and is thought to account for as much as 40% of its profits.

The Moat Map

Facebook has completely internalized its network and commoditized its content supplier base, and has no motivation to, for example, share its advertising proceeds. Google similarly has internalized its network effects and commoditized its supplier base; however, given that its supply is from 3rd parties, the company does have more of a motivation to sustain those third parties (this helps explain, for example, why Google’s off-sites advertising products have always been far superior to Facebook’s).

Netflix and Amazon’s network effects are partially internalized and partially externalized, and similarly, both have differentiated suppliers that remain very much subordinate to the Amazon and Netflix customer relationship.

Apple and Microsoft, meanwhile, have the most differentiated suppliers on their platform, which makes sense given that both depend on largely externalized network effects. “Must-have” apps ultimately accrue to the platform’s benefit.

Apple’s developer ecosystem is plenty strong enough to allow the company’s product chops to come to the fore. I continue to believe, though, that Apple’s moat could be even deeper had the company considered the above Moat Map: the network effects of a platform like iOS are mostly externalized, which means that highly differentiated suppliers are the best means to deepen the moat; unfortunately Apple for too long didn’t allow for suitable business models.

Uber’s suppliers are completely commoditized. This might seem like a good thing! The problem, though, is that Uber’s network effects are completely externalized: drivers come on to the platform to serve riders, which in turn makes the network more attractive to riders. This leaves Uber outside the Moat Map. The result is that Uber’s position is very difficult to defend; it is easier to imagine a successful company that has internalized large parts of its network (by owning its own fleet, for example), or done more to differentiate its suppliers. The company may very well succeed thanks to the power from owning the customer relationship, but it will be a slog.

How much would you pay to keep using Google?

Part of the problem is that GDP as a measure only takes into account goods and services that people pay money for. Internet firms like Google and Facebook do not charge consumers for access, which means that national-income statistics will underestimate how much consumers have benefitted from their rise.

Survey respondents said that they would have to be paid $3,600 to give up internet maps for a year, and $8,400 to give up e-mail. Search engines appear to be especially valuable: consumers surveyed said that they would have to be paid $17,500 to forgo their use for a year.


There is another

Spotify has better technology, merchandising (like discovery playlists), and brand. Unlike Apple Music, being a pure-play (as opposed to being owned by a tech giant) gives Spotify more cred among purists, young people, and influencers. The instinct / T Algorithm cocktail has resulted in a firm with 170M users, 75M of whom are premium subscribers. The firm registered €1B this quarter, representing 37% growth. Spotify accounted for 36% of premium music subscribers globally.

What takes Spotify to $300B, and true horseman status? They launch video, and become the most successful streaming entertainment firm, full stop. Netflix’s legacy is on the second most important screen, TV. Spotify was raised on the most important – mobile. Netflix needs to become Spotify before Spotify becomes Netflix. Nobody has cracked social and TV, and as half of young people no longer watch cable TV, if Spotify were to launch video and captured any reasonable share and engagement via unique playlists, then cable and Netflix would begin ceding market cap to Spotify.


Subscriptions for the 1%

The problem with these minuscule conversion rates is that it dramatically raises the cost of acquiring a customer (CAC). When only 1% of people convert, it concentrates all of that sales and marketing spend on a very small sliver of customers. That forces subscription prices to rise so that the CAC:LTV ratios make rational sense. Before you know it, what once might have been $1 a month by 20% of a site’s audience is now $20 a month for the 1%.

There is a class of exceptions around Netflix, Spotify, and Amazon Prime. Spotify, for instance, had 170 million monthly actives in the first quarter this year, and 75 million of those are paid, for an implied conversion of 44%. What’s unique about these products — and why they shouldn’t be used as an example — is that they own the entirety of a content domain. Netflix owns video and Spotify owns music in a way that the New York Times can never hope to own news or your podcast app developer can never hope to own the audio content market.

The Apple Services machine

It is this hardware dependency that makes it impossible to look at Apple Services as a stand-alone business. The Services narrative isn’t compelling if it excludes Apple hardware from the equation. Apple’s future isn’t about selling services. Rather, it’s about developing tools for people. These tools will consist of a combination of hardware, software, and services.

Apple currently has more than 270 million paid subscriptions across its services, up over 100 million year-over-year. Apple is in a good position to benefit from growing momentum for video streaming services including Netflix, HBO, and Hulu. It is not a stretch to claim that Apple will one day have 500 million paid subscriptions across its services. Apple isn’t becoming a services company. Instead, Apple is building a leading paid content distribution platform.

Tencent Holdings Ltd. delivered two major milestones when it reported its earnings Wednesday: record quarterly profits and more than one billion monthly active users on its WeChat platform. The social media and gaming giant, which has been leery of barraging its users with ads, also declared it had raised the maximum number of ads that customers see on WeChat Moments from one a day to two. The app has become China’s most popular messaging service and is integral to driving everything from gaming and payments to advertising for Tencent.

MoviePass: the unicorn that jumped into Wall Street too soon

“The growth-at-all-costs strategy is being funded these days by the venture community, not the public market. The last time we saw the public markets fund a growth-at-all-costs strategy was the 1999 internet bubble, and we all know how that ended.”

The prospect of steep declines in a company’s valuations once it hits the public markets is one reason why U.S. companies are waiting longer to go public. Overall, U.S. companies that have gone public this year have done so at an average market capitalization of $1.1 billion, according to Thomson Reuters data, a 44 percent increase from the average market cap during the height of the dot com craze in 1999. At the same time, companies are now going public 6.5 years after receiving their first venture capital backing on average, more than double the three years between initial funding and going public in 1999.

Cerebras: The AI of cheetahs and hyenas

The specialist starts out with a technology optimized for one specific task. Take the graphics-processing unit. As its name denotes, this was a specialist technology focused on a single task–processing graphics for display. And for the task of graphics, graphics-processing units are phenomenal. Nvidia built a great company on graphics-processing. But over time, the makers of graphics-processing units, AMD and Nvidia, have tried to bring their graphics devices to markets with different requirements, to continue the analogy to hunt things that aren’t gazelle. In these markets, what was once a benefit, finely tuned technology for graphics (or gazelle-hunting), is now a burden. If you hunt up close like a leopard and never have to run fast, having your nose smooshed into your face is not an advantage and may well be a disadvantage. When you hunt things you were no longer designed to hunt, the very things that made you optimized and specialized are no longer assets.

Intel is the classic example of a generalist. For more than 30 years the x86 CPU they pioneered was the answer to every compute problem. And they gobbled up everything and built an amazing company. But then there emerged compute problems that specialists were better at, and were big enough to support specialist companies—such as cell phones, graphics and we believe AI. In each of these domains specialist architectures dominate.

We are specialists, designing technology for a much more focused purpose than the big companies burdened with multiple markets to serve and legacy architectures to carry forward. Specialists are always better at their target task. They do not carry the burden of trying to do many different things well, nor the architectural deadweight of optimizations for other markets. We focus and are dedicated to a single purpose. The question of whether we—and every other specialist– will be successful rests on whether the market is large enough to support that specialist approach. Whether, in other words, there are enough gazelle to pursue. In every market large enough, specialists win. It is in collections of many modest markets, that the generalist wins. We believe that the AI compute market will be one of the largest markets in all of infrastructure. It will be the domain of specialists.


This $2 billion AI startup aims to teach factory robots to think

What sets Preferred Networks apart from the hundreds of other AI startups is its ties to Japan’s manufacturing might. Deep learning algorithms depend on data and the startup is plugging into some of the rarest anywhere. Its deals with Toyota and Fanuc Corp., the world’s biggest maker of industrial robots, give it access to the world’s top factories. While Google used its search engine to become an AI superpower, and Facebook Inc. mined its social network, Preferred Networks has an opportunity to analyze and potentially improve how just about everything is made.

At an expo in Japan a few months later, another demo showed how the tech might one day be used to turn factory robots into something closer to skilled craftsmen. Programming a Fanuc bin-picking robot to grab items out of a tangled mass might take a human engineer several days. Nishikawa and Okanohara showed that machines could teach themselves overnight. Working together, a team of eight could master the task in an hour. If thousands — or millions — were linked together, the learning would be exponentially faster. “It takes 10 years to train a skilled machinist, and that knowledge can’t just be downloaded to another person” Fanuc’s Inaba explained. “But once you have a robot expert, you can multiply it infinitely.”

China buys up flying schools as pilot demand rises

In September Ryanair axed 20,000 flights due to a rostering mess-up made worse by pilot shortages. This forced the low-cost carrier to reverse a longstanding policy and recognise trade unions and agree new pay deals — a move that it said would cost it €100m ($120m) a year from 2019.

China is on course to overtake the US as the world’s largest air travel market by 2022, according to the International Air Transport Association.

US aircraft maker Boeing predicts China will need 110,000 new pilots in the years through to 2035, and its airlines are expected to purchase 7,000 commercial aircraft over the next two decades.

China’s aviation market grew by 13 per cent last year, with 549m passengers taking to the skies, double the number who flew in 2010. Growth is being driven by the rising middle class, an expansion of routes by Chinese airlines and the easing of visa restrictions by foreign governments keen to attract Chinese tourists.

California will require solar power for new homes

Long a leader and trendsetter in its clean-energy goals, California took a giant step on Wednesday, becoming the first state to require all new homes to have solar power.

The new requirement, to take effect in two years, brings solar power into the mainstream in a way it has never been until now. It will add thousands of dollars to the cost of home when a shortage of affordable housing is one of California’s most pressing issues.

Just half a percent

If you save $5,000 a year for 40 years and make only 8% (the “small” mistake), you’ll retire with about $1.46 million. But if you earn 8.5% instead, you’ll retire with nearly $1.7 million. The additional $230,000 or so may not seem like enough to change your life, but that additional portfolio value is worth more than all of the money you invested over the years. Result: You retire with 16% more.

Your gains don’t stop there. Assume you continue earning either 8% or 8.5% while you withdraw 4% of your portfolio each year and that you live for 25 years after retirement. If your lifetime return is 8%, your total retirement withdrawals are just shy of $2.5 million. If your lifetime return is 8.5% instead, you withdraw about $3.1 million. That’s an extra $600,000 for your “golden years,” a bonus of three times the total dollars you originally saved.

Your heirs will also have plenty of reasons to be grateful for your 0.5% boost in return. If your lifetime return was 8%, your estate will be worth about $3.9 million. If you earned 8.5% instead, your estate is worth more than $5.1 million.

Keep your investment costs low.
Slowly increasing your savings rate over time.
Consistently saving while treating investment contributions like a periodic bill payment.
Bettering your career prospects to increase your income over time.
Avoiding behavioral investment mistakes which can act as a counterweight to the benefits of compounding.

Curated Insights 2018.01.21

JD.com’s Richard Liu decodes the Chinese consumer

No one wants to take a bag, and put it on a table when a lot of ladies have the same bag with the same style. They want to find something special. Something you cannot find in your circle…But if you look at China, there are more and more young people, and their income is relatively very small, but they want to spend time to find fashion, maybe not as expensive as luxury brands, but still very fashionable. Maybe not big brands, [but rather] small brands, or niche brands.

Commerce platforms for them are the best way to convert their customers to buying. And at the same time, for JD, we are not just a sales platform; we are a brand-building platform. We spend more and more resources to help build the brand — to strengthen the brand is as important as the sales side.

We will use two different ways to cover the entire globe. The first is our South [East] Asian channel. We will set up [a] subsidiary there and copy the Chinese business model. Build a local team, buyer team, logistics system and last mile delivery team, everything the same as in China. In Indonesia we have been operating for almost two years, and we will go to Thailand very soon.

But for Europe and [the] US we will use a cross-border business model. We have been thinking about this for many years. If you just copy another model or local players do exactly the same thing as them, you cannot find an advantage. So we will cooperate with Chinese local brands and bring them to the US and Europe. They need us, and we also need them, because the brand quality is very good and price is not as high. We will choose them, pick them up and bring [them] to the US and Europe. I think people will love these kinds of Chinese brands.


Alibaba’s AI outguns humans in reading test

“That means objective questions such as ‘what causes rain’ can now be answered with high accuracy by machines,” Luo Si, chief scientist for natural language processing at the Alibaba institute, said in a statement. “The technology underneath can be gradually applied to numerous applications such as customer service, museum tutorials and online responses to medical inquiries from patients, decreasing the need for human input in an unprecedented way.”


Keyence: Leading Japan’s new wave of tech giants

Keyence is a beneficiary of the AI, robotics, and industrial-automation boom. Sales of its factory automation sensors have been particularly strong in China, where labor costs are rising. As manufacturing grows more data intensive, factories require more sensors and vision systems to collect data and become “smarter.” Plus, a large proportion of Internet of Things spending is on sensors and connectivity. “Keyence has the highest exposure to upgrade-and-innovation demand,” says Jay Huang of Sanford C. Bernstein. Keyence, with its diversified customer base, is one of least exposed to cycles of single trends like the iPhone, he says, and has more than half the global market share for 3-D vision systems —a market growing 30% a year—and rising sales in China.


Facebook’s motivations

The key thing to remember about Facebook — and Google’s — dominance in digital ads is that their advantages are multi-faceted. First and foremost are the attractiveness of their products to users; that attractiveness is rooted not only in technology but also in both data and people-based network effects. Second is the depth of information both companies have on their users, allowing advertisers to spend more efficiently on their platforms — particularly on mobile — than elsewhere. The third advantage, though, is perhaps the least appreciated: buying ads on Google and Facebook is just so much easier. They are one-stop shops for reaching anyone, which means competitors need to not have similar targeting capabilities and user engagement, but in fact need to be significantly better to justify the effort.


Adapt or die is Marchionne’s stark farewell message to carmakers

Carmakers have less than a decade to reinvent themselves or risk being commoditized amid a seismic shift in how vehicles are powered, driven and purchased. Auto companies need to quickly separate the stuff that will be swallowed by commodity from the brand stuff.

While the car industry has always been tough — Chrysler and GM both went bankrupt during the financial crisis — in the past the mistakes were self-induced, Marchionne said. Now the tumult is being driven by outside forces, and it’s coming faster than people expect, he said — a surprising view, given that Fiat is perceived to be behind some competitors in adapting. He said the company is positioned well, and rather than pour money into competing with Silicon Valley, the industry should try to identify the best solutions coming from tech companies and reduce its exposure to products that aren’t going to be easily defended.


Ensemble Capital: Prestige Brands update

Owning these strong brands, in small niche markets, results in Prestige generating the highest profit margins in their industry. While Procter & Gamble and Johnson & Johnson might be a lot more well known, Prestige Brands turns every dollar of revenue into 34 cents of profits while P&G and J&J manage to squeeze out just 26 cents of profits.

It is important to recognize that Prestige is a brand management company more than a product producer. They outsource most of the capital-intensive production aspects of the business. This capital light, outsourcing approach means the company only employs 520 people, generating an amazing $1.7 million per employee. In comparison, most health care and consumer staple companies do closer to $500k per employee and Apple, which has the highest revenue per employee in the technology industry does only slightly more at $1.9 million. Until their acquisition of Fleet a year ago, Prestige had only 259 employees and was doing an amazing $3.1 million per employee.


How Roku morphed from a quirky hardware startup to a TV streaming powerhouse

For about two years, Roku considered building its own TV set in-house. “Then we decided: No, that’s a way to lose a lot of money,” remembers Wood. Instead, the company teamed up with Chinese firms looking to enter the U.S. market and willing to undercut the competition with budget-priced TV models — a strategy Sappington calls “a very smart decision.” And with millions of active users and growing brand awareness, Roku was able to talk to TV makers eye-to-eye and demand that they not change a thing about its software. “We had a big enough brand that they were willing to do those kinds of deals,” Wood says.

But to really understand Roku, you have to look beyond the streaming boxes, sticks and even TVs. “People think of Roku as a hardware company,” says Martin. “It is not.” Rather, the firm is leveraging hardware to acquire users, which can then be monetized via advertising and licensing fees. “The goal was always to generate revenue by monetizing the platform,” says Wood. “As our scale started to approach 5 million active accounts, that’s when we said, ‘Now we can start focusing on monetization.’”

Still, his message to Hollywood is clear: Roku is already in the content business, and it wants to be top of mind as studios think about windowing their content. “We are a very viable outlet,” says Holmes. “We should be one of their first calls.”


China’s top movie ticketing app said to plan $1 billion IPO

China’s box-office receipts rose 15 percent last year to 52 billion yuan ($8 billion), making it the world’s second largest movie market after the U.S. Almost 80 percent of movie tickets in the country are sold through mobile apps, and Maoyan Weying is the largest ticketing provider with a 52.5 percent market share as of the third quarter 2017, according to researcher Analysys.


Didi has a brilliant plan to contain the threat of China’s bike-sharing services

Already, Ofo and arch rival Mobike have chipped away at Didi’s share of short journeys and struck deals with local governments with the aim of solving congestion problems. Now, they are looking to expand beyond that. Mobike, for example, has tested ride-sharing services. Mobike and Ofo both claim over 100 million registered users, so action is best taken sooner rather than later. The question is whether Didi’s move is too late.

This devilish strategy works because Ofo and Bluegogo have no choice but to be a part of the platform due to their ties with Didi. Ofo counts Didi as an investor and is already integrated into its app, while Didi swooped in to save Bluegogo after it went broke. It’s no surprise that Mobike, the other bike-sharing unicorn which no Didi connection, didn’t elect to be a part of the program.

Techmate: How AI rewrote the rules of chess

No top chess player would take such a big risk, he says. But this computer seems to have “such control over the board, it’s almost as though it has an intuition something good will happen”. His verdict on its overall game-playing ability: “It’s incredible. It’s hard for me to get my head around it.”

All computers before this, as he describes it, worked by brute force, using the intellectual equivalent of a steamroller to crack a nut. People don’t operate that way: “Humans are flexible because we know that sometimes we have to depart from the rules,” he says. In AlphaZero, he thinks he has seen the first computer in history to learn that very human trick.

Predictions about the imminent rise of the machines have always turned out to be wildly over-optimistic. Herbert Simon, one of the pioneers of AI, forecast in 1965 that computers would be able to do any work a human was capable of within 20 years. When today’s experts in the field were asked when that moment would come, only half picked a time within the next 30 years.


This army of AI robots will feed the world

If robots can prevent herbicides from having any contact with crops, it means that 18 classes of chemicals previously considered too damaging to be widely sprayed suddenly become viable. “We’re both ratcheting down the volume of chemicals that need to be used, but also expanding how many types can be used,” Heraud says. In other words, Blue River’s success might be the worst thing that could happen to the herbicide industry, or it could open up an avenue to sell new products.

His next step, with Deere’s backing, will be to move Blue River’s robots beyond herbicides to fertilizers, the culprits behind toxic algae blooms, which are killing fish and making lakes unswimmable. Farmers typically spend up to 10 times more annually on fertilizers than weed killers—about $150 billion a year. But the shift is a big leap for a robot. It must gather a range of visual signals—the colors, sizes, and textures of a plant’s leaves—and from this data extrapolate the plant’s health and how much nourishment it needs. “It’s a ton more processing power, but it’s doable,” Heraud says.

The next link in this technological chain could be a kind of agricultural Swiss Army knife: a robot that can apply not only herbicides and fertilizers but also insecticides, fungicides, and water all at once, delivering only as needed.

The implication of plant-by-plant—rather than field-by-field—farming is not just the prospect of vast reductions in chemical usage. It could also, in theory, end monocropping, which has become the new normal—cornfields and soybean fields as far as the eye can see—and has given rise to the kind of high-calorie, low-nutrient diets that are causing heart disease, obesity, and Type 2 diabetes. Monocrops also leach soil nutrients and put food supplies at risk, because single-crop fields are more susceptible to blight and catastrophe. Modern farmers have been segregating crops in part because our equipment can’t handle more complexity. Robots that can tend plants individually could support intercropping—planting corn in with complementary crops such as soybeans and other legumes.

Bright outlook for the economy and stocks

But I worry that this tax cut is happening at a time when the U.S. economy doesn’t need fiscal stimulus. And longer term, what will tax cuts do to the federal deficit? The deficit was going to be rising as a percentage of GDP anyway, partly for structural reasons relating to the aging of the baby boomers. A $1.5 trillion tax cut will add an additional $300 billion to $400 billion interest-rate burden in the next few years.

In the past 10 years, American companies made an inordinate effort to think about how to move people or structures outside the U.S. for nonproductive purposes—basically, to increase earnings per share. By moving toward a territorial system of taxation and bringing our corporate tax rate in line with the rest of the world’s, we can get back to having managers focus on productive investments, greater efficiency, and value creation. This will unlock the strength of America and drive GDP growth. Simply, the absence of a major negative is a positive. This is a generational change. While inflation potentially is a fear for the stock market, you have to be positive on the S&P 500, even though we are 102 months into an expansion.

Having covered the auto-parts industry for 50 years, I am seeing more companies announce that they are going to relocate to the U.S. And the U.S. is a magnet not only for American, but also for foreign companies locating here because the U.S. is a big market.

But now the Fed is starting to allow $30 billion of Treasuries, more or less, to mature into the market each month. There is a chance—I’d call it a base case—that the rhetoric and actions of the ECB will have to become more hawkish, given economic growth in Europe. That means the ECB might start to pull back on quantitative easing. Central-bank balance sheets could start to decline, in the aggregate, sometime during 2018. If that happens, the stock market will go down. Quantitative easing, cumulatively, has been highly correlated to the gains in the S&P 500 and global stock markets. Central-bank footings, or assets, went from $6 trillion pre-financial-crisis to $22 trillion subsequently. Bankers are talking about bringing that down to $16 trillion or $17 trillion. Maybe it drops more quickly. It is undeniable that central-bank asset buying has been a prop for the markets.


Some great thoughts on network effects from Anu Hariharan on Twitter:

Often misunderstood – Network Effects is not the same as scale

One simple way to test for that is ask this question – what is the “barrier to exit” for the user?

If the barrier to exit for the user is low, then there is no network effect. This implies it is easy for users to switch from your service

Ride sharing services (Uber, Lyft) don’t have a network effect (in other words demand side economies of scale). Users often switch apps if it takes longer than 5 mins ETA or if there is surge pricing on one

However ride sharing does have supply side economies of scale and therefore opportunity for select players to have monopolistic share in a market

On the other hand apps like Facebook, LinkedIn have very strong network effect – because the barrier to exit for the user is really high!

A user has invested time and effort in building a social graph on these platforms with connections, history of exchanges and in some cases even maintain them. It is not easy for customers/ users to switch easily and therefore the “barrier to exit” for the user is really high

What if everyone got a monthly check from the government?

Kela’s researchers originally envisioned the experiment as the first in a series that would help them understand the implications of expanding basic income nationwide. “With basic income, there will be a lot of winners, but there will be a lot of losers also,” Kangas says. “We have to study the losers.” For one thing, he points out, to provide Finns with the level of financial security they enjoy under their current system, basic income payments would have to be at least twice those of the trial. And to pay everyone, the country would have to change its tax structure.

The wealthiest would be relatively unaffected by such a change because their taxes are already high, but a swath of middle- and upper-middle-class Finns would pay more in taxes than they’d get back in basic income. In national polls, when the possibility of a 55 percent flat tax was raised, the percentage of Finns who supported basic income dropped from 70 to about 30. “We would need to implement another study for the whole population to understand it,” says Miska Simanainen, a tax specialist who was part of Kangas’s team. No such studies are planned.

Trust is perhaps the most radical aspect of basic income. Handing out money requires a government to have faith that people know what’s best for themselves—that, on the whole, they have enough intelligence and foresight to put their financial resources to good use. In almost every basic income study conducted so far, this faith has been borne out. The little money wasted on vices is more than offset by what is spent on groceries or child care. But trusting that this will hold true universally requires an even bigger leap of faith. In 2016, Switzerland’s citizens overwhelmingly voted down a proposal that would’ve given them each the equivalent of $2,555 a month. Surveys showed they didn’t think it was right for people to be given something for free.


Savvy Investor Awards 2017: The Best White Papers

Savvy Investor is the world’s leading research network for institutional investors. Since the site launched in 2015, the Savvy Investor research team has curated over 20,000 investment and pensions papers, placing it in a unique position to judge the best white papers of 2017. The official announcement of winners was made on December 5.

The accolade of “Best Investment Paper 2017” is awarded to the CFA Institute Research Foundation for the paper, “Financial Market History: Reflections on the Past for Investors Today.”


Why dolphins are deep thinkers

One day, when a gull flew into her pool, she grabbed it, waited for the trainers and then gave it to them. It was a large bird and so the trainers gave her lots of fish. This seemed to give Kelly a new idea. The next time she was fed, instead of eating the last fish, she took it to the bottom of the pool and hid it under the rock where she had been hiding the paper. When no trainers were present, she brought the fish to the surface and used it to lure the gulls, which she would catch to get even more fish. After mastering this lucrative strategy, she taught her calf, who taught other calves, and so gull-baiting has become a hot game among the dolphins.

How to guard against moat erosion

A wet moat, called a douve or wet ditch, formed a very efficient obstacle against the assaulting army. However, wet moats could be something of a mixed blessing; they were inconvenient in peacetime, which meant that unofficial bridges were often erected – with subsequent argument and indecision about the right moment to chop them down in an emergency. Besides, water might dangerously erode the base of the wall, and stagnant water might be a year ‘round health hazard for the inhabitants of the castle.

Curated Insights 2018.01.07

The $100 billion venture capital bomb

Son must deploy $20 billion, or a fifth of the fund, every year for the next five years to meet investors’ terms and their expectations in a market that many already consider overvalued.

Son explained to Hauser that there was a big new wave of computing coming — the sixth, in Hauser’s estimation, following on from the mainframe, the minicomputer, the workstation, the PC, and mobile. This next wave would automate processes in industrial manufacturing and on consumer devices. Son said Arm could uniquely capitalize on this new order as the leading processor manufacturer behind the Internet of things.

“This is the company,” Son said in a televised interview. “No one can live on the earth without chips — it’s in cars, refrigerators, everywhere. So if chips are the things everyone needs, and one company has a 99 percent market share, there must be a barrier. They’re not monetizing well enough. But if I own it, we can monetize it much better. I think the company is going to be more valuable than Google.”

Aside from its 95 percent domination of smartphones, Arm has 34 percent of the global processors market. There are currently 110 billion Arm processors in the world. The company has forecast a total of one trillion by 2035. As the applications get more advanced — be that a car, a washing machine, or a drone — they demand smarter processors, which are more expensive to produce in-house. “We price our fee at a tenth of the cost of what it would cost to develop it yourself,” Thornton notes. “So when you’re staring down the barrel of $100 billion and ten years to develop that processor yourself, we can say it will cost $10 billion from us and you can have it instantly. This is why we have expanded so rapidly over 20 years. One by one, design team by design team, we will become the processor of choice in those markets.”

“Arm Holdings has an insight into the future. When Arm makes a contract with a new business venture, providing the Internet of things for automobiles or farming, Arm will know what is in the pipeline for the Internet of things two years ahead.” SoftBank, in turn, gets a head start on funding companies for a market that doesn’t yet exist.

Analysts say SoftBank, which declined to comment for this article, is at work on vertical integration: Foxconn builds devices, Arm supplies the chips, and SoftBank-owned Sprint and OneWeb, an Internet satellite company, operate the networks on which the devices run. Vision Fund portfolio companies will reap the benefits of these partnerships. SoftBank sits in the middle, introducing high-growth prospects from the fund to one another and to the infrastructure on which their success rides.

Units of time are the new currency

Buffett’s not wrong, but technology has changed the nature of competition. While businesses were once considered only as valuable as the dividends they paid out, the “impenetrable” moats that let companies spit off excess cash are dwindling. A moat today is simply a temporary buffer that helps a company get ahead of the next innovation cycle. When you compound time, you’re creating and recreating value faster than the current innovation cycle.

This is the formula for compounding time into a utility and beyond: 1) Reduce friction for your customers and yourself. Use the time you save to build your utility. 2) Compound time by investing in the ecosystem and getting other companies to integrate with your product. Other companies will integrate with you to save themselves time, building on top of your platform and giving you time to invest in the next great business. 3) Buy other people’s time to defend your utility and stay relevant. Smartly acquiring new products helps you maintain your utility.

Jeff Bezos: “All service interfaces, without exception, must be designed from the ground up to be externalizable. That is to say, the team must plan and design to be able to expose the interface to developers in the outside world. No exceptions.” While this created more work in the short-term, it broke Amazon down into hundreds of micro-services that communicated via APIs. By making all services accessible via API, Amazon drastically reduced the time it took to deploy new features and functionality.

Google’s machine-learning algorithms are reportedly five to seven years ahead of the competition. By keeping TensorFlow to itself, Google would have maintained its lead time — similar to how moats are created by stockpiling assets. But by taking the opposite approach and giving TensorFlow away for free, Google created a utility.

Building a traditional moat will be antithetical to building a great business. The only way to survive is to extract the core of your business and spread it out to compound returns on time. First, you have to save time for your customers and even yourself. Then, you have to invest it forward by co-operating with other products in your ecosystem. Finally, you have to acquire new innovation to maintain your lead.


Why has Waymo taken so long to commercialize autonomous taxis?

To estimate the rate at which passengers will tolerate autonomous taxi errors, we analyzed the manually driven car statistics to set the hurdle. On average human driven cars break down roughly once every 50,000 miles and crash once every 240,000 miles,2 thus offering perspective on acceptable tolerance rates for autonomous vehicle SIFs and UFs.

Supporting this hypothesis, its cars seem to have had difficulty making left turns. One possible explanation is that it has chosen not to vertically-integrate, outsourcing vehicle production to partners like Fiat Chrysler and then taking engineering shortcuts by integrating its sensor suite into a product manufactured away from its controls. In contrast, Tesla’s and Cruise Automation’s (GM) manufacturing operations are vertically-integrated, which could become an important source of competitive advantage.

We are skeptical of that negative conclusion for a number of reasons. Today, Waymo probably is trying to maximize its failure rate to identify faults and root them out. Some stretches of road are trickier and some intersections more difficult to navigate than others.

Getting my fix of Starbucks

SBUX has been successful engendering loyalty from its customers as well- Starbucks Rewards has 13.3mm members in the US and an incredible 36% of all dollars tendered in the stores is transacted through the loyalty program (US Company operated stores).

In the US- the average new SBUX location generates revenue of $1.5mm (average unit volume or AUV) and generates a year 1 store profit margin of 34% or $510k. Based on an average store investment of $700k in the US, this results in an ROI of ~75%. Compare this to a McDonalds with an ROI of ~30%, an average fast casual operator at ~40% or even Chipotle (at its peak before the food illness issues) at ~70%. This means that the average SBUX store earns back its investment a third of the way into its second year – very compelling unit economics. The math likely changes with higher investments in Reserve stores and premium Roasteries in the coming years but if these seek to elevate the overall SBUX experience and thus drive pricing power through the entire system, it’s the right move for the long term.

Starbucks is a well-positioned company led by a smart management team playing “the long game”. While store growth in more mature markets and continuing competition in premium coffee may be a drag to future growth, Starbucks benefits from a moat in the form of a strong brand and a loyal, repeat customer that can be extended into more markets and into more than just coffee. And I believe that this moat is sustainable under the right leadership team that understands that Starbucks delivers an experience that extends far beyond just selling coffee. The sustainability of the moat is predicated on continued investment to elevate the store experience and thus drive pricing power. Management has demonstrated a willingness and enthusiasm to invest and has ample runway to do so while also rewarding shareholders with share repurchases.

How big tech is going after your health care

Now, as consumers, medical centers and insurers increasingly embrace health-tracking apps, tech companies want a bigger share of the more than $3 trillion spent annually on health care in the United States, too. The Apple Heart Study reflects that intensified effort.

Each tech company is taking its own approach, betting that its core business strengths could ultimately improve people’s health — or at least make health care more efficient. Apple, for example, has focused on its consumer products, Microsoft on online storage and analytics services, and Alphabet, Google’s parent company, on data.

Last year, Facebook made it more appealing for pharmaceutical companies to advertise their medicines on the platform by introducing a rolling scroll feature where drug makers can list their drug’s side effects in an ad. Such risk disclosures are required by federal drug marketing rules.


Western Digital, Nvidia on board with ‘RISC-V,’ so pay attention, says Benchmark

Any investor interested in learning how adoption of RISC-V stands to disrupt the CISC and RISC processor domains, including discrete processors and/or processor IP (cores and architectures) embedded within simple MCUs as well as advanced ASICs. Additionally, RISC-V stands to disrupt R&D development roadmaps for merchant and captive SoC companies. For example, if Western Digital truly intends to adopt RISC-V in storage products, Marvell will need to reconsider usage of Arm cores. This could lower the upfront licensing and royalty costs for Marvell; however, it may require a revamping of Marvell’s storage controller design flow. Processor IP companies such as Arm Holdings, Synopsys, Cadence Design, Imagination Tech and even CEVA, Inc. could see an impact.

China removes 1,400 baby formula products from shelves

The regulations, effective Jan. 1, require factories making formula to register those products with China’s Food and Drug Administration and pass safety inspections. Plants are limited to working with three brands, and those brands can make only three different products each. China’s FDA has approved 940 infant-formula products from 129 factories so far, the agency said. That compares with more than 2,300 formulations available to parents before Jan. 1.

That vaulted Nestle, Danone and Reckitt Benckiser Group Plc into the top spots in the $20 billion market, according to Euromonitor International.

Capturing those families will be crucial. With the relaxation of China’s one-child policy, Reckitt Benckiser anticipates about 20 million babies being born annually, which could trigger an annual growth rate of at least 7 percent in the infant-formula category during the next five years, said Patty O’Hayer, a spokeswoman. The company bought Mead Johnson for $16.6 billion last year, and its Enfa and Enfinitas brands were approved for sale. Asia generated half of the Enfa lineup’s $3.7 billion in sales for 2016.

The Paris-based company wants to deploy technology such as laser printing to make tampering more difficult and QR codes to ensure traceability of a product back to the factory — moves intended to assure Chinese parents concerned about food safety.

Cancer deaths fall to lowest rate in decades

While a number of breakthrough, high-cost drugs have improved the outlook for people with some deadly cancers, the biggest cause of the decrease in deaths is that Americans are smoking less. The report found decreased smoking rates, and improved detection and treatment, have led to sharp declines in the rate of lung, breast, prostate and colorectal cancer deaths.

How blockchain technology is redefining trust

‘Regulators will like that blockchain-based transactions can achieve greater transparency and traceability– an “immutable audit trail”,’ Masters says. In other words, it could help eliminate the kinds of fraud that come from cooking the books.

How do typical loans work? A bank assesses the credit score of an individual or business and decides whether to lend money. The blockchain could become the source to check the creditworthiness of any potential borrower, thereby facilitating more and more peer‑​to‑​peer financing.

Consider traditional accounting, a multi-billion industry largely dominated by the ‘big four’ audit firms, Deloitte, KPMG, Ernst & Young, and PwC. The digital distributed ledger could transparently report the financial transactions of an organization in real time, reducing the need for traditional accounting practices. And that is why most major players in the financial industry are busy investing significant resources into blockchain solutions. They have to embrace this new paradigm to ensure it works for, not against, them.

In the patent, Goldman describes SETLcoin as having the potential to guarantee ”nearly instantaneous execution and settlement“ for trades. It would mean all the capital the bank is required to keep in reserve, to hedge against the risk of transactions if they don’t settle, would be freed up.

The blockchain raises a key human question: How much should we pay to trust one another? In the past year, I’ve paid my bank interest and fees, some hidden, to verify accounts and balances so that I could make payments to strangers. I’ve spent thousands of dollars on lawyers to draw up contracts because I am not quite sure how another person will behave (and to sort out a few incidents where trust broke down). I’ve paid my insurance company to oversee the risk around my health, car, home, and even life. I’ve paid an accountant to reconcile an auditing issue. I’ve paid an estate agent tens of thousands of dollars essentially to stand between me, the prospective buyer, and the current owner to buy a house. It would seem we pay a lot for people to lord over our lives and double-check what’s happening. All these ‘trusted intermediaries’ are part of the world of institutional trust that is now being deeply questioned.

Today, it is circa 1993 for blockchain technologies. Even though most people barely know what the blockchain is, a decade or so from now it will be like the internet: We’ll wonder how society ever functioned without it. The internet transformed how we share information and connect; the blockchain will transform how we exchange value and whom we trust.


Bitcoin-is-Worse-is-Better

It’s not the decentralized aspect of Bitcoin, it’s how Bitcoin is decentralized: a cryptographer would have difficulty coming up with Bitcoin because the mechanism is so ugly and there are so many elegant features he wants in it. A cryptographer’s taste is for cryptosystems optimized for efficiency and theorems; it is not for systems optimized for virulence, for their sociological appeal. Centralized systems are natural solutions because they are easy, like the integers are easy; but like the integers are but a vanishingly small subset of the reals, so too are centralized systems a tiny subset of decentralized ones. It may be that Bitcoin’s greatest virtue is not its deflation, nor its microtransactions, but its viral distributed nature; it can wait for its opportunity. If you sit by the bank of the river long enough, you can watch the bodies of your enemies float by.

Gyms ditch machines to make space for free weights

In recent years the 420-location chain has scaled back cardio and weight machines to 50% of floor space from about 66%. The gym devotes the other half of floor space to free weights and functional training, which includes things like kettlebell swings and body-weight exercises with TRX suspension straps. It has also expanded its studio group-exercise classes.

“I prefer to do classes, because the teacher pushes me farther than I would push myself,” she says. “I get bored on cardio machines or on the weight machines.”

The shift away from machines is even more pronounced overseas. In 54 gyms of varying price levels in the U.K., members’ time spent on cardio machines dropped 7% between 2013 and this year, even as the total number of gym visits increased, according to an analysis from Edinburgh-based tracking firm GYMetrix.

The Remarkable Early Years of Warren Buffett (Part 1)

The risks of buying a home that’s too big

“The biggest house isn’t necessarily the best house or even the best investment. An older, smaller home with a shorter commute, bigger lot or greater remodel potential may appreciate more. In fact, many fancy new homes can lose value quickly if a developer builds newer homes nearby, while older areas may have more enduring land value.”

“You want enough space to live comfortably, but you don’t want to heat, clean and pay taxes on space you aren’t utilizing.”

Long-term returns. The money saved in buying a right-size home could pay dividends in the future—literally. A $20,000 savings each year over the life of a 30-year mortgage could result in a nearly $1.2 million nest egg if invested in a stock market portfolio earning 4% a year, Ms. Adam says. The annual savings, when compounded over time, is likely to exceed the appreciation in your home’s value over the term of the mortgage.

Curated Insights 2017.12.17

Disney and Fox

With an increasingly high-profile brand, large user base, and ever deeper pockets, Netflix moved into original programming that was orthogonal to traditional programming buyers: creators had full control and a guarantee that they could create entire seasons at a time Each of these intermediary steps was a necessary prerequisite to everything that followed, culminating in yesterday’s announcement: Netflix can credibly offer a service worth paying for in any country on Earth, thanks to all of the IP it itself owns. This is how a company accomplishes what, at the beginning, may seem impossible: a series of steps from here to there that build on each other. Moreover, it is not only an impressive accomplishment, it is also a powerful moat; whoever wishes to compete has to follow the same time-consuming process.

Another way to characterize Netflix’s increasing power is Aggregation Theory: Netflix started out by delivering a superior user experience of an existing product (DVDs) to a dedicated set of customers, leveraged that customer base to gain new kinds of supply (streaming content), gaining more customers and more supply, and ultimately leveraged those customers to modularize supply such that the streaming service now makes an increasing amount of its content directly. What Disney is seeking to prove, though, is that it can compete with Netflix directly by following a very different path.

The implication of Netflix’s shift to original programming, though, isn’t simply the fact that the streaming company is a full-on competitor for cable TV: it is a competitor for differentiated content as well. That gives Netflix far more leverage over content suppliers like Disney than the cable companies ever had.

Netflix isn’t simply adding customers, it is raising prices at the same time, the surest sign of market power. Therefore, the only way for Disney to avoid commoditization is to itself go vertical and connect directly with customers: thus the upcoming streaming service, the removal of its content from Netflix, and, presuming it is announced, this deal.

Whereas Netflix laddered-up to its vertical model and used its power as an aggregator of demand to gain power over supply, Disney is seeking to leverage — and augment — its supply to gain demand. The end result, though, would look awfully similar: a vertically integrated streaming offering that attracts and keeps customers with exclusive content, augmented with licensing deals.

In addition, Disney and 21st Century Fox combined for 40% of U.S. box office revenue in 2016; that probably isn’t enough to stop the deal, and as silly as it sounds, don’t underestimate the clamoring of fans for the unification of the Marvel Cinematic Universe in swaying popular opinion!

GM’s latest weapon in pickup truck wars: Carbon fiber

Pickup sales represent about 16% of the U.S. market, but delivered the bulk of the $25 billion in operating profit Detroit’s Big Three auto makers earned in North America last year, according to analysts. J.D. Power estimates GM’s large pickups fetch $43,220 on average, up about 30% from five years ago, but below the $45,000 transactions on Ford’s F-Series.

Trucks represent a unique challenge for Detroit. Buyers expect ample power to haul boats and construction gear, but regulators are demanding more efficient designs over the next seven years to reduce greenhouse-gas emissions and improve fuel economy. That thinking underpinned Ford’s use of aluminum for the market-leading F-Series, which Environmental Protection Agency officials have said they see as already nearly meeting 2025 fuel-economy standards.

Carbon fiber is at least 50-75% lighter than steel and 20-50% lighter than aluminum, depending on the type, according to Ducker Worldwide, a materials consultancy that works with auto makers. It would improve dent resistance and give GM a differentiating feature in the fierce realm of truck marketing, said Richard Schultz, a metals expert at Ducker.

Researchers train robots to see into the future

These robotic imaginations are still relatively simple for now – predictions made only several seconds into the future – but they are enough for the robot to figure out how to move objects around on a table without disturbing obstacles. Crucially, the robot can learn to perform these tasks without any help from humans or prior knowledge about physics, its environment or what the objects are. That’s because the visual imagination is learned entirely from scratch from unattended and unsupervised exploration, where the robot plays with objects on a table. After this play phase, the robot builds a predictive model of the world, and can use this model to manipulate new objects that it has not seen before.

The system uses convolutional recurrent video prediction to “predict how pixels in an image will move from one frame to the next based on the robot’s actions.” This means that it can play out scenarios before it begins touching or moving objects.

China has been building what it calls “the world’s biggest camera surveillance network”. Across the country, 170 million CCTV cameras are already in place and an estimated 400 million new ones will be installed in the next three years.

Many of the cameras are fitted with artificial intelligence, including facial recognition technology. The BBC’s John Sudworth has been given rare access to one of the new hi-tech police control rooms.

World’s largest water diversion plan won’t quench China’s thirst

It’s China’s age-old dilemma: a tug of war between the farms that help feed the nation, and the soaring demands of industry and city-dwellers in the parched northern plains.

Beijing, which gets about 70 percent of its water from the South-North diversion project, is expected to add another 2 million people before the government caps the city’s population at 23 million.

One way to stem the reduction in groundwater is taxes. Last month, the government expanded a water resource tax trial to cover nine municipalities and provinces, with duties ramping up if quotas are exceeded. Regular water tax rates were highest in Beijing and Tianjin, according to China’s finance ministry, and water from underground will be taxed at twice the rate or more than for surface water.

Another option is to import food that requires a lot of moisture to grow — nearly half of China’s farmland has no irrigation system. That’s not straightforward, as China also has a long-standing food-security policy that aims to be largely self-sufficient in staple grains.

Each ton of imported wheat saves China about 500 cubic meters of water and 0.4 acres of farmland, Fang said. The country is already the world’s largest importer of soybeans, but could buy more, as well as meat and dairy products, she said. But an increase in grain imports would put a further strain on global food markets. China’s soybean demand has prompted farmers in Brazil to turn over some 13 million hectares of farmland and forest to growing the crop in the past 10 years, an area about the size of Germany.

Still, in many cases there’s little incentive for farmers to save water. Agriculture uses 62 percent of China’s water, but crops have a relatively low marginal value. So the government bans the sale of agricultural water to industry, which pays 10 times the price, to ensure food supply.


A caution from the world’s biggest shipping line

Decade-old oversupply issues swamped demand for containerized sea trade in the third quarter, a senior official at Maersk Line Ltd. said in an interview last week. Over 90 percent of trade is routed through ships, making the industry a bellwether for the worldwide economy.

Drewry Shipping Consultants expects the container-shipping freight growth rate to drop to less than 10 percent in 2018 from around 15 percent in 2017 as a supply glut hits home. CMA CGM, the No. 3 container shipping company, recently signaled slightly lower rates for 2018 in early negotiations of Asia-Europe contracts, analysts at Credit Suisse Group AG wrote in a Nov. 29 note.

In contrast, the air-freight market is buoyant after years in the doldrums, International Air Transport Association said last week. The development of e-commerce should mean growth rates remain ahead of the pace of expansion in world trade.


The world produces more than 3.5 million tons of waste a day – and that figure is growing

The world generates at least 3.5 million tons of solid waste a day, 10 times the amount a century ago, according to World Bank researchers. If nothing is done, that figure will grow to 11 million tons by the end of the century, the researchers estimate. On average, Americans throw away their own body weight in trash every month. In Japan, meanwhile, the typical person produces only two-thirds as much. It’s difficult to find comparable figures for the trash produced by mega-cities. But clearly, New York generates by far the most waste of the cities I visited: People in the broader metropolitan area throw away 33 million tons per year, according to a report by a global group of academics published in 2015 in the journal of the National Academy of Sciences. That’s 15 times the Lagos metropolitan area, their study found.


Salmon open flood gates for human consumption of GM animals

Engineered to grow at twice the rate of regular salmon, it is also believed to be the first example of a genetically engineered animal bred and sold for human consumption.


The main advantage of the salmon’s shorter lifespan is that the fish can be grown in tanks inland, vastly reducing the cost of transportation and the burden on the environment. “Demand for global protein is increasing,” he says. “We have to do a better job and we have to do it efficiently.”

One area Professor Muir regards as promising is the creation of genetically modified goats’ milk by scientists at the University of California, Davis, which carries a protein found in human breast milk that could, for example, help protect children in the developing world from bacterial infection.

More moats, more profits

Some businesses, however, have structural advantages that enable a stronger defense against competition, enabling high profits over an extended period. As competitive advantages have improved for the leading firms, we believe the ability to shield profits from normal competition has increased, enabling higher overall profits. The high concentration of wide and narrow moats among the largest 100 firms suggests that their elevated profit margins partly reflect the successful defense of competitive positions. In analysis looking at the past 10 years, wide-moat firms have generated more than triple the operating margins of no-moat firms, while narrow-moat firms have posted more than double the returns of no-moat companies. As the moat rating improves, the margins expand, supporting the importance of moats in protecting profits.

Beyond the global growth, the current phase of industrialization also supports more moats. As industrialization has moved from mechanical and mass production to information technology, we have seen an expansion in moats, especially in intangible assets and switching costs. Further, as we move into the next phase of industrialization focused on networking and the exchange of data between machines and humans,3 we expect more growth in profits supported by network effects. Several of the largest companies, including wide-moat firms with strong network effects Alphabet, Facebook, Amazon.com, Alibaba, and Tencent, didn’t exist 30 years ago and now represent more than 10% of the market capitalization of the top 100 firms.

The blockchain economy: A beginner’s guide to institutional cryptoeconomics

But a database still relies on trust; a digitised ledger is only as reliable as the organisation that maintains it (and the individuals they employ). It is this problem that the blockchain solves. The blockchain is a distributed ledgers that does not rely on a trusted central authority to maintain and validate the ledger.

A better metaphor for the blockchain is the invention of mechanical time. “The effect of the reduction in the variance of time measurement was felt everywhere”, Allen writes. Mechanical time opened up entirely new categories of economic organisation that had until then been not just impossible, but unimaginable. Mechanical time allowed trade and exchange to be synchronised across great distances. It allowed for production and transport to be coordinated. It allowed for the day to be structured, for work to be compensated according to the amount of time worked — and for workers to know that they were being compensated fairly. Both employers and employees could look at a standard, independent instrument to verify that a contract had been performed.

Complete contracts are impossible to execute, while incomplete contracts are expensive. The blockchain, though smart contracts, lowers the information costs and transactions costs associated with many incomplete contracts and so expands the scale and scope of economic activity that can be undertaken. It allows markets to operate where before only large firms could operate, and it allows business and markets to operate where before only government could operate.

The blockchain and associated technological changes will massively disrupt current economic conditions. The industrial revolution ushered in a world where business models were predicated on hierarchy and financial capitalism. The blockchain revolution will see an economy dominated by human capitalism and greater individual autonomy.

Curated Insights 2017.12.03

A dynamic knowledge tool to understand the issues and forces driving transformational change across economies, industries, global issues and the Forum’s system initiatives.

How to tame Google, Facebook, Amazon, and Apple

The problem with price regulation is that Google doesn’t charge high prices—at least not to consumers, the traditional victims in monopoly cases. The company initially helped wipe out the profitability of newspapers and magazines, in part, by undercutting the price of print advertising. These days, however, Google can charge hefty prices to advertisers because it controls so much inventory and user data. Advertisers can feel they have no choice but to pay up, while consumers pay precisely zero to do searches or send emails.

Amazon is a “cheetelephant,” said one analyst: an elephant that runs as fast as a cheetah. It’s considerably faster than the regulators and lawmakers who have been caught flat-footed and are now wondering what, if anything, to do about its increasing market power, from books to groceries to moviemaking.

“If you look at the business models of these firms, none of these is a predatory pricing model. These firms are making a lot of money doing what they’re currently doing,” said Penn’s Hovenkamp. Besides, he said, “there are constantly new entrants” that would prevent a company from earning monopolistic profits. For antitrust enforcers, the problem is that by the time you know for sure whether a company predatorily drove rivals out of business, it’s too late to prevent it.

Facebook, in other words, is damned if it does censor and damned if it doesn’t. How is this likely to evolve? One possibility is that Facebook will tire of taking the heat and voluntarily submit to government regulation. A regulated Facebook would still have to employ people and algorithms to scour its website of forbidden materials, as it does today, but at least it could point the finger at lawmakers and regulators if questioned about its choices. The same would go for Google and some companies not covered here, such as Twitter.

It’s a good bet that there will be more such orders in coming years. Governments want money, and the four tech giants have a lot of it. In the meantime, while trying to come up with a better tax system, Europe is toying with the idea of taxing the tech companies’ revenue rather than their profits. The reasoning is that revenue is harder to manipulate. But revenue is a crude measure of a company’s ability to pay taxes. Revenue-based taxation would be too hard on companies with lots of revenue but little profit, and too easy on companies with little revenue but lots of profit.

Under an apportionment system, each country is still permitted to set its corporate tax rate however it chooses. But it will be able to charge its rate only on its little slice of the company’s global profit—a slice that’s determined by an agreed-upon formula. A country can no longer grab a bigger piece of a shrinking corporate-tax pie by cutting its rate below other countries’. In one stroke, the race to the bottom in tax rates is cut short.

Getting low-tax countries to go along with an apportionment system would be tough, though. No country wants to give up what makes it special. So something like the current tax system, albeit with fewer loopholes, is likely to persist for at least awhile. Apple, Google, Facebook and Amazon will keep finding ways to pit countries against one another.


Why Tencent Could Become an Advertising Powerhouse Like Facebook

Tencent’s ad revenue could more than double to $11.4 billion by 2019, according to researcher eMarketer. The company is estimated to increase its market share in China’s digital ad space to 15 percent from about 9 percent, eMarketer said.

Social advertising, which relies on information from a user’s network, is still a nascent business in China. The model that drives Facebook only accounts for about 10 percent of mainland digital marketing with e-commerce and search ads still taking the lion’s share. Lau expects that to change. “Social advertising can play a larger role,” said Lau. “In China, we are kind of pioneering the categories” of that.

So Tencent’s chosen to exercise restraint, usually showing just one ad per day on WeChat’s “Moments”, a function similar to Facebook’s news feed, capping inventory by intention. That’s why it earns just $2.10 per daily active user on WeChat, versus Facebook’s $30.10, Morgan Stanley estimates.

To do that, it’s enlisted an army of more than 250 computer scientists to expand in artificial intelligence, focusing on natural language processing, image recognition and user behavior prediction. That investment is showing up in some areas: Tencent worked with BMW to target high-end users based on their friends and location logs, sending them WeChat ads through which they could book test drives. The end game is converting ads into purchases, which is why the company’s exploring also hotels, dining and property, Lau said.


How Tencent could help Snapchat

Integrating gaming into Snapchat might be a good idea – not just because it creates more ways to generate revenue, but also because it can enhance user engagement. Globally, more people watch gaming videos and streams than HBO, Netflix, ESPN, and Hulu combined. As Snapchat strives to add users globally, it would be smart to tap into the millions of gamers worldwide who are already spending hours each day playing games, many of which Tencent has invested in.

“There is a strong likelihood that the redesign of our application will be disruptive to our business in the short term. We’re willing to take that risk for what we believe are substantial long-term benefits to our business.”


Amazon focuses on machine learning to beat cloud rivals

The industry has turned into a race to provide customers tools and functions to use that data in new ways. Those tools are helping speed the transition to the cloud, since companies that don’t have access to them will be at a competitive disadvantage, Jassy said. “We are in a transition stage right now. Relatively few companies will own their own data centers, and those who do will have significantly smaller footprints. That means all of that data is moving to the cloud.”

The cloud computing market will grow to $89 billion in 2021, up from $35 billion today, according to technology research firm Gartner Inc.


Amazon AWS: Is that what the second headquarters is about? Asks Goldman

“While Amazon has never discussed any plans for a spin or any HQ2 plans relative to AWS, it is possible that the location of the new headquarters could provide some insight into the way management is thinking about the positioning of AWS.”

Terry’s curiosity is piqued by the fact that Amazon increasingly competes in the same industries that are customers for AWS, including gaming, healthcare and life sciences. Presumably, a separation of AWS might lessen the conflict there. Terry sees AWS being worth $430 billion, on a sum-of-the-parts basis, equaling 60% of Amazon’s enterprise value.


Broadcom could bid as much as $100 for Qualcomm and still see a payoff, says Canaccord

We assume Qualcomm settles its licensing dispute with Apple with Apple paying roughly half of what it previously paid Qualcomm for iPhone royalties. We also assume Qualcomm settles its dispute with Huawei or the other large OEM currently not paying Qualcomm royalties. We believe Broadcom management has solutions for Qualcomm’s disputes as part of its reasoning to make a bid for Qualcomm, but we have used these assumptions based on our Qualcomm scenario analysis used for our Qualcomm price target in our last published Qualcomm note. We also assume $500M in synergies achieved between Qualcomm and NXP in our scenario analysis including NXP. Further, we assume a 4% interest rate on combined debt for an acquisition with NXP and 3.5% for an acquisition without NXP given larger debt levels needed if the acquisition includes NXP. We also assume $1.5B in F2019 synergies between Broadcom in Qualcomm and a combined company tax rate of 15%.


Beyond Tesla’s semi truck: The future of trucking and transportation

We are currently entering a period of a rapid change in our transportation systems. And as I see it, it’s the innovator’s dilemma playing out in the wild: Incumbents like General Motors are moving too slowly to adapt to an all-electric future—wasting billions of dollars on stock buybacks—while upstarts like Tesla, unencumbered by legacy business models, are forging a path into a clean, fully-electric, fully-autonomous future. (GM has spent almost $17 billion in the last several years buying back its stock, three times what Tesla has spent building Gigafactories.)

One is that the cost of trucking falls by at least 50%, if not more. No driver, double the passive productivity, and in essence, you eliminate most of the safety problems. And by the way, if you apply this [autonomous] technology, many of the concerns we have from a safety standpoint about large trucks go away and you can make the trucks bigger. So, the costs fall at least in half. Transit time falls at half too, because you’re not waiting.

Let’s look at it from a technical standpoint. There are two competencies that keep trucking firms alive. The first one is their ability to match demand and supply; which is very important, and the second is their ability to manage drivers. There’s a modest competency with respect to equipment, but it’s not that important. Well, in the first place, if you if you eliminate the drivers, you eliminate half of the value-added that the trucker provides. And second, if you go to integrated big data, the business of matching capacity to demand becomes much easier. So, what it does is it either eliminates, or dramatically changes the principal competencies of whatever we call this entity which we now call “trucker” provides to the marketplace. So it’s big, big changes.


Why Tesla’s fuel efficiency advantage won’t last

At the early part of the 2000’s trucks getting 5 mpg were common. Today’s fleet is more like 7 mpg. That two miles per gallon increase means diesel used falls from 20,000 gallons a year down to under 15,000 gallons. Best-in-class trucks today might approach 9-10 miles per gallon. That three mpg increase versus fleet average (presumably what Tesla used in its cost calculator) is another 30% drop in fuel use, down to 10,000 gallons. The SuperTruck programs that get 12 or more mpg, (using many of the same aero techniques that Tesla’s Semi uses) would use around 8,000 gallons of fuel. In other words the opportunity to lower the Tesla cost of ownership with fuel savings is currently 15,000 diesel gallons a year, but will soon enough be only half that, using current line-of-sight technologies. At current fleet average diesel costs the savings opportunity on 100,000 miles per year is $37,500 per truck. At current best-in-class the available pool of offset-able fuel cost is $25,000. On future trucks, perhaps not too far distant from Tesla’s launch, is only $20,000 per year. All this assumes you can run a truck 100,000 miles a year in 300 to 500 mile increments.

The future difference between Tesla’s astonishing 19 mpg equivalent and the SuperTruck 12 mpg is only 3,000 gallons a year of diesel equivalent. Compared with the 7,000 gallons per truck per year already in the diesel improvement pipeline, that 3,000 gallons doesn’t look as compelling.


Inside the revolution at Etsy

Inside Etsy, Mr. Silverman’s reorganization has upended parts of the company once considered sacrosanct. Last month, Etsy changed its mission statement. Gone was a verbose commitment “to reimagine commerce in ways that build a more fulfilling and lasting world.” Instead, the mission was reduced to just three words, “Keep commerce human,” accompanied by a spreadsheet outlining its goals for economic, social and ecological impact. And because remaining a B Corp would require the company to change its legal standing in Delaware, where it is incorporated, Etsy will let that certification lapse.


Paytm aims to become largest full-service digital bank

“Digital payments was our entry point, we want to become a vertically-integrated financial services company.”

Payments banks can accept deposits and remittances but cannot lend. Paytm is one of less than a dozen entities that got permits to start payments banks to bring financial services within easy reach of about a fifth of India’s 1.3 billion people who do not have access to organized financial services.

Paytm Payments Bank is majority-owned by Sharma. One97 Communications, which is backed by Alibaba Group Holding, Ant Financial Services and others, holds the remaining 49 percent. The payments bank morphed out of Paytm’s digital wallet which got a huge boost and amassed over a hundred million customers after India took its high currency bills, totaling nearly 90 percent of the value of cash, out of circulation last November.

Sharma may have found a way around the regulatory hurdles that bar lending. One97 Communications will introduce a charge card and offer monthly installment-based loans, he said. “We will launch share trading and insurance products very soon,” said Sharma. “We want to become an Internet-age financial services company.”

Business lessons from Ben Thompson of Stratechery

“Zero distribution costs. Zero marginal costs. Zero transactions. This is what the Internet enables, and it is completely transforming not just technology companies but companies in every single industry.” “Aggregation Theory is a completely new way to understand business in the Internet age.”

“instead of some companies serving the high end of a market with a superior experience while others serve the low-end with a “good-enough” offering, one company can serve everyone…. it makes sense to start at the high-end with customers who have a greater willingness-to-pay, and from there scale downwards, decreasing your price along with the decrease in your per-customer cost base (because of scale) as you go (and again, without accruing material marginal costs). Many of the most important new companies, including Google, Facebook, Amazon, Netflix, Snapchat, Uber, Airbnb and more are winning not by giving good-enough solutions to over-served low-end customers, but rather by delivering a superior experience that begins at the top of a market and works its way down…”

“Apple and Amazon do have businesses that qualify as aggregators, at least to a degree: for Apple, it is the App Store (as well as the Google Play Store). Apple owns the user relationship, incurs zero marginal costs in serving that user, and has a network of App Developers continually improving supply in response to demand. Amazon, meanwhile, has Amazon Merchant Services, which is a two-sided network where Amazon owns the end user and passes all marginal costs to merchants (i.e. suppliers).”

“Once an aggregator has gained some number of end users, suppliers will come onto the aggregator’s platform on the aggregator’s terms, effectively commoditizing and modularizing themselves. Those additional suppliers then make the aggregator more attractive to more users, which in turn draws more suppliers, in a virtuous cycle. This means that for aggregators, customer acquisition costs decrease over time; marginal customers are attracted to the platform by virtue of the increasing number of suppliers.”

“Breaking up a formerly integrated system — commoditizing and modularizing it — destroys incumbent value while simultaneously allowing a new entrant to integrate a different part of the value chain and thus capture new value.”


Active vs. passive vs. Amazon et al.

“Sectors such as finance, information technology, media, and pharmaceuticals — which have the highest margins — are developing a winner-take-all dynamic, with a wide gap between the most profitable companies and everyone else.”

“I have long described Amazon as a Field of Dreams company, one that goes for higher revenues first and then thinks about ways of converting those revenues into profits; if you build it, they will come. In coining this description, I am not being derisive but arguing that the market’s willingness to be patient with the company is largely a result of the consistency with [which] Jeff Bezos has told the same story for the company, since 1997, and acted in accordance with it.”

“These models have an in-built structure where they are going to tip into winner-take-all areas. The cost of adding a new user gets smaller and smaller the bigger you get. [This starts] creating a competitive advantage that gets harder and harder to bridge.”

It’s not unusual for a few stocks to drive broader market performance in a given year, but we would be foolish to ignore that it has been the same several stocks quite frequently in recent years. Facebook, Apple, Amazon, Netflix, and Google are responsible for roughly 20% of the S&P 500’s performance this year, and generated more than the entire return of the index in 2015.


The secret to tech’s next big breakthroughs? Stacking chips

The advantage is simple physics: When electrons have to travel long distances through copper wires, it takes more power, produces heat and reduces bandwidth. Stacked chips are more efficient, run cooler and communicate across much shorter interconnections at lightning speed.

Chip stacking enables totally new capabilities too. Some phone cameras stack an image sensor directly on top of the chip that processes the image. The extra speed means they can grab multiple exposures of an image and fuse them together, capturing more light for dim scenes.

But Mr. Dixon-Warren says the spread of 3-D chips is rapid and their takeover inevitable. A decade ago, this technology was limited almost exclusively to university labs; five or six years ago, it was still hard to find commercial examples. But now it’s popping up all over, in applications like networking and high-performance computing and in high-end wearables like the Apple Watch.


How does Costco sell 18-year-old single malt Scotch for $38?

“Costco has a volume deal with [spirits] companies including Edrington and Diageo. They agree to buy a certain amount of product at a certain price, which is far lower than everyone else is paying. For products like Johnnie Walker Blue or Macallan, it’s virtually impossible to beat Costco on price.”

“If Costco can control the importation of the whisky, get someone to distribute it to them at cost (or at very slim single-digit margins due to high volume) and then sell it at very low margins, then they’re golden.”

Finally, one reason rarely considered for why Costco might be able to offer better pricing is proof. Typically, whisky connoisseurs would want that 25-year-old Scotch to have some decent heft after all those years of concentrating in barrel. Alcohol is a conduit for flavor, after all. But all Kirkland Signature Scotches are sold at 80 proof, meaning that these whiskies are watered down to the absolute lowest legal limit and, thus, Costco is able to empty barrels into way more bottles.


Big oil and auto makers throw a lifeline to the combustion engine

The new lubricants are meant to help auto makers build smaller, turbocharged engines that are still quite powerful, resulting in efficiency gains close to 15% compared with older models. Optimizing internal combustion engines could boost efficiency by an additional 25%—a calculation that might tempt auto makers from spending more on electric-vehicle technology. Other efforts to enhance performance include adding gears to transmissions and making vehicles more aerodynamic.

The gains from engine oil alone are limited, however. Industry experts say the latest lubricants typically boost fuel economy by less than 1%, primarily by reducing the amount of energy needed to pump a piston. Even so, it is a highly cost-effective solution that adds up when spread across millions of vehicles.


‘It’s beautiful’: This Toronto startup is investors’ secret weapon to beating the market

Legal experts say investors may be risking more than their capital when using such alternative data since case law hasn’t yet determined what crosses the line into privacy violations or insider trading, but it’s a risk a growing number of financial institutions are willing to take, especially since in Apache’s case, and many others, it has paid off.

“That is the original alpha source, knowing something the market doesn’t know. It’s beautiful,” he said. “If you can come to them with a genuine information advantage, where they can know something their peers in the market do not know that’s tradable, that’s hugely valuable.”

Quandl is particularly interested in companies that produce what it calls “exhaust” data, or data collected as part of a company’s normal operations without intending to turn it into a revenue source. For example, insurance companies keep records of how many new car insurance policies they sell, as well as which vehicle manufacturer’s model is being insured, which happens to be a great predictor of new car sales before the automakers release the data themselves.

But Quandl faces a dilemma after convincing suppliers to sell their data: the more clients the company sells the data to, the less of an investing edge it provides, making it less valuable. To solve that problem, Quandl uses the data to build a predictive model to make an educated guess about how much money could be invested before the data loses its advantage and then sells it to a limited number of clients accordingly.


About 11% of land in Japan is unclaimed

That’s about 41,000 square kilometers (16,000 square miles), which is equivalent to the size of Japan’s southwestern island of Kyushu, or almost as large as Denmark. By 2040, land equivalent to Japan’s second-largest island of Hokkaido will be unclaimed or abandoned, according to a panel of experts and government representatives. This will cost the nation roughly 6 trillion yen ($54 billion) over the period 2017-2040, including lost development opportunities and uncollected taxes, the panel says.

“Land prices are falling in the depopulating regions,” Yamanome said. “Not only is it impossible to make money by owning some land, but also you can’t get rid of it because regional real estate markets are stale.”


Great products vs. great businesses

A product is something that solves someone’s problem. A business is a product that works so well that people will pay more than it costs to produce.

But losses come in different flavors. There is a difference between a company that loses money because it’s investing in the infrastructure needed to become a profitable company, and a company that loses money because it can’t charge customers a price that reflects what it costs to run the business. But we often conflate the two, treating all loss-making startups with a sense of, “It’s OK, they’re growing.”

Companies are staying private longer than they used to. So venture investors that specialize in the early phase of big-losses-because-we’re-investing-in-what-it-takes-to-build-a-profitable-business have found themselves holding mature companies that in a different era would have been passed onto investors who demanded a sustainable business model with profits. In any other era, Uber, Airbnb, Pinterest, and others all would have been public companies by now. And public markets almost certainly wouldn’t let losses pile up for as long as they have. We’ve seen this with Blue Apron and Snap, whose shares have fallen between 50% and 70% since going public just months ago. Both make amazing products that attracted armies of users, which VC investors oogled over. But public investors took one look at their business models and said, “What the hell is this?!” Who knows what that means for their future as standalone companies.


Pricing power: Delighting customers vs mortgaging your moat

The problem with this source of pricing power is that it comes with an off balance sheet liability. A sort of “negative goodwill” that grows every time you increase prices. While the profits might roll in for awhile, one day the customers will revolt. At the very least, the perceived excessive pricing of the well water will create a huge incentive for customers to try any new competitor that comes to town. While the high pricing makes it look like the company has a competitive advantage, in fact the excess returns are being created by a process that increases the likelihood of a successful competitive assault sometime in the future.


Lessons from a legendary short seller

“Because I never wanted to get up in the morning hoping that things would be getting worse. All intellectuals I think — and I don’t use that as a particularly flattering term — but all intellectuals tend to have a pessimistic streak.”

“I would forget the shorting. I think it’s over. It’s over for one simple reason: If shorts start working, that is, stocks go down for any sustained period of time, a great many people who are not now shorting will start shorting. There is a limited supply of stocks to borrow to sell short. Those stocks that are good shorts tend to be very obvious. As I’ve often said, I can predict with confidence that you’ll die. I cannot predict that you’ll be born, and so failure is analytically obvious and everybody piles into the same short. . . . I do believe if shorting really becomes profitable again, it’s going to become so crowded that most people won’t be able to borrow stock.”

Pulling iron from brain may offer hope in Alzheimer’s fight

The familiar metal is key to numerous brain functions, but too much of it is toxic. Researchers in Melbourne showed two years ago that iron levels in the brain can predict when people will get Alzheimer’s disease. Now, the team aims to show how removing excessive amounts with a drug called deferiprone can stave off the memory-robbing disorder.


Laptops are great. But not during a lecture or a meeting.

Laptops distract from learning, both for users and for those around them. It’s not much of a leap to expect that electronics also undermine learning in high school classrooms or that they hurt productivity in meetings in all kinds of workplaces.


Curated Insights 2017.07.16

Tom Russo on shareholder value creation and global brands

Competition is both global and local. The fight is typically fair, but not always. In India, for instance, Nestlé suffered a below-the-belt punch with its famous Maggi instant soup business. It suffered a massive goodwill assault by local forces that alleged the product would kill young children because of ingredients that were toxic. There is absolutely no hard science to support the claim. Yet, it ran across all 250 newspapers in India, and Nestlé’s brand preference score for the Maggi product dropped from 98% to 8%.

The century of biology

When engineering, biology, and computer science come together it elevates bio to a “read/write” paradigm. That is, you don’t just read the code of biology but you can also write, or design, with it.

…when you looked at a cell type that was normal, and you looked at its related diseased counterpart, you could see changes in the differential set of genes that were being expressed in one cell type vs. another (the cell program). Sometimes there’s not a mutated gene that’s causing the disease — it’s not just a bug or “bad gene” in the code (genomics) — it’s the cell running the wrong program, which is where epigenomics comes in again. The gene doesn’t just turn on and off like a light switch to cause disease, it can be more like a dimmer, going higher or lower (too much or too little of a gene). What causes a healthy cell to shift in to a diseased state, whether it’s cells multiplying uncontrollably in cancer or dormant immune cells suddenly getting activated in autoimmune disease? The ability to understand how the genome is being deployed or regulated within a cell — is it the wrong dosage or level for a particular set of genes? — becomes a very interesting new avenue to help us get to the right drug, for the right patient, at the right dose, and at the right time.

This leads us to the second derivatives of read/write, which is to enable insight/design. We’re not just generating data on the read side, we’re also fundamentally understanding it deeply in ways that we couldn’t before, especially with multiple data streams and machine learning to help make sense of it all. And on the write side, we’re not just editing, we’re also designing with biology. In the future, biology can become its own creative medium of sorts.

…our ability to read/write biology will disrupt a wide range of industries. In addition to its obvious impact across health, we’re increasingly using biology for manufacturing. Eventually it’s going to impact areas people don’t typically think about as “biological” — like textiles, architecture, and many more areas — in ways we can’t even conceive of yet.


Scientists can use CRISPR to store images and movies in bacteria

CRISPR was invented billions of years ago, as a way for bacteria to defend themselves against viruses. The bacteria grab the DNA of invading viruses, incorporating it into their own genomes. That viral DNA always gets inserted in the same place, and new sequences get added after old ones, as if the bacteria were stacking books on a shelf. They use these archives to guide an enzyme called Cas9, which cuts and disables any viral DNA that matches the stored sequences.

So, first and foremost, CRISPR is a kind of genetic memory—a system for storing information. And that information doesn’t have to be the DNA of viruses. Scientists can now encode any digital file in the form of DNA, by converting the ones and zeroes of binary code into As, Cs, Gs, and Ts of the double helix.

Recording information in DNA isn’t new: That’s effectively what living things have been doing since the dawn of life itself. More recently, scientists have realized that DNA makes the perfect storage medium. It takes up so little space that you could fit all the world’s data in the back of a truck. It’s durable, provided it’s kept cold, dry, and dark. And it is immune to obsolescence: DVDs and Blu-Rays will eventually go the way of cassettes and laser discs, but humans will always have the desire and means to read DNA.​


In China, shoppers buy bad loans online with their groceries

For 4.15 million yuan ($610,000), customers on the site can bid for the debt of a steelmaker from Zhejiang. The company has failed to pay back a 9.95 million-yuan loan, including interest, so a distressed asset manager is auctioning it off to the highest online bidder.

“Financial technology and e-commerce in China has reached a high level of sophistication. Online platforms are leveling the playing field in the distressed debt market as it means everybody gets access to the same information.”

“Conducting NPL auctions online has increasingly become a trend. More investors are using Taobao as a platform because of the simplicity, transparency and confidentiality of the bidders’ identity.”

But bad-loan investing isn’t like trading equities or even ordinary debt, which raises questions over the opening up of the market to rank-and-file investors.

The most important moat

“A Bezos Moat is premised on the idea that the customer is willingly and is frequently entering into a commercial transaction with the company because the customer is deriving more value from the transaction than he or she is paying for.

“A Buffett Moat attempts to identify companies that will be the only one (or one of a few) available in a commercial landscape, so that the customer is, in effect, forced to transact with these companies (i.e. only bridge, only newspaper, only soft drink option).”

Curated Insights 2017.07.09

Massive Chinese Brainpower Is the Next Really Big Thing

The large scale and low cost of Chinese brainpower is another game changer. Suddenly thousands of engineers can be ramped up in a matter of days. And this phenomenon is starting to ripple through industry after industry. What is the impact on the pharmaceutical industry if companies can now access tens of thousands of scientists cheaply? If your competitor is opening a research and development center in China with 10,000 technical specialists, how big of a problem is that for you? Chinese brainpower is starting to impact many industries – often in unexpected ways.”


Could India become the best-performing stock market of the next ten years?

India’s estimated domestic consumption growth of 12 percent y-o-y through 2025 is forecast at more than double the global average of 5 percent — poised to triple to $4 trillion by 2025.

India will have the largest middle class globally by 2027. Currently, only 5% (27 million) of the 519 million strong workforce is classified as “urban middle,” earning more than $11,000 per year.

A structural shift of household savings into equities is helping propel Indian stock markets. A Morgan Stanley analysis concludes that domestic equity savings are on-track to rise by $525 billion over the next decade. The government is also taking steps to increase public-equity exposure.


We are still waiting for the robot revolution

Our chief economic problem right now isn’t that the robots are taking our jobs, it’s that the robots are slacking off. We suffer from slow productivity growth; the symptoms are not lay-offs but slow-growing economies and stagnant wages.

…Imagine an economy that was the exact opposite of one where the robots took over, and it would look very much like ours.

…productivity growth stalled before the financial crisis, not afterwards: the promised benefits of the IT revolution petered out by around 2006.


Could Amazon Spur a CapEx Boom Rather Than Disinflation?

Younger investors haven’t yet seen a Capital Expenditure bubble. What went in the mid-aught’s was a debt and real estate bubble and what’s going on now is a buyback bubble. (Yes, everything is a bubble).

But in the mid- to late 1990’s, we had the CapEx bubble to end all CapEx bubbles (involving computers and wireless telephony), and it was good for the economy (for awhile). The 1950’s featured an infrastructure CapEx bubble (the Interstate Highway System), the 1960’s had its “Space Age” CapEx bubble and the late 1800’s enjoyed a railroad CapEx bubble.

These spending sprees were unlike the debt bubble of the 2003-2007 period in that, when the dust settled, at the very least they had left something useful behind (roads, rails, fiber optics, jets and rocket technologies). The last bubble we had only left behind unpaid loans and financial losses.


Watch Out, Intel. New Types of Chips Are Gaining Ground

“If I look at the latest generation of microprocessors, this year, performance only went up by 3%.”

While Intel’s microprocessor is broadly useful, running everything from scientific computing to spreadsheets, the TPU focuses on a specific problem such as speech recognition so it has power where it counts. It has 3.5 times as much memory as a comparable Intel part in a chip half the size. “We threw out a lot of stuff that was not needed. Instead of the Honda for everyone, we are making these Formula One race cars for some things.”

…the TPU went from sketch to finished chip in just 15 months whereas the latest Intel processors take years to develop. “We are at a paradigm shift in computing architecture. This is a big revolution in terms of the technology approach. Intel is working for two years to squeeze out 10% improvements in performance, and this can get you 10 times the performance, while being less expensive than Intel’s most complex parts.”


Tencent Dominates in China. Next Challenge Is Rest of the World

…the company was also learning how to cut its losses and play to its strengths. In 2013, Tencent gave up on its floundering search business, turned it over to a competitor, Sogou Inc., and invested $448 million in Sogou instead. The following year it sold its equally unsuccessful e-commerce initiative to JD.com Inc. and invested $214 million in JD for a 15 percent stake. Before these deals, Tencent “was involved in everything.” After the deals, “it only focused on what it did best and entrusted other sectors to partners.” Zhang gives much of the credit for these moves to Lau. “Martin is first and foremost a great business analyst. He knows what wars to fight.”

“It’s a little bit like the Godfather Don Corleone saying, ‘I’m going to make you an offer you can’t refuse.’ If you don’t take their money, and they invest in a competitor, it can be deadly.”

Beyond Bitcoin: How Blockchain Is Changing Banking

The government, for its part, hasn’t even settled on what Bitcoin is. The Internal Revenue Service considers it an asset; the Commodity Futures Trading Commission says it’s a commodity; and Treasury Department regulators have described it as a “virtual currency.” Fed Chair Janet Yellen has said the agency has no authority to oversee Bitcoin, but has encouraged central bankers to study it.

“…half of the people in the group are looking for a solution; the other half are there uniquely to obstruct progress.”

Moats & Knights, Part Deux

1. Has management been forthcoming about competitive challenges or do they downplay the threat of new entrants?

2. Does management have the right financial incentives in place or has the board set up low hurdles to make sure large bonuses are realized, regardless of performance?

3. Does management know what the company’s advantages are and have plans in place to extend and strengthen those advantages?

4. Does management have meaningful personal ownership in the business (and thus have skin in the game) or are they akin to mercenaries? 

5. Does management have a track record of sacrificing short-term results for long-term results or do they seem to play the quarterly earnings game?


What I Believe Most

Incentives are the strongest force in the world. They cause otherwise good people to do awful things, and vice versa. They’re also the most misunderstood and counterintuitive force in business. Brent Beshore: “I want to know what motivates people. The problem is not that they won’t tell me, because they will. The problem is that none of us know the truth, even about ourselves. The only thing to do is watch someone over a very long period of time and try to piece it together.”

There are five sources of edge: 1) Learn faster than your competition, 2) empathize with stakeholders more than your competition, 3) communicate more effectively than your competition, 4) be willing to fail more than your competition, and 5) wait longer than your competition.