People & Ideas (#15)
Hi all,
I hope the new year has been treating you all well so far. I’m going back and forth between enjoying the peaceful serenity of my little town and anxiety about what comes next. For all its flaws, there are things I miss terribly about New York City. Especially the the ecosystem of smart and enterprising people. Also, after ten years in another country I’m not quite sure where I belong. It’s an odd feeling.
I’m struck by how much wackiness there is in markets now. The SPAC boom continues unabated. There has been a surge in penny stock trading and short squeezes. As George Livadas pointed out: “For now, the primary goal on the short side is survival.”
Just look at the Gamestop chart which has turned into an epic short squeeze led not by long-time investor Michael Burry but a crowd of reddit retail traders teaming up to take on sizeable hedge funds.
The likes of Robinhood are enabling a new generation of traders to access the markets with high leverage (in the form of options) by removing all the friction and in a gamified way. Platforms like reddit, twitter, discord allow them to organize very effectively. As long as the bull market continues I think we should be prepared for more of this stuff.
I’d like to collect more examples of this: be it meme-driven short squeezes, sentiment extremes, valuation extremes, other fundamental trends like money losing companies. Email or DM me your weekly favorite “it’s getting weird out there” chart/data point and I’ll highlight my favorites in the each email.
Content today
Quick notes: thank you, poll time, VYGG
The bubble debate won’t stop
Compounding knowledge: letters, ideas (check out Farmaè & CBOE), podcasts
Quick Notes
Thank you!
I started the substack as a bit of an experiment and because I enjoy writing. The topics I’m interested in can be pretty nichey and are often not directly related to actionable ideas today (so what if Kirk Kerkorian was a value investor in planes and studios?!). I’m beyond thrilled to count 787 of you who tune in and read my stuff. It makes me happy to know you are all out there and I’m grateful to have you as readers!
Poll Time
I’m thinking about settling into a more consistent writing/publishing routine: one general email like this one and one profile or story a week. I’m hopeful that’s a cadence that works while I’m working on other projects.
Another idea I’ve played around with is to use a tool like Roam to build something like a knowledge repository to collect information, files, and links on the people, companies, and events worth studying. But one step at a time.
I’m thinking about writing about the topics below. Maybe one day I’ll find a concise way to summarize them.
Learning from history (ie. unknown investors like Floyd Odlum, Charlie Bluhdorn, revisiting “young Buffett,” Soros’s transformation, Kirk Kerkorian, Bass/Rainwater)
Studying smart investors today and tracking what they’re up
Studying the founders/owner operators today (ie. Barry Diller, Bernard Arnault, Jitse Groen, Toby Lutke, Rales/Danaher)
Under the radar companies, particularly in Europe
I would be curious:
Do you have a clear preference among the above topics?
Are there other topics you’d want to hear about from me?
Are there specific people or companies that you think would be interesting to explore?
I want to thank the 31 people who gave feedback on prior emails. Let’s keep this going!
Anyway, here’s the link to the poll:
On VYGG
I got a heads-up (thank you, Ti!) that Alexander Tamas is also the founder of Synaptic, a company that aggregates venture data. Looks a bit like Crunchbase or Pitchbook. The company lists Vy Capital and Ribbit as customers. Of course other investors have access to this kind of data as well. But it can’t hurt to be on the inside of a comprehensive data collection effort on startup companies.
The bubble debate won’t stop
I wrote about Mary Meeker, the leading internet analyst during the dotcom days. What strikes me most when learning about the late 90’s is that many ideas were fundamentally right, just way too early (check out the great chart of dotcom reinventions in this piece). Things took longer than expected and the market toppled under high valuations, high cash burn, Fed tightening, and a supply of low quality companies trying to cash in on the boom.
It’s something to keep in mind when thinking about today’s hot sectors, for example EVs. One can be long-term bullish on EV adoption (and second order effects like demand for certain metals etc.) but that doesn’t mean the current crop of EV companies will get there without hiccups. And especially not the lower quality companies that are joining the (SPAC) party now. Read the Upslope letter (below) on EV SPACs and check out the GMO podcast (below) for the implications in metals/natural resources markets.
As to whether we’re in an epic bubble:
In the bull corner: Bill Miller who doesn’t think so:
Being contrarian—but not a naïve contrarian—usually pays more than being in the consensus, but not, I think, in this case, if being contrarian means believing most of the economic conditions now underway will reverse in 2021. Where I think the consensus may be wrong is that 2021’s economic and profit growth could be considerably higher than is now priced into stocks and bonds, leading some groups that have trailed the market for years, such as banks and energy, to move from laggards to leaders. I also think the market is likely underestimating the risks of inflation.
Whereas Jeremy Grantham at GMO has seen enough:
I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000. It is intellectually exciting and terrifying at the same time.
1999 was the only experience we have had of clients reacting as if we were deliberately and maliciously depriving them of gains. In comparison, 2008 was nothing. But in the last few months the hostile tone has been rapidly ratcheting up.
Compounding knowledge this week: letters, ideas, podcasts
It’s Q4 letter season. Track ‘em in this reddit thread.
A reminder on how to write effectively (in this case in an academic/professional context): write with the reader in mind and deliver value to them. Don’t write to demonstrate what you know.
“You have learned that explaining is revealing to the world what is inside your head. No one cares what’s inside of your head.”
"No one cares what you think. They care what they think. Write to change minds.”
I struggle with this. A lot, frankly. I’ll do a ton of research and feel compelled to fit all the little nuggets I’ve found into a piece. This can be very counterproductive. Not only does it not serve the reader but I also tire myself out and spend far too much time editing and cutting it back into a digestible format.
Shawspring letter on optionality: Excellent framework with many recent examples, including AWS, Match Group, Sea Ltd, Netflix.
Optionality Type #1 ― New Business(es)
Optionality Type #2 ― Product / Category Expansion
Optionality Type #3 ― Strategic Shift / Evolution
Optionality Type #4 ― Geographic Expansion
We notice the market frequently omits Optionality (or other variable factors) in its projections and oftentimes assumes some linearity of growth.
When the market is unsure about the future, it applies a simple linear growth rate relative to the market’s current circumstances for valuing equities.
Compounding this is the career risk associated with being non-consensus… a linear extrapolation based on historical trends is more defensible.
Saber Capital’s John Huber on whether we should expect less mean reversion due to: the transition to a digital economy, “economics shared” model that is strengthening leaders, technology and network effects, and the capex of the incumbents feeding the next generation of technology companies.
I’ve been tinkering with this idea for years, trying to better understand why so many great companies seem to defy the laws of gravity when it comes to returns on capital, profitability, and size generally.
The Power Law is getting stronger, and if you’re a stock picker, it’s imperative to think critically about how this will impact your investments.
In 1991, more than a decade before Kodak became an obvious value trap, it looked like a good old-fashioned value stock, and Bill Ruane was pitching it to a group that included Warren Buffett and Bill Gates. Gates told Ruane: “Kodak is toast”, which seems obvious at this point but was prescient in 1991.
Upslope Capital letter with thoughts on SPACs and a write-up of CBOE.
For now, the primary goal on the short side is survival.
The SPAC market really does resemble a modern version of the 90s tech bubble. Through mid-January, I counted 21 announced or closed EV-related (electric vehicle) SPACs that had a combined pro forma enterprise value of almost $120bn. This group is expected to generate less than $700mm of sales in 2020 for a combined EV/Sales multiple of about 175x. Of course, virtually every EV SPAC has offered up hockeystick-shaped projections, with the group forecasting a 230% revenue CAGR through 2022 (Competition? What competition?). This implies a 16x 2022 revenue multiple, about in-line with Tesla, the poster-child for bubble stocks in general. Except, unlike Tesla, the vast majority of EV SPACs have little scale and often little-to-no working product today
Interesting writeup of Farmaè, a micro cap Italian online pharmacy. Founder-led in a market that has been lagging severely in ecommerce penetration - which is now changing thanks to the lockdowns.
I’m looking to join Mr. Riccardo Lacometti and his 70% ownership in this company as he takes on 95% of the OTC/BCP market, that is still offline.
Wedgewood with a deep dive on Progressive.
Ajit Jain (Vice Chair Insurance Ops): Without getting too technical, GEICO has a significant advantage over Progressive when it comes to the expense ratio, to the extent of about seven points or so. On the loss ratio side, Progressive does a much better job than GEICO does. They have, I think, about a 12-point advantage over GEICO. So, net-net, Progressive is ahead by about five points
Robert Vinall’s 2020 letter (you can just use a Google login): with thoughts on the concept of Margin of Safety. I agree that there is a cost to being overly conservative - and therefore inaccurate - as it leads to negative selection bias in a market with a lot of competition for high quality companies.
A contrarian mindset is perfectly adapted to a world that is characterized by reversion to the mean.
If I look back at some of the best investment opportunities I have missed, it strikes me that when I thought I was being conservative, I was in fact being inaccurate.
Investors that consistently attach no value to free options commit the same sin as a lender that overestimates risk. They cede a competitive advantage to investors that do value them and expose themselves to negative selection by fishing in a pool drained of the best investment opportunities.
Podcasts
I enjoyed this ILTB podcast on the food/retail and franchising ecosystem. Zack Fuss offered a detailed breakdown of the Domino’s model and how the different pieces fit together, including the high gross margins of pizza, fortressing (clustering of stores) to improve economics in a market, advantage of “ghost kitchen” cheaper real estate, and economics for franchisees (often former employees).
I also enjoyed this episode of Infinite Loops with Tren Griffin. It’s not focused on investing but more of a fun exploration of Tren’s life philosophy, call it “how to live a rewarding and interesting life.” For those who don’t know Tren, he writes a thoughtful blog and will correct you on Twitter if you confuse value investing with low multiple investing😉
Lastly, I got a lot out of this podcast with Lucas White from GMO who runs their Natural Resources and Climate Change strategies. It’s an area I’m not that familiar with that looks like it could become really interesting again after a period of underinvestment and with demand from EVs starting to take off.
"Resource companies have outperformed over the last 100 years pretty substantively."
"Tesla alone projected by 2030 they will consume about 80% of current nickel supply."
Disclaimer: this is not investment advice and not a recommendation to buy or sell any of the securities mentioned. Always do your own research before making an investment. Always seek advice from your own financial advisor. Please manage your portfolio and position sizing in accordance with your own risk tolerance and investment objectives. I may own, buy or sell any of the securities mentioned.