Curated Insights 2018.06.29

75% of bull markets are nothing but multiple expansion

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

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

Amazon’s scale in Japan challenges rivals and regulators

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

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

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


Amazon wants the whole package in delivery

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

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

Danny Meyer’s recipe for success

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

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

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

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

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

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

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

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

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


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

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

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


The business of death has a bright future in Japan

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

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

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

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

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

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

Where 3 million electric vehicle batteries will go when they retire

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

Introducing a16z crypto

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

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

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


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

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

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

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

Curated Insights 2017.10.29

How Intuitive Surgical turned medical sci-fi into reality

Intuitive’s devices are now used at all of the top-ranked U.S. hospitals for cancer, urology, gynecology, or gastroenterology—including venerable institutions like New York’s Memorial Sloan Kettering Cancer Center, the Mayo Clinic, Johns Hopkins, and the Cleveland Clinic. More than 4,100 da Vinci base units have been installed worldwide as of June 30, including 2,703 in the U.S., 698 in Europe, 538 in Asia, and 210 in the rest of the world.

The systems aren’t cheap: The list price for the fourth-generation da Vinci Xi is $1.9 million, and that doesn’t include the cost of various surgical appendages, which can add tens of thousands of dollars more to the price tag. Still, the robots keep selling—and surgeons are increasingly adopting them in their practices.

The company says that more than 4 million minimally invasive surgeries have been performed with da Vinci systems since 2000—a new one begins every 42 seconds somewhere around the globe, Intuitive CEO Gary Guthart tells Fortune. The number of those procedures done worldwide spiked 15% in 2016 compared with the previous year, and Intuitive pro­jects an additional 14% to 15% rise in the number by the end of 2017. Indeed, for certain more complicated procedures, such as radical prostate removal, robotic-assisted surgeries now account for nearly 90% of operations.

The boom has driven Intuitive to $2.7 billion in 2016 global revenue, with more than 70% of sales being recurring in nature—a fact that underscores the advantage that comes from being the first major player in a rapidly growing market.

It isn’t clear whether robotic surgery uniformly leads to better outcomes. (Don’t look to the extensive medical literature for a clear-cut answer; conclusions differ from study to study.) But surgeons who swear by their robotic arms tend to return to the same words of praise: They tout the “speed of recovery” for patients, who typically don’t need to spend days or weeks in a hospital as they might after traditional open surgery. They speak of the “clarity” of its camera, the “flexibility” of its instruments.

A survey by investment and research group RBC Capital last year found that American surgeons think that within five years, 35% of operations will involve robots in some form, compared with 15% today.

 

Shake Shack founder on changing the way restaurants do business

And I think what fine-casual is doing is, “If you’re willing to give up waiters and waitresses and bartenders and reservations and table cloths and flowers, we’re gonna s– we’re gonna give you about 80 percent of the quality that you would have gotten in a fine-dining restaurant. We’re gonna save you about 80 percent of the money you’d spend in a fine-dining restaurant. And we’re gonna save you about 60 percent of the time.”

So by saying, “Hospitality included,” it’s basically saying, “You see that price that it costs to get the chicken? That includes everything. That includes not only the guy that bought the chicken and the guy that cooked the chicken, but it also includes the person who served it to you and how they made you feel.”

 

AlphaGo Zero: Learning from scratch

Previous versions of AlphaGo initially trained on thousands of human amateur and professional games to learn how to play Go. AlphaGo Zero skips this step and learns to play simply by playing games against itself, starting from completely random play. In doing so, it quickly surpassed human level of play and defeated the previously published champion-defeating version of AlphaGo by 100 games to 0.

It is able to do this by using a novel form of reinforcement learning, in which AlphaGo Zero becomes its own teacher. The system starts off with a neural network that knows nothing about the game of Go. It then plays games against itself, by combining this neural network with a powerful search algorithm. As it plays, the neural network is tuned and updated to predict moves, as well as the eventual winner of the games.

 

Nike’s focus on robotics threatens Asia’s low-cost workforce

For Nike, the shift to greater automation has two huge attractions. By driving down costs, it could lead to a dramatic improvement in profit margins. It would also allow the company to deliver new designs more quickly to fickle, fashion-conscious customers at a premium. A pair of Nike Roshe shoes costs $75 without Flyknit uppers, compared to as much as $130 with Flyknit.

The potential upside for Nike of greater automation is immense. Analysts at Citibank estimate that by using the Flex manufacturing process to produce Nike’s 2017 Air Max shoes, one of its top-selling lines, the cost of labour would decrease 50 per cent and materials costs would fall 20 per cent. That would equate to a 12.5 percentage point increase in gross margins to 55.5 per cent, according to analysts Jim Suva and Kate McShane. If Flex were to produce 30 per cent of Nike’s North American footwear sales, Nike could save $400m in labour and material costs, representing a 5 per cent benefit to earnings per share, according to Citibank estimates.

Traditional shoe production has required as many as 200 different pieces across 10 sizes, often cut and glued together by hand. The new manufacturing process being developed by Flex has introduced two ideas once thought impossible: the gluing process has been automated and lasers are used to cut the Flyknit material. Lead times in the shoe industry once ran to several months: Flex has promised to help Nike speed up lead times, which can be three to four weeks for a customised pair of sneakers.

Nike has reduced its supply chain by nearly 200 factories in the past five years to focus on fewer “quality, long-term partnerships”. However, the process of closing a factory, including those with compliance issues, can be a long and costly process for “brand-sensitive companies like Nike” to mitigate the disruption to local economies.


Birth of a Hidden Champion: TSMC & Morris Chang

Morris Chang said Intel’s advantage lies in its robust technological power and strong business operation foundation, having maintained No. 1 in the global semiconductor for decades. But its biggest drawback rests with its inexperience in the wafer foundry sector that highlights a service-oriented corporate culture, as Intel’s technology departments have long served the company’s own needs, totally different from the core culture of serving others seen in the pure-play foundry sector. With his 25-year experience at Texas Instruments before founding TSMC, Chang said he realized very well what kind of corporate culture was needed for the foundry sector. He said when establishing TSMC 30 years ago, he was able to easily inject the service-oriented culture into the TSMC at the very beginning.


Apple’s COO Jeff Williams recounts how business with TSMC began with a dinner at the founder’s home

Williams said that in the next 10 years, the biggest problem lies not in computing performance, but in the lack of sufficient visions to apply new advanced technologies such as AI (artificial intelligence) as well as how to safeguard privacy.

He said Apple has many expectations for AI applications, but what the company needs is neither to make chips with faster computing performance or to make cars able to fly, but to utilize advanced technologies to change the world, such as making use of semiconductors to achieve medical technology innovations.”


Apple supplier TSMC says Moore’s Law is no longer valid

Chang said that the time frame set in Moore’s Law is no longer applicable. He said TSMC has kept increasing transistor density, but not at a pace according to the law. Chang continued by noting that discussions about the applicability of Moore’s Law in recent years have often focused on ASML, a leading semiconductor lithography equipment supplier, because the company is now the world’s only supplier of EUV (extreme ultraviolet) lithography equipment and EUV technology bears a great responsibility of keeping Moore’s Law valid. Chang said major semiconductor firms have been keen to incorporate EUV technology into their 7nm process.


ChowNow, a GrubHub competitor, raises $20 million Series B round

ChowNow prides itself on being different from the likes of GrubHub and Seamless. ChowNow’s flagship service offers restaurants a white-label platform that enables restaurants to own their customer data, and feel confident their customers aren’t constantly fending off menus and discounts from competitors. Unlike its competitors, ChowNow charges an upfront monthly cost of $150/month per location instead of taking a commission on all orders.

“Yes, our software supports delivery but we have a unique place in the restaurant where we don’t play in the delivery space outright,” Webb said. “We’re also not a traditional marketplace either. Shopify for restaurants is an accurate way to describe us. Restaurants can plug in to our system and integrate it into their delivery backend.”

In charts: has the US shale drilling revolution peaked?

Throughout its existence, the shale oil industry has consumed cash. Companies have been unable to cover their drilling costs from their incomes, and have needed constant infusions of debt and equity financing. They have had little difficulty in raising that money, in part because investors wanted to share in the productivity miracle that the companies represented. If the miraculous days are over, and a more humdrum reality is setting in, will investors still be prepared to back the industry so willingly? Already equity raising by US exploration and production companies has slowed sharply this year. Plenty of attractive investment opportunities still exist in shale: internal rates of return of 30 per cent and higher are available in the Permian Basin, according to S&P Global Platts Well Economic Analyzer. Will there be enough of those attractive opportunities to keep US oil production rising, as the government’s Energy Information Administration and others expect? The industry says yes, but the drilling and productivity numbers will be worth watching closely over the months to come.

 

Australia’s got a lock on supply of the metal used for EV batteries

“Australia’s importance has been cemented by offtake deals and equity investments in mines,” Alice Yu, a Hong Kong-based consultant at CRU, said by phone. Backing from major battery manufacturers and auto producers could also see the nation add processing facilities to develop exports of higher-value lithium chemicals, she said.

Still, Macquarie Group Ltd. has warned there’s a bearish outlook for lithium prices in the short-to-medium term as “too many Australian rock producers are crowding in” with new projects. The surge is threatening to create a period of oversupply before rising demand for electric vehicles clears the surplus from about 2021, the bank said in a note this month.

Even with a wave of new supply, including from Australia, the lithium market is likely to remain tight with a stronger demand outlook than anticipated, according to Melbourne-based UBS Group AG analyst Lachlan Shaw. “We have had increased supply this year, and all the while lithium prices have kept going up,” he said. “The market is probably underestimating demand.”

How Saudi Arabia is building its $2 trillion fund

The kingdom plans to transfer ownership of Saudi Aramco, the state-owned oil company, to the PIF. An initial public offering of a small Aramco stake — probably just under 5 percent — will provide investment cash. That sale could raise about $106 billion, according to the Sovereign Wealth Fund Institute. Transferring Aramco to the PIF would allow the government to get its revenue from investments, rather than oil, according to the Prince, and along the way transform the PIF into the world’s biggest sovereign fund.

 

Bogle: Vanguard’s Size a Worry

The economies of scale just can’t keep going on much longer. We’ve only got 12 basis points to go, and let me say it: There’s an irreducible minimum, no matter how big you are, just for the fun of it, 8 basis points, cost a lot of money to run this business. We’re now talking about a 4 basis point improvement in cost. I just don’t think it’s worthwhile, hyping and trying to bring in more and more money.

The David Rubenstein Show: Masayoshi Son

On his US$100bn Vision Fund: He thinks that machines will become more intelligent than humans across a wide range of subjects within the next 30 years, an event referred to as the singularity. This will have a profound and largely positive impact on humankind. The fund will invest in companies that underpin the global shifts brought on by artificial intelligence.

On the Alibaba investment: Invested US$20m early on in the company’s history. He met with Jack Ma, who at the time had no business plan, zero revenue and only 35-40 employees. Still, he could tell from the way he talked (with “strong, shining eyes”) that he had a vision and impressive leadership skills. Similar story with Jerry Yang and the Yahoo! investment.

On his recent investment in ARM: Biggest investment to date. UK-based semiconductor company that has an overwhelming market share for semiconductor designs used in mobile phones and other mobile devices. He says they will ship more than 1 trillion IoT chips in the next 20 years.

Chinese women are getting rich by simply livestreaming their days

In China, young women like 23-year-old Huan Huan can earn up to $20,000 a month livestreaming themselves just doing regular things. That’s about 30 times more than the average college graduate makes at their first job.

In China, which banned online porn in 2000, PG-rated livestreaming has become a $4 billion-a-year industry with nearly 350 million followers — more than the entire population of the United States.


How do I get my daughter interested in computers?

Nobody becomes a software engineer because they love writing code; they become a software engineer because it allows them to build out ideas. This is a useful skill to have. Except that most software engineers aren’t realizing their own ideas. They’re getting paid to build someone else’s pet project. Software engineers are the wage labourers of the tech industry.

The most important tech skill, then, isn’t computers or engineering — It’s the art of getting paid to control vast amounts of money. Then you can make programmers build out whatever dumb ideas you like. Parents who want their daughters to succeed in Silicon Valley need not worry about teaching their girls to code: Teach them about capitalism instead.